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L E T T E R F R O M C H A I R O F T H E B O A R D
L E T T E R F R O M C H I E F E X E C U T I V E O F F I C E R A N D P R E S I D E N T
S T O R I E S : O U R P R O G R E S S O N T H E R O A D A H E A D
O P E R A T I N G C O M M I T T E E A N D O T H E R C O R P O R A T E O F F I C E R S
B O A R D O F D I R E C T O R S
2 0 1 8 C O R P O R A T E R E S P O N S I B I L I T Y H I G H L I G H T S
2 0 1 8 F I N A N C I A L R E P O R T
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S T O C K P E R F O R M A N C E
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Dear Fellow S hare holder s
We are steadfast in
our commitment to
building and protecting
the long-term value
of the company.
Looking back on my first year as chair of the
individually and the decentralized nature of
Wells Fargo Board of Directors, I am encouraged
certain control functions. I believe this review
by the progress the company and our board
was necessary to help us serve our customers
have made as we build a better Wells Fargo for
better. In the past two years, we have centralized
the future.
many aspects of our organizational structure,
strengthened risk management, and improved
Before I talk about the board, I’d like to recognize
governance practices and oversight. Going
the tireless efforts of our management team.
forward, we believe maintaining a holistic view
Tim Sloan became CEO just over two years ago,
of the company and focusing on operational
and since then, with the full support of the board,
excellence will result in continued positive change.
he has been driving transformational change
at the company.
Organizationally, Tim has pulled together a
strong management team that blends Wells Fargo
As CEO, Tim’s first priority was to initiate an
veterans with experienced talent from elsewhere.
extensive review to identify, understand, and
Three of his direct reports are from outside
resolve the problems of the past; to provide
the company, and two more — the company’s
appropriate remediation to customers who
new head of Technology and chief auditor — will
were harmed; and to be transparent about our
join Wells Fargo in April. Most of his other direct
progress. We discovered a variety of issues, and
reports are in new or expanded roles. Together,
even though the specific causes may have been
the leadership team is executing plans to
different, some common themes emerged, such
streamline the company’s operating structure,
as the company’s history of running businesses
better define roles and responsibilities, fill key
E L I Z A B E T H A . D U K E | C h a i r, B o a r d o f D i r e c t o r s , W e l l s F a r g o & C o m p a n y
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positions, enhance the way we serve customers,
regulatory expectations remains a top priority,
strengthen risk and compliance measures, and
as is continuing to serve our customers and help
instill our Vision, Values & Goals uniformly
them succeed financially.
into the culture of Wells Fargo. In addition, the
management team has redesigned the strategy,
O U R B O A R D O F D I R E C T O R S
leadership, and incentive structure of the retail
The board operates very differently today than
bank and the Wells Fargo Auto business to align
it did a year ago. Following our independent
with a more forward-looking consumer approach.
board investigation into retail sales practices
One important early indicator of the success
and our 2017 board self-evaluation, we
of these efforts is that “Customer Loyalty” and
identified several areas in which we could
“Overall Satisfaction with Most Recent Visit”
enhance board oversight. As a result, we added
Community Bank branch survey scores reached
more directors with expertise in financial
24-month highs in December 2018. At the same
services; adjusted committee structures,
time, voluntary team member attrition in 2018
charters, and membership; enhanced agenda
improved to its lowest level in six years.
planning; and worked with management to
better focus materials provided to the board.
Early in 2018, we agreed to a consent order with Mary Jo White, a senior partner at the law firm
the Board of Governors of the Federal Reserve
of Debevoise & Plimpton LLP and former chair
System and consent orders with the Office of the
of the Securities and Exchange Commission,
Comptroller of the Currency and the Consumer
was engaged by the board to facilitate its 2017
Financial Protection Bureau. To make sure we are
self-evaluation and work with the board on
meeting our commitments under the consent
its 2018 self-evaluation to help assess our
orders, the board and senior management are
progress. Regular self-assessment provides us
engaged in regular dialogue with our regulators.
a mechanism for continuous improvement.
Clear communication is necessary so that the
comprehensive changes we are making across With 13 directors, our board is smaller than in
the recent past. More than half of the current
the company will sufficiently strengthen our
governance and oversight, as well as operational
directors joined the board in 2017 or later.
and compliance risk management. Although we
These new directors came ready to work and
are devoting a significant amount of resources
began to contribute immediately. The new
to these efforts, we also have been delivering on
directors have brought important experience in
our ongoing cost-reduction initiatives. Expense
several areas, including financial services, other
savings from simplifying and centralizing
highly regulated industries, and consumer brand
operations help fund our investments in areas
management. With board turnover, we have
such as risk management and technology.
also refreshed our board committee leadership.
Since September 2017, six of seven standing
We continue to have constructive dialogue
board committees have new committee chairs.
with the Federal Reserve on an ongoing basis
Today, the average tenure of our independent
to clarify expectations, receive feedback, and
directors is less than four years. Even as the
assess progress under the consent order, and
board and its committees have experienced much
we are now planning to operate under the
change, we remain focused on responding to
asset cap through the end of 2019. Making
stakeholders, enhancing oversight, and creating
the changes necessary to ensure we meet
long-term value for shareholders.
In January 2019, Wayne Hewett joined our
satisfying regulatory expectations. We
board. Throughout his career as a CEO and
are specifically focused on satisfying the
senior executive, Wayne has had a record of
requirements of the company’s outstanding
success managing strategic priorities in complex
consent orders. But more broadly, we are
business environments. His background as an
enhancing our risk and reporting systems
industrial engineer and experience with data-
to meet the heightened regulatory
driven process improvement methodologies
expectations for systemically important
will be especially valuable as we focus on
financial institutions and our own goal of
operational excellence.
industry leadership in risk management.
We are engaging in frequent and open
Karen Peetz will retire from the board at our
communication with our regulators about
Annual Meeting of Shareholders in April
our progress.
2019. Karen has been effective at framing risk
management imperatives and insisting on
Enhancing risk management.
individual accountability, especially in her role
Wells Fargo has been and remains an
as chair of the Risk Committee. Since Karen
industry leader in credit, market, and
joined the Risk Committee, we have brought
liquidity risk management. Over the years,
on to our board and Risk Committee additional
the company has demonstrated an ability
expertise in risk management of financial
to manage through difficult economic
institutions. By announcing her retirement
conditions, including the 2008 financial
decision early, Karen has again demonstrated
crisis, but management of compliance and
her commitment to responsible governance
operational risks needed improvement.
by ensuring a smooth transition of Risk
We have new leadership in the chief risk
Committee chair to Maria Morris, who will
officer, chief compliance officer, head of
continue the work Karen started.
Regulatory Relations, and chief operational
O V E R S I G H T
risk officer roles. They have developed and
are busy implementing plans to continue
Our board oversight in 2018 focused heavily
building our operational and compliance
on identifying, understanding, and resolving
risk management systems to a level that
issues within the company, including
matches our business, structure, and
concerns identified by our regulators.
strategies. These plans include enhancing
We are also looking to the future. In his letter
management-level governance committee
to shareholders, Tim details management
structures, oversight, monitoring and
strategies to achieve our six company goals
controls, and escalation processes and
of becoming the financial services leader in
procedures. Our objective is to build an
customer service and advice, team member
industry-leading risk management program.
engagement, innovation, risk management,
corporate citizenship, and shareholder value.
Operational excellence. Many of our past
Going forward, board oversight of those
operational risk problems stemmed from
goals will emphasize the following:
weaknesses in underlying operations.
Meeting regulatory expectations.
to inventory and map all our business
We recognize the importance of fully
processes. While identifying risk areas
In 2018, management launched a project
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will improve our control testing and
S TA K E H O L D E R I N T E R A C T I O N
monitoring functions, reducing the number
For the past several years, our independent
and complexity of our business processes
directors have participated in a shareholder
also offers the potential for improving
engagement program to help us better
the efficiency and effectiveness of core
understand our shareholders’ views on key
operations. We expect this work to
corporate governance and other topics.
improve the customer and team member
The candid feedback of our shareholders
experience, reduce operating costs, and
helps us define priorities, assess progress,
enhance risk management.
and enhance our corporate governance
practices. In 2018, I met with shareholders
Oversight of culture and human capital
representing more than 35 percent of our
management. We continue to assess
company’s common stock to discuss our
and shape the company’s culture, with
governance approach.
an emphasis on such areas as ethics,
training and development, and diversity
Our board is also focused on corporate
and inclusion. One of the guiding values
citizenship, which is overseen by the board’s
of Wells Fargo is “people as a competitive
Corporate Responsibility Committee.
advantage.” We expect to devote a
The committee reviews environmental and
substantial amount of board attention to
social governance practices and policies.
talent management strategies, including
Following our 2018 Annual Meeting of
plans to attract, retain, reward, develop,
Shareholders, Corporate Responsibility
and care for the very best people available.
Committee members met with members
We recognize the importance of rewarding
of our external Stakeholder Advisory Council
outstanding performance and holding
to seek feedback and insights on current
team members accountable.
and emerging issues important to them.
Tim and I continued to meet with the council
Technology. New generations of customers
during the year to discuss such varied topics
and team members expect technology to
as mortgage lending, services for unbanked or
work seamlessly and intuitively. Thoughtful
underbanked consumers, our efforts to help
use of emerging technologies can enable
customers avoid and reduce overdraft fees,
quantum leaps in innovation and efficiency.
environmental commitments, human rights,
At the same time, cyber risk is at an all-time
and reputational risk issues.
high. We want to make sure all our systems
operate on up-to-date platforms, are able to
One of our most significant responses to
process and protect massive amounts of data,
shareholder feedback was the publication of
and contribute to our vision of operational
a Business Standards Report on our website
excellence and leadership in innovation.
in early 2019. The report was the culmination
of engagement with a group of stakeholders
We have already made progress in each
led by the Interfaith Center on Corporate
of these areas, and we will continue to focus
Responsibility, which requested the report.
on them in 2019.
The report discusses our business practices and
the many fundamental changes we have made —
and continue to make — as we transform our
We do not take our strengths for granted.
company. The report also details what we have
We intend to continue to strengthen risk
learned and what we have changed as we work
management, streamline and simplify
to improve the company and rebuild trust.
operations, and innovate responsibly so we
I encourage you to read it.
can build on our strengths. The goal of all
“ The entire board remains
excited and optimistic about
Wells Fargo.”
these efforts is to become even more customer-
focused, innovative, and better positioned for
the future — creating long-term value for
our shareholders.
I N A P P R E C I AT I O N
On behalf of the directors of your company,
L O N G -T E R M S H A R E H O L D E R VA L U E
thank you for choosing to invest in Wells Fargo
Over the past few years, management and the
and for your continued faith in the future of our
board have devoted a substantial amount of time
company. Even though much work remains, we
and attention to the problems we have found
believe we are on the right path and are making
in our company. Finding, fixing, and atoning for
real progress. We are confident we have a CEO
those problems is necessary to build our future
and management team with the vision and
on a strong foundation and is required to meet the
strategy to achieve our goals — and to fix the
expectations of our regulators and regain the
problems of the past while building a strong
trust of our customers, team members, and the
foundation for the future. The changes the
public. Through it all, we have also delivered solid
company is making are showing positive signs,
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financial performance. The company earned
and we are confident in our success.
$22.4 billion in 2018, or $4.28 per diluted
common share, the highest earnings per share
I encourage you to carefully review this
in the company’s history. Our ability to sustain
report, our 2019 proxy statement, and the
solid financial performance in the face of our
other materials the company makes available
recent challenges is a testament to the fi nancial
to shareholders to better understand the
durability provided by our core franchise and
opportunities and challenges ahead and
diversified business model.
Wells Fargo’s work to execute its strategy.
Our capital levels are well in excess of regulatory
building and protecting the long-term value
We are steadfast in our commitment to
minimums. As part of the company’s goal of
of the company.
delivering long-term shareholder value, we’re
committed to returning capital to shareholders
The entire board remains excited and
when appropriate. During 2018 we returned a
optimistic about Wells Fargo.
record $25.8 billion in capital to shareholders
through common stock dividends and net share
repurchases, representing a 78 percent increase
from 2017. In January 2019, we increased the
quarterly common stock dividend from 43 cents
to 45 cents per share.
E L I Z A B E T H A . D U K E
Chair, Board of Directors
Wells Fargo & Company
February 15, 2019
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To Ou r Owne rs
I am as optimistic as
ever about the future
of Wells Fargo.
We have a clear vision and deeply held values.
and our team members. We continued to make
Our company continues to produce strong
progress in our efforts to address past issues
financial results, we have robust goals in place,
and rebuild trust with stakeholders. While we
and I believe we have the best team members
have more work to do, we have learned from our
in the business to execute on our goals for our
mistakes and are making fundamental changes
70 million customers.
as we transform Wells Fargo for the future.
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We are building on a truly remarkable history.
T H E D U R A B I L I T Y O F T H E F R A N C H I S E
Wells Fargo has prospered for 166 years, an
I believe Wells Fargo is prepared for the future —
incredibly durable franchise. Our symbol, the
for evolving customer preferences, for emerging
stagecoach, was not only transformative in its
technologies, for new risks, and more — and I am
time, it also signifies forward momentum. Today
confident that our underlying strengths provide
we are maintaining that momentum in many
a very strong foundation for success. These
ways, including a new brand strategy inspired by
strengths include our diversified business model,
human ingenuity and featuring a more modern
which has enabled us to perform well through
version of the stagecoach.
a variety of interest rate and economic cycles.
In 2018, we further strengthened the foundation
We also have industry-leading distribution, both
for our road ahead through new products and
physical and digital. We are a longtime leader in
services, improvements in the customer
providing innovation for our customers, and our
experience, greater operational efficiency, and
pace of innovation has increased.
deepened commitments to our communities
T I MOT H Y J. S LOA N | C h i e f E x e c u t i v e O f f i c e r a n d P r e s i d e n t , W e l l s F a r g o & C o m p a n y
We have a large customer base, serving one in
W E A R E T R A N S F O R M I N G
three U.S. households, and our valuable low-cost
F O R T H E F U T U R E
deposit franchise includes $1.3 trillion in deposits.
The future of the financial services industry
We offer a broad product set at scale, including
encompasses many different aspects, and
being among the largest lenders in the U.S., and
I am confident that Wells Fargo is taking
our outstanding team is committed to serving
a comprehensive view.
our customers.
This year, we have made significant progress on
Our strong credit discipline has enabled us to
strengthening our risk management, especially
perform well through numerous credit cycles,
operational and compliance risk. This is a top
and we currently have historically low charge-
priority for the company and for me. To further
offs. We have delivered consistent shareholder
our risk management capabilities, we’ve made a
returns and built a strong capital position,
tremendous investment in people, technology,
and we remain committed to returning more
infrastructure, and cybersecurity.
capital to shareholders.
In January 2019, we released a Business
we put our vision and values, the bedrock of our
Standards Report detailing the actions we have
company, into practice. And that’s how we will
taken to address past issues and outlining our
achieve our goals. Culture also means that we
business practices and areas of focus as we
work as a team to hold each other accountable.
We also continue to focus on our culture. It’s how
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move forward. The report addresses how we
In order for Wells Fargo to fulfill its vision of helping
are improving our culture, making things
our customers succeed financially, every team
right for customers who were harmed, and
member needs to be living our values every day.
strengthening our risk management and
controls. Titled “Learning from the past,
We made several leadership changes in 2018.
transforming for the future,” it represents
For example, we welcomed a new chief risk
our commitment to transparency as well as
officer, Mandy Norton, who brings nearly three
an important step in engaging and rebuilding
decades of financial industry experience to the
trust with all of our stakeholders.
role. Mandy has immediately made her mark
as an experienced and insightful leader who
Every day I meet with people who have a stake
has driven our risk management work forward
in our success — including customers, team
throughout the company.
members, community leaders, investors,
and government leaders. These conversations
We announced that Saul Van Beurden, who has
are the best part of my day! The feedback I hear
25 years of financial services experience, will fill
is one way to affirm that we’ve made a lot of
the new head of Technology role at our company,
progress in transforming Wells Fargo. We have
reflecting the importance of centralizing and
work ahead, and we are staying focused on
elevating that work. And Julie Scammahorn will
our six company goals: becoming the financial
join Wells Fargo as chief auditor. Julie brings
services leader in customer service and advice,
significant experience and a proven track record
team member engagement, innovation, risk
to this role, having led large audit functions for
management, corporate citizenship, and
global financial services institutions. Saul and
shareholder value.
Julie will join our Operating Committee. I also
elevated our head of Human Resources, David
greater consistency and manage risk. A key
Galloreese, who joined the company in 2018, to
component of the centralization process was
the Operating Committee, reporting to me, and
the consolidation of 57 regional business
consolidated our Corporate Philanthropy and
centers into four regional hubs, which we
Community Relations work with the Stakeholder
completed in 2018. This transformation
Relations function led by Jim Rowe, who also
was designed to enable us to better serve
reports to me.
“ We are making changes to
better serve our customers, as
we continue to put them at the
center of everything we do.”
our customers and improve our efficiency
by simplifying change delivery, reducing
operational risk, leveraging enterprise
infrastructure and standards, improving
consistency, increasing career development
opportunities for team members, and
creating economies of skill and scale by
co-locating similar functions.
Wealth Management’s Fiduciary Management
I am pleased that 2018 was another great year
Services team instituted a series of enhance
of innovation for our customers and clients.
ments to its client service model in 2018,
We prioritize innovation not in terms of what
including moving to a single point of contact
we can do, but based on what our customers
from a team-based model for serving affluent
tell us they want and need. That means the
fiduciary and trust clients, having newly
continued expansion of services such as
assigned relationship managers proactively
Pay With Wells Fargo5, now in pilot; our online
reach out to each client, and implementing
mortgage application; and Control Tower™.
an automated workflow tool to provide front
office partners with visibility into servicing
We are also focused on operational excellence,
requests. One result is that overall client
which we are driving through every corner of
loyalty and satisfaction increased more than
our business. This effort includes reducing the
10 percentage points.
number of processes we have for any given
task and assessing the efficiency of those
We’re in the process of transforming our
processes. We are considering where there are
Wholesale Banking division to reduce
risks in our operations and how we can mitigate
duplicative processes and platforms and
them. We are evaluating the number of platforms
break down the silos that exist across
and technology tools we use in our work and
our businesses so we can provide a more
how we can combine and reduce them. And,
consistent and efficient customer and team
finally, we are ensuring that we have the proper
member experience. That should allow us
oversight and the proper testing for each of our
to do a better job of serving the customer’s
processes. Some examples:
existing and emerging needs. Since I spent
many years of my career in the Wholesale
Wells Fargo Auto, which serves more than
Banking business, I know firsthand what
3 million auto loan customers and more
an incredible difference these operational
than 11,000 auto dealers, centralized
improvements can make for our team
back-office business functions to create
members and our customers.
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We have brought together more than 200
as growth in net interest income was more than
team members from 14 teams to create an
offset by a decline in noninterest income.
Estate Care Center of Excellence, focused on
simplifying the estate settlement process
Credit quality remained strong with our net
for survivors when a loved one passes
charge-off rate near historic lows. Our capital
away. When rollout is complete to all of our
levels also remained strong, and we returned a
branches, survivors will no longer have to
record $25.8 billion to shareholders in 2018,
contact multiple lines of business to deal
up 78 percent from 2017, including reducing
with finances. A dedicated team member
our common shares outstanding by 6 percent
will support them throughout the process,
in 2018.
reducing required paperwork and providing
access to new digital self-service capabilities
With respect to the Federal Reserve consent
to simplify settling an estate. In the wake of
order from February 2018, we continue to have
the tragic wildfires in Northern California, the
constructive dialogue with the Federal Reserve
Estate Care Center of Excellence developed
on an ongoing basis to clarify expectations,
special procedures to assist family members
receive feedback, and assess progress. In order to
who lack traditional documentation.
have enough time to incorporate this feedback
into our plans in a thoughtful manner, adopt
Finally, we’ve made good progress in making
and implement the final plans as accepted by
things right for our customers. We created a
the Federal Reserve, and complete the required
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Customer Remediation Center of Excellence
third-party reviews, we are planning to operate
to establish a consistent approach to managing
under the consent order’s asset cap through the
and executing remediation efforts across
end of 2019. Making the changes necessary to
Wells Fargo. This includes strengthening internal
ensure we meet regulatory expectations remains
governance and reporting processes to achieve
a top priority, as is continuing to serve our
greater accountability. It also includes investing
customers and help them succeed financially.
in specialized teams dedicated to remediation
We believe that we can achieve both of these
efforts and providing them the resources they
priorities while we operate under the asset cap.
need to provide outstanding service to customers.
O U R C O M PA N Y G O A L S
All of these elements are examples of the
More than a year ago, I introduced six company
significant milestones we accomplished in 2018.
goals, so everyone at Wells Fargo would be clear
F I N A N C I A L R E P O R T
on the most important things we need to do to
continue to move forward. Our goals are rooted
Our financial results in 2018 were solid.
in our vision — to satisfy our customers’ financial
Wells Fargo generated $22.4 billion in net
needs and help them succeed financially — and
income in 2018, or $4.28 per diluted common
our company values of doing what’s right for
share, the highest earnings per common share
customers, people as a competitive advantage,
in the company’s history. We achieved our
ethics, diversity and inclusion, and leadership.
2018 expense target. Expenses declined,
driven by lower operating losses as well as the
I am delighted that in 2018 we made very strong
progress we’ve made to reduce expenses while
progress toward our goals.
reinvesting in the business. Revenue declined
T H E V I S I O N , V A L U E S & G O A L S
O F W E L L S F A R G O
Our Vision
Our Goals
We want to satisfy our customers’ financial
needs and help them succeed financially.
We want to become the financial services
leader in these areas:
Our Va lues
What’s right for customers
People as a competitive advantage
Ethics
Diversity and inclusion
Leadership
Customer service
and advice
Team member
engagement
Innovation
Risk management
Corporate
citizenship
Shareholder
value
C U S T O M E R S E R V I C E A N D A D V I C E
might want an auto, mortgage, or small business
We are making changes to better serve our
loan; a retirement savings account; or the services
customers, as we continue to put them at the
of our wealth management team. Having one
center of everything we do. As a company,
Consumer Strategy means we are with our
we have always emphasized working together
customers at every step of their financial lives.
as a team to provide the best service for all
our customers — because no matter the role,
We are continuing to improve the customer
our work affects them.
and team member experience within Consumer
Banking with speed, convenience, and new
How we serve our customers’ needs is evolving.
digital offerings. Our branch survey scores for
Our Consumer Strategy is a holistic approach
“Customer Loyalty” and “Overall Satisfaction
designed to meet our customers’ financial needs
with Most Recent Visit” reached a 24-month
by anticipating and serving every stage of their
high in December 2018.
financial journey — and it extends across all of
our consumer businesses.
The Customer Relationship View, a new customer
relationship platform we developed, gives our
When customers start their financial journey,
team members a more holistic view of each
they may rely on balance alerts so they can
customer and saves customers from rehashing
monitor their checking account status more
interactions they’ve already had. For example,
closely. (We sent an average of 37 million
one of our bankers in Lubbock, Texas, phoned a
monthly zero-balance and customer-specific
longtime customer to thank him for his business,
balance alerts to our customers last year!)
and in the course of their conversation, the banker
Or Overdraft Rewind®, which helped more
reminded him that he had more than 64,000
than 2.3 million customers avoid overdraft
unused credit card points.
charges in 2018. Eventually, customers
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The customer was then advised that he could
customers every day and demonstrate great
redeem the points through our Go Far® Rewards
optimism about our future. Our voluntary team
program. The customer redeemed the points
member attrition improved to its lowest level
for cash, which he used to buy plane tickets
in six years in 2018. Team members are truly
for family members so they could visit him
our greatest asset.
and his wife.
They are also the source of some of our best ideas!
Changes like these help our team members
In 2018, we continued to gather their ideas and
become better connected with their customers
feedback through multiple channels, including
and maintain their focus on our customers’
surveys, focus groups, our internal team member
needs. Between May and December 2018, our
portal, and town hall meetings. Our team members
bankers reached out to 3.3 million customers
will tell you that I am the biggest cheerleader for
to thank them for their business, respond to
our surveys, because I believe so strongly in the
their questions, and make appointments for
importance of their feedback. In fact, I think they
in-person consultations.
get tired of me reminding them to take advantage
of every opportunity to have their voices heard.
We are also transforming our Wealth and
Investment Management businesses to make
Our team members are the face of Wells Fargo,
them more client-centric. The changes we
and they drive our company culture. In 2018,
are making are designed to make WIM faster,
we introduced a set of clear and common
simpler, and better for clients, with a focus on
behavioral expectations for all team members.
the research, thought leadership, and advice
These expectations describe how team members
that WIM clients value. An example is Envision
should conduct themselves at work, and this
Scenario, introduced in 2018, which allows
allows us to more consistently align individual
clients to see how changing their investment
actions with our Vision, Values & Goals. We help
decisions can impact their investment goals.
ensure accountability and measure performance
And as I stated earlier, putting the customer at
leadership objective that all team members
the center of everything we do also means that we
had as part of their 2018 performance plans.
make things right for them. So we have worked to
A common “One Wells Fargo” culture helps
implement a consistent, companywide customer
ensure that we are focused on the right things
against these expectations through a single
complaints strategy, using data and analytics so
to drive our success.
we can assist our customers with their concerns
more proactively and, when necessary, direct them
“ Team members are truly
to a team member with expertise to understand
their concerns and resolve them.
our greatest asset.”
T E A M M E M B E R E N G A G E M E N T
I am privileged to meet regularly with our
Diversity and inclusion, one of our five primary
customers and community leaders, and I hear
values, is essential to our success. In order
their appreciation and praise for our team
to satisfy our customers’ financial needs and
members. I am proud of Wells Fargo’s 259,000
help them succeed financially, our team needs to
hardworking team members, who take care of
reflect the diversity of our customers in the U.S.,
which is growing more diverse every day, and
said above, we seek out team member feedback
around the world. I also strongly believe that when
regularly so we can measure the effectiveness of
you get people with different experiences in a
what we offer, and we use team member ideas
room or working on a team together, you get better
and opinions to drive our engagement efforts.
ideas and better problem solving. I’m proud that
our efforts have been recognized externally by the
Most important, through their feedback, our team
Bloomberg Gender Equality Index, DiversityInc,
members remind me how important the work
the Human Rights Campaign, and the National
we do is, because they tell me how much they
Organization on Disability.
care about our customers.
An example of our focus on diversity and
I N N O VAT I O N
inclusion in action is our commitment to military
At Wells Fargo, we are innovating because our
service members and veterans. At any one time,
customers are asking for it. They expect us to keep
Wells Fargo has more than 250 team members
up with other technological advances they see in
on active duty. We support those team members
their daily lives. Convenience used to mean a bank
through financial and other benefits. We value
branch on every corner, but now there are a variety
the leadership and skills of military veterans,
of channels our customers can use to engage
and we have a number of recruiting programs
with us: a branch, their phones, online banking,
in place to help us identify and hire veterans.
and more. As customer engagement continues
to grow, we are using customer feedback to drive
Our team members are our competitive advantage,
new products and services.
and we continue to invest in them in many ways.
15
In 2018, we increased the minimum base pay
An example is the new Wells Fargo Propel®
in the U.S. to $15 an hour, which benefited
American Express® Card (page 36). Propel offers
approximately 36,000 team members. We also
one of the most compelling rewards programs
reviewed pay for team members whose salaries
for no-annual-fee cards, and we’re delighted
were at or slightly above the new minimum wage
with its success so far. It came to life because
and increased the base pay for approximately
our customers and our team members told us
50,000 team members. Our team members receive
what they wanted.
competitive salaries, training and development
offerings, and leadership opportunities. And we
Our innovation program is focused on five areas that
spend approximately $13,000 annually per
can help us deliver additional value to our customers.
U.S. team member to provide affordable health
care options, work-life balance programs, 401(k)
First, we are creating digital account opening
matching contributions, a discretionary profit-
sharing plan, and family leave. In 2018,
approximately 250,000 team members
experiences for many of our products so
the experience is simple and fast and helps
customers get the most out of their new
worldwide were awarded restricted share rights
accounts. An example is our online mortgage
equivalent to 50 shares of Wells Fargo stock to
application (page 34). Usage of our online
eligible full-time employees, and the equivalent
mortgage application saw a steady increase
of 30 shares to eligible part-time employees, with
throughout 2018, with online applications
a two-year vesting period. This ties their success
representing 30 percent of our total retail
to what’s important to our shareholders. As I
applications in December.
“ I am confident that our
strong innovation program
will allow us to continue
to provide lasting value
to customers.”
Since we centralized our innovation work in 2016,
we have increased the pace of innovation and
new product development. I am confident that
our strong innovation program will allow us to
continue to provide lasting value to customers and
maintain and strengthen our market leadership.
R I S K M A N A G E M E N T
Second, we are enhancing our payments
Risk management continues to be a priority
capabilities so customers can easily make
for the company, and, to that end, in 2018 we
payments as well as gain more visibility
continued to invest in technology, infrastructure,
into and control over their accounts. For
cybersecurity, and people. We have adopted and
instance, Zelle5 allows customers to make
are implementing our enhanced risk management
real-time payments to friends and family,
framework. We have added a number of new
and later this year we plan to complete the
leaders to the risk management team, through both
rollout of Pay With Wells Fargo SM, which
internal and external hires, including more than
displays customers’ most commonly used
3,200 risk management team members hired from
payment features on our mobile app home
outside the company over the past three years. We
screen, making it quick and easy to send a
now have more clarity of roles and responsibilities
payment, pay a bill, or make a transfer.
across the entire company, providing breadth to
our risk management discipline.
16
Third, we are building personalized experiences
for every customer. For example, Greenhouse®,
We have historically been strong in many areas
our mobile banking app with cash management
of risk management, including credit risk,
expertise for new-to-banking customers,
market risk, and liquidity risk. We know we
offers personalized guidance to help customers
have work to do in compliance and operational
save for monthly expenses and manage their
risk, and under Chief Compliance Officer Mike
money responsibly, and we expect its rollout
Roemer’s leadership, most of the Compliance
in 2019.
team is now part of one organization and, after
centralization, numbers nearly 4,000 team
Fourth, we are building capabilities to allow
members. Mike is focused on transforming
us to seamlessly serve customers through
our compliance function into a competitive
multiple channels. We are bringing digital
advantage for the company and integrating
experiences to our branches to speed
and implementing best practices across the
authentication and account opening, and
company. Our Operational Risk team, under
we offer banking and payment services on
the leadership of Chief Operational Risk Officer
non-Wells Fargo platforms.
Mark Weintraub, oversees the management of
operational risk exposures and the effectiveness
Finally, we are building capabilities and
of our operational risk management practices.
technologies that enable innovation, such as
This includes educating and empowering team
artificial intelligence, identity management,
members to identify and assess risks and help
distributed ledger, and application
ensure we have the right controls in place to
programming interfaces.
mitigate those risks.
Through our enhanced risk management
This problem-solving mindset was showcased in
framework, we have a greater ability to understand
our October announcement of the Where We Live5
and manage our risks in a comprehensive and
program in Washington, D.C., which combines the
holistic manner. As a result, we can better drive
power of philanthropy and our market-leading
and support effective decisions about risk
lending businesses with our deep community
management at all levels of the company.
partnerships. We made a five-year commitment
We continue to work very hard and through
of $1.6 billion to help revitalize disadvantaged
multiple avenues to strengthen risk management.
neighborhoods in the district. Through our
We aren’t finished and continue to make progress,
collaboration with the National Community
building on the changes we have made.
Reinvestment Coalition and nearly 20 other local
Hand in hand with the enhancements we have
affordable housing, small business growth, and
made to our risk management framework is
job skills for underserved residents in Ward 7 and
our continued emphasis on our “raise your
Ward 8 through corporate philanthropy and our
hand” culture, in which every team member is
mortgage and small business lending businesses.
community organizations, we plan to increase
encouraged to speak up if they need help or see
something that doesn’t look right. We’ve coupled
We continue to make progress in our efforts to
that effort with enhanced escalation channels and
address the negative consequences of climate
processes to help ensure that any questions raised
change and other environmental challenges
by team members are investigated thoroughly
affecting our planet. In addition to reducing our
and confidentially. Every team member has
company’s environmental footprint, in April
personal accountability for managing risk.
2018 we announced our commitment to provide
$200 billion in financing to sustainable businesses
C O R P O R AT E C I T I Z E N S H I P
and projects by 2030, with more than 50 percent
I believe our commitment to corporate citizenship
focused on clean technology and renewable energy
sets us apart. Our goal is clear: We want to help
transactions to help accelerate the transition
people and communities succeed financially in
to a low-carbon economy. This commitment
all of the places where we live and do business.
demonstrates how our products and services,
We take a comprehensive approach to increasing
operations and culture, and philanthropy can be
access to economic opportunities and strengthening
harnessed toward a single goal. As an example,
local neighborhoods, working with a range of
Wells Fargo committed capital in construction
public and private sector stakeholders to understand
debt, as well as the tax-equity funding of $35 million,
the most urgent problems and the solutions that
for Origis Energy’s new solar generation facility in
can have the most impact.
“Our goal is clear: We want to
help people and communities
succeed financially in all of
the places where we live
and do business.”
Orange County, Florida. This facility will include
more than half a million solar panels, producing
and transmitting enough renewable electricity to
reduce greenhouse gas emissions by more than
57,000 tons per year.
One of my personal highlights this year was
announcing and then surpassing our $400 million
philanthropy target for 2018. Wells Fargo donated
$444 million in 2018 to nearly 11,000 nonprofits
17
18
to help communities and people in need. It is
Wells Fargo has a solid base from which to
exciting to think of the positive change we can
achieve this goal, including strong levels of
make in our communities and in people’s lives
capital and liquidity. And historically, we have
through the Wells Fargo Foundation, which is
generated steady financial performance over
investing an average of more than $1 million
time and through different economic cycles.
a day toward important causes and into the
We also remained disciplined regarding credit.
communities we serve. Beginning in 2019,
Our net charge-off ratio in 2018 was near
we are targeting 2 percent of our after-tax
historic lows, and our nonperforming assets
profits for corporate philanthropy. We were
declined 16 percent from a year ago.
recognized in 2018 as the No. 2 most generous
cash donor in the U.S., and the top financial
We returned $25.8 billion to our shareholders
institution in overall giving, by The Chronicle
through common stock dividends and net share
of Philanthropy (based on 2017 data).
repurchases in 2018, up 78 percent from 2017.
We reduced our common shares outstanding by
We all have causes that are especially near and
6 percent in 2018, the sixth year in a row we have
dear to our hearts, and the WE Care Fund is close
reduced our common share count. In July 2018, we
to mine. The WE Care Fund, now in its 17th year,
increased our quarterly common stock dividend
provides financial grants to help team members
to 43 cents per share, and in January 2019, we
recover from natural disasters, accidents, and
increased our quarterly common stock dividend
other life-changing events. Team member
to 45 cents per share.
donations to the WE Care Fund are augmented
by funding from the Wells Fargo Foundation.
Our efficiency initiatives contribute to our ability
One team member found support and assistance
to provide long-term shareholder value. They are
when her husband was diagnosed with an
focused on three areas: further centralization
aggressive form of amyotrophic lateral sclerosis,
and optimization to create a simpler and
or ALS. With the help of a WE Care Fund grant,
more collaborative Wells Fargo, realigning
they were able to build a wheelchair ramp at
our businesses to more efficiently serve
their home, giving them one less expense
customers, and enhancing our governance and
to worry about. The WE Care Fund is just one
enforcement of controls and policies to drive
of many ways our team members contribute
down costs. We met our expense target in
their financial resources and volunteer hours to
2018, and we remain committed to meeting
make our communities and our teams better.
our expense targets for 2019 and 2020.
I am deeply moved by the care that our team
members demonstrate for each other every day.
As planned, we completed 300 branch
S H A R E H O L D E R VA L U E
consolidations in 2018 and sold 52 branches
in the fourth quarter. Following these changes,
Our first five company goals all contribute to our
our physical distribution remains unparalleled
final goal, which is to deliver long-term shareholder
in the industry; we have branches in more
value through our diversified business model, a
states and in twice the number of markets as
solid risk discipline, efficient execution, a strong
our peers. We believe we have an opportunity
balance sheet, and a world-class team dedicated to
to further reduce redundancies without
meeting the financial needs of our customers.
meaningfully affecting our distribution, while
having room to grow in many of our businesses.
O U R P E R F O R M A N C E
$ in millions, except per share amounts
20 18
20 17
% CH ANGE
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
Debt securities5
Loans
Allowance for loan losses
Goodwill
Equity securities5
Assets
Deposits
Common stockholders’ equity
Wells Fargo stockholders’ equity
Total equity
Tangible common equity1
Capital ratios6:
Total equity to assets
Risk-based capital7:
Common Equity Tier 1
Tier 1 capital
Total capital
Tier 1 leverage
Common shares outstanding
Book value per common share8
Tangible book value per common share1, 8
Team members (active, full-time equivalent)
$
$
$
$
$
22,393
20,689
4.28
22,183
20,554
4.10
1.19 %
1.15
11.53
13.73
65.0
86,408
30,282
1.640
4,799.7
4,838.4
11.35
13.55
66.2
88,389
29,905
1.540
4,964.6
5,017.3
945,197
1,888,892
1,275,857
747,183
956,129
1,933,005
1,304,622
758,271
2.91 %
2.87
484,689
953,110
9,775
26,418
55,148
1,895,883
1,286,170
174,359
196,166
197,066
145,980
473,366
956,770
11,004
26,587
62,497
1,951,757
1,335,991
183,134
206,936
208,079
153,730
10.39 %
10.66
11.74
13.46
16.60
9.07
4,581.3
38.06
31.86
258,700
12.28
14.14
17.46
9.35
4,891.6
37.44
31.43
262,700
1
1
4
3
2
1
(2)
(2)
1
6
(3)
(4)
(1)
(2)
(2)
(1)
1
2
-
(11)
(1)
(12)
(3)
(4)
(5)
(5)
(5)
(5)
(3)
(4)
(5)
(5)
(3)
(6)
2
1
(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 securities, 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.
4 Consumer and small business banking deposits are total deposits excluding mortgage escrow and wholesale deposits.
5 Financial information for 2017 has been revised to reflect the impact of our adoption in first quarter 2018 of Accounting Standards Update (ASU) 2016-01 – Financial Instruments – Overall (Subtopic 825-10):
Recognition and Measurement of Financial Assets and Financial Liabilities, which amends the presentation and accounting for certain financial instruments, including equity securities. See Note 1 (Summary
of Significant Accounting Policies) to Financial Statements in this Report for more information.
6 See the "Financial Review – Capital Management" section and Note 28 (Regulatory and Agency Capital Requirements) to Financial Statements in this Report for additional information.
7 The risk-based capital ratios were calculated under the lower of Standardized or Advanced Approach determined pursuant to Basel III. Beginning January 1, 2018, the requirements for calculating common equity
tier 1 and tier 1 capital, along with risk-weighted assets, became fully phased-in; however, the requirements for calculating tier 2 and total capital are still in accordance with Transition Requirements. See the
“Financial Review – Capital Management” section and Note 28 (Regulatory and Agency Capital Requirements) to Financial Statements in this Report for additional information.
8 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.
19
As an example, we streamlined the retail
I am also thankful for our customers, who are at
mortgage sales operation, eliminating layers
the center of everything we do. And I am especially
and reengineering the mortgage fulfillment
grateful for our 259,000 talented team members,
process. We will continue to look for ways to
who work hard every day to ensure we realize our
improve efficiency as we focus on creating
vision of satisfying our customers’ financial needs.
long-term shareholder value.
I am honored to lead them.
I N C L O S I N G
The future always brings both opportunities
I am confident that Wells Fargo is well-positioned
and challenges, and I feel optimistic about what
for the future. In 2019, we will continue working
lies ahead for Wells Fargo. I thank you, our
to build the most customer-focused, efficient, and
shareholders, for your support of Wells Fargo
innovative Wells Fargo ever — characterized by
during 2018 and as we travel our road ahead.
a strong financial foundation, a leading presence
in the markets we serve, focused growth within a
strong risk management framework, operational
excellence, and highly engaged team members.
As we look ahead, we won’t lose sight of our roots
and our company’s history. We are building on
an exceptionally strong foundation to transform
Wells Fargo into a better bank for the future.
T I M O T H Y J . S L O A N
Chief Executive Officer and President
Wells Fargo & Company
February 15, 2019
20
Coupled with the strong optimism I feel for the
future of our company is a deep sense of gratitude.
I am thankful for the leadership, guidance, and
support of Betsy Duke, our board chair, and our
other highly qualified, hard-working, and dedicated
board members. I would like to especially
recognize Karen Peetz, who is retiring from the
board this year, for her contributions, and welcome
Wayne Hewett, who joined the board this year
and brings deep experience in business operations
and processes.
As Wells Fargo makes
progress on the road
ahead, CEO Tim Sloan
has established six
goals to guide us.
The stories that follow illustrate just a few
of the many ways we are working to become
the financial services leader in:
21
Customer service and advice
Team member engagement
Innovation
Risk management
Corporate citizenship
Shareholder value
Le a r n m o re a b o u t eve r yo n e fe a t u re d i n t h i s ye a r ’s A n n u a l Re p o r t a t w e l l s fa rg o.c o m /s to r i e s
Strengthening financial health through
focused conversation
WHEN DARLENE AHMED NEED ED GUIDANCE ON HER FI NANCIAL JOURNEY,
SHE FOUND IT IN WELLS FARGO’S FINAN CI AL HEALTH CONV ERS ATI ON S PRO GRAM.
Talking about money isn’t always easy, but it can be a tremendous help.
Darlene Ahmed of Fruitland Park, Florida, found that out last year when a series of focused
conversations helped her transition from renting an apartment to owning her first home.
It was the kind of talk that takes place daily in all parts of Wells Fargo — in person, over mobile
devices, and on the phone.
Ahmed, 57, a certified nursing assistant at an assisted-living facility, had rented for years while raising
a child — financially secure but unsure if she was ready for homeownership. When she became an
empty nester, she figured the time might be right. She called Wells Fargo Home Lending and soon
learned she couldn’t be pre-approved for a mortgage. The culprit? A low credit score.
22
“I was shocked when I heard what my credit score was,” Ahmed said. She was put in touch with
Financial Health Banker Dustin Griffin in Sioux Falls, South Dakota. Griffin started by asking
questions, and soon the two had hit upon a hard fact: What Ahmed always thought was good —
no credit cards, no loans, no lines of credit — actually meant a thin credit history and low credit score.
So over a series of short conversations, Griffin recommended that Ahmed start slowly building her
credit history — applying for a couple of credit cards, paying off all purchases on time, and never
using more than 30 percent of the available balances.
Months later, when she tried for pre-approval again, “I got approved and a week later found
my house on my birthday,” said Ahmed. “Dustin was right there for me every step of the way,
giving me peace of mind, confidence, and guidance.”
Griffin said, “Once she figured out what she wanted, there was no stopping her! I just helped lay
out a clear path for her to get there.”
Since 2015, Griffin and his Wells Fargo teammates have helped nearly 50,000 customers learn to
save more and strengthen their credit through Financial Health Conversations, a program for
customers who request additional help to save more, improve credit, or save for a home. Wells Fargo
operates the program from contact centers in Sioux Falls; Charlotte, North Carolina; Richmond,
Virginia; and Phoenix — as well as El Monte, California, and San Antonio, which also serve
Spanish-speaking customers. The team conducts more than 400 conversations weekly.
Griffin concluded, “It’s important to me not just to give out information but to form a real bond
and connection with customers like Darlene. I couldn’t be happier for her.”
Righ t: Da rlene Ahmed at her home in Fru itl and Park , Fl orida.
23
A plan to provide
working capital
24
B USINESS OWNER RAY HUFNAGEL G OT FIN AN CI AL PLAN N ING HELP — AND THE
FINANCING HE NEEDED TO G ROW — FROM HI S WELLS FA RG O BA NKER.
Now that a decade has passed, businessman
So Hufnagel connected with Wells Fargo
Ray Hufnagel can see that the low point for
Commercial Banker Jay Hong of Pasadena,
his company also was a catalyst for its success
California, who recognized an opportunity
today. But it didn’t feel like it at the time.
for growth in the then-regional company that
Plastic Express, a logistics services company
resin — the BB-sized core ingredient for all
specialized in loading and shipping plastic
based in City of Industry, California, was like
plastic products.
many businesses that struggled at the beginning
of the Great Recession. Despite a 30-year track
Together, Hufnagel and Hong devised a plan
record, it didn’t turn a profit in 2008, and the
to meet Plastic Express’ short-term needs
company was rebuffed when it turned to its bank
while also looking strategically at the years
for advice. “Everything was great with our old
ahead. Hong said, “To meet the demand for
bank until our checking account went to zero,”
the unique service Plastic Express provides,
said Hufnagel, president and CEO. “They really
and to be prepared to earn new business,
weren’t interested in looking at our financials or
they needed access to capital — often ahead
helping us plan. I just didn’t feel supported.”
of revenue coming in. So Wells Fargo did the
research and worked with their team.
25
“Now we provide the working capital the
to deliver for our customers — as well as
company needs to finance things like new
quadrupling gross revenue — since we started
and replacement equipment — like tractors,
our relationship with Wells Fargo,” Hufnagel said.
trailers, and packaging lines — which are key
drivers for the company’s continued growth.”
A bonus, according to Hufnagel, who was a Navy
pilot with 15 years of active duty service: “I love
A decade later, Plastic Express has executed
the fact that Wells Fargo hires veterans.”
on its strategic plan of expanding geographically.
The company now covers the U.S. coast to coast,
Hong, an Army combat veteran, concluded,
with 16 warehouses, 19 trucking terminals,
“The military taught me the value of teamwork,
42 bulk rail terminals, and 9,000 railcar spots.
risk assessment, and planning — all of which
It also now employs 375 people. “We’ve grown
have benefited my work as Plastic Express’
both our national footprint and our ability
relationship manager at Wells Fargo.”
Above: Ray Hufn agel, right, with Wells Fargo’s Jay H on g in City of Industry, California.
26
The voice of a veteran
C H A N T Y C L AY S U C C E S S F U L LY N AV I G AT E D T H E T R A N S I T I O N F R O M
M I L I TA R Y S E R V I C E T O W E L L S F A R G O , A N D N O W S H E U S E S T H AT
E X P E R I E N C E A N D H E R P H . D . T O G U I D E O T H E R S .
If experience is a great teacher, then Chanty Clay of St. Louis is a master.
She served 10 years in the U.S. Air Force, where she worked in inventory management, training, and
human relations, and earned a college degree. After honorable discharge, she applied the leadership
skills she had learned to Wells Fargo and then earned a Ph.D. Today she leads a team of Human
Resources consultants at Wells Fargo and mentors eight veterans — both inside and outside
the company — who are making the transition to life after the military.
“What the Air Force prepared me for was to use my competencies, regardless of the industry,” Clay
said. “In the military, you contribute to the team in so many different ways. For any veteran making
the transition to civilian life, the most important thing to realize is that you have specific skills from
27
your military job and also interpersonal and leadership skills that are applicable to other areas.”
For example, in Air Force inventory management, one of Clay’s early roles involved answering
questions from service members about their supplies and reports. “I saw the value of true customer
service — building trust, maintaining relationships, and delivering outstanding service. Those are
values I’ve continued to hold onto throughout my career,” she said.
Clay made the decision to enlist in the military while she was a 20-year-old college student trying to
figure out what to do with the rest of her life. In considering her options, Clay said, “I appreciated the
structure of the military, and I appreciated the camaraderie, but most important, I appreciated the
opportunity to have diverse experiences and learn new things.”
Making connections is part of what drives Clay’s work in supporting veterans today. She helped
create the local St. Louis chapter of the internal Veterans’ Team Member Network at Wells Fargo.
Clay said she is proud “to provide a safe space where veterans can share with me what they’re
experiencing. Together, we can confront challenges and celebrate successes.”
Jerry Quinn, Military Affairs Program manager for Wells Fargo, said, “Chanty’s personal story
of transition, utilizing her skills and abilities, is an experience many veterans have. And her
dedication is further testimony of the value veterans bring to Wells Fargo and our communities.”
Lef t: Wells Fa rgo’s Chanty Clay with Alexander Propst, a veteran sh e mentors, in St. Louis.
Teaming up to promote economic
empowerment
W I T H B AC K I N G F R O M W E L L S FA R G O, Y VO N N E G R E E N S T R I V E S TO E M P OW E R
T H O S E W H O L I V E A N D W O R K O U T S I D E T H E T R A D I T I O N A L F I N A N C I A L S Y S T E M .
“Financial success” has many definitions.
Connecticut, Ohio, Florida, and Texas —
For Yvonne Green, it starts with saving money
to five additional markets.
rather than living paycheck to paycheck and
depending on pawnshops and payday lenders.
The program aims to address the needs of
those who are unbanked (people who do
Green considers herself lucky to have parents
not have a checking or savings account) and
who, despite limited resources, insisted she
underbanked (people who have a checking or
open a checking account when she got her first
savings account but also use services outside
job at 16. Now, as a fellow with the independent
of traditional financial institutions). The
initiative Bank On Houston, she works as
Federal Deposit Insurance Corporation
a financial health advocate for those in her
estimates that 63 million U.S. adults meet
hometown who live outside the traditional
these definitions because they don’t have
28
financial system.
enough money to meet a minimum balance
requirement, distrust financial institutions,
“I’m reminded daily of what it means to save as
or have identification or credit problems —
much of your money as you can, while at the
making them susceptible to expensive,
same time avoiding taking on debt that you
alternative financial services.
cannot manage,” said Green. “That legacy lives
on through my work at Bank On Houston, and
“The Bank On program is all about
for that I am truly grateful.”
communicating the benefits of accounts
and saving,” said Lisa Price of Wells Fargo
Bank On works with coalitions around the
Community Relations in Phoenix. “It
U.S. to build financial capacity in communities.
doesn’t promote one financial institution
In 2017, Wells Fargo invested $1 million to
over another.”
launch the Bank On Fellows program with
the Cities for Financial Empowerment Fund,
Fellows like Green work with consumers,
which aims to improve the financial stability
community organizations, local governments,
of low and moderate-income households.
-
and various financial institutions to connect
The CFE Fund and Wells Fargo share a
those in need with safe financial products.
commitment to economic empowerment
and strengthening financial self-sufficiency
“I believe that sharing my story can help
in underserved communities. In 2018,
communities understand the importance
Wells Fargo announced an additional $1 million
of financial empowerment,” Green said.
grant to expand the Bank On Fellowship —
“By using safe and affordable products, families
which currently operates in Alabama,
can begin to build better financial practices,
accumulate wealth, and leave a lasting legacy.”
Rig ht: Yvonne Green, lef t, with Wells Fargo s Lis a Pric e in H ous ton.
’
29
30
Engineering a better tomorrow
SCHOLARSHIP SUPPORT FROM WELLS FARGO HELPED BI OENGINEER LILY SOOKLAL
EARN HER COLLEGE DEGREE, AND NOW SHE IS PAYING IT FORWARD.
Lily Sooklal, 24, was never really sure what she wanted to be when she grew up. Then a relative’s
medical diagnosis brought things into focus, and today she is a bioengineer designing and
developing medical devices that aim to diagnose disease.
“I was inspired to study bioengineering by my aunt’s multiple sclerosis,” said Sooklal, an
Indo-Trinidadian American whose parents emigrated from Trinidad to the U.S. “The chance
I had to work in a lab researching that same disease during my first year of college was amazing,
and I discovered I wanted to do work that gives back to patients like my aunt in other countries.”
She added, “In my family, education has a lot of value, and the desire to earn a college degree is
something my parents instilled in me early on.” Her family has a long history of farming in Trinidad,
and her father was not able to go to high school. Sooklal’s family lived below the poverty line, and
she became aware that she would need to pay her own way through school.
Sooklal found help from APIA Scholars, which promotes the success of Asian and Pacific Islander
American students through scholarships, college planning, leadership training, and financial education,
and provides professional development tools and resources. Wells Fargo has worked with APIA
Scholars since 2006, providing more than $7.6 million to fund more than 1,700 college scholarships.
Many of the 252 APIA/Wells Fargo scholars pursuing their education in the 2018–19 academic year
have similar backgrounds as Sooklal: Eighty-five percent are first-generation college students, and
67 percent were living at or below the poverty line.
Jimmie Paschall, head of Enterprise Diversity & Inclusion at Wells Fargo, said, “We aim to make a
positive contribution to communities through philanthropy, advancing diversity and inclusion, and
creating economic opportunity. Through APIA Scholars, Wells Fargo is supporting both diversity
and higher education in a direct and meaningful way: by providing talented, underserved APIA
students the financial means to achieve their dreams.”
Sooklal’s scholarship helped her with college tuition and housing costs. She also benefited from an
APIA initiative that provides tips, advice, and information to help college students be successful in their
first year. Now she works to pay it forward: At her company, she serves as co-president of a women’s
network and supports an internal Asian resource group. Sooklal also runs networking and resume
workshops every year at the University of Maryland.
She concluded, “I believe it’s important to support — both at the high school and college levels —
women in technical fields, and organizations like APIA Scholars are part of that. APIA Scholars
has given people in the Asian community hope and light. It means a lot.”
Rig ht: Lily Sooklal at the University of Maryland, Co lleg e Park .
31
32
Helping clients protect their
f inancial resources
W E L L S FA R G O A DV I S O R S T E A M M E M B E R S W O R K TO H E L P S E N I O R S
BY M A N AG I N G R I S K A N D P U T T I N G S A F E G UA R D S I N P L AC E .
In reviewing the activity in a client’s brokerage account, a Wells Fargo Advisors financial advisor
wondered: Why would an 80-year-old be taking out so much cash, and so often?
The advisor alerted the Elder Client Initiatives team, which investigated and soon found the
answer: One of her sons was making the withdrawals for himself. The team moved quickly and
advised the client to add a different relative as a “trusted contact” on the client’s account —
which stopped the abuse.
This is one of many successes the team has logged since it was created in 2014, among the first of
its kind in the brokerage industry. “Everything we do is designed to help clients manage risk and
avoid financial harm,” said Ron Long, head of Elder Client Initiatives at Wells Fargo Advisors.
Long’s team investigates more than 200 cases a month, typically referred by financial advisors who
spot red flags that indicate their customers may be at risk of abuse. The team also conducts research
on related issues and works with protective services and senior advocacy groups across the U.S.
“We know that families are not always having the conversations they should be having about
protecting savings and investments,” Long said. “That allows scammers to come onto the scene
and take advantage.”
The Elder Client Initiatives team also worked with lawmakers in Alabama on legislation to help
protect seniors from financial crimes. Joe Borg, director of the Alabama Securities Commission,
worked with Long to come up with proposed provisions, such as requiring the reporting of certain
transactions and authorizing financial advisors to speak with the clients’ trusted contacts about
suspected problems.
“If a hospital has to report when someone falls out of bed, why shouldn’t we as an industry have
to report attempts to wipe out someone’s bank or retirement account?” said Borg. “The Alabama
legislature shared our concerns, and the law passed.”
Every year, Wells Fargo trains team members who interact with customers on how to prevent,
identify, and report suspected elder financial abuse.
Long concluded, “Putting safeguards in place — and engaging in transparent, open dialogue —
is critical if we want to protect the dollars older Americans have worked so hard to accumulate.
We are proud to be part of that.”
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. CAR–0119–00596
Lef t: Wells Fa rgo Advisors’ Ron Long, right, with Joe Bo rg in Montgomery, Alabama.
33
Reaching homebuyers in
their digital domain
34
WELLS FARGO S NEW ONLINE MORTG AG E AP PL ICATION GI VES CUSTOMERS
’
LIKE ERIK GRUBER THE SPEED AN D CONVEN IEN CE THEY’VE COME TO EXPECT.
Erik Gruber spends most of his life on the
in December 2018, 30 percent of all retail
internet, whether he’s creating videos for work
mortgage applications were done through
or ordering pizza for dinner. So when he started
the online mortgage application.
to consider becoming a homeowner, it was only
natural to research the subject online, fi nd houses Michael DeVito, head of Wells Fargo
Home Lending, said, “We see a broad
online — and get pre-approved for a mortgage
using an online application from Wells Fargo.
range of customers readily embracing
the online mortgage application. We are
“Whenever I have the option, online
attracting customers of all ages as they
usually works best for me,” said Gruber,
increasingly use their smartphones and
29, a Wells Fargo customer in suburban
mobile devices for daily activities. Digital
Philadelphia. “It’s just more convenient.”
tools like the online mortgage application
He is far from alone. Wells Fargo has attracted
convenience for customers.”
hundreds of thousands of customers to the
online mortgage application since the tool
It is especially convenient for tech-savvy
launched in first quarter 2018. In fact,
millennial professionals who, like Gruber,
help Wells Fargo deliver simplicity and
35
are part of the gig economy — self-employed
After submitting his application online,
contractors who work for multiple employers,
Gruber received a decision from the company
have many income sources, and who have
in a matter of hours. Then, once he found
lots of paperwork to manage.
a house, he sent documents to Wells Fargo
through yourLoanTracker SM, an online tool
“Millennials want their information fast,”
that allows direct uploading. He closed on his
said Derek Tesinsky, a Wells Fargo home
new home in spring 2018.
mortgage consultant in Des Moines, Iowa,
who worked with Gruber on his loan.
He concluded, “I do all my other banking with
“They want an interface that tells them
Wells Fargo, so it made sense to use Wells Fargo
what they need and what needs to be done.
for my mortgage. And the online mortgage
They don’t want to spend their time talking
application worked great! It all boiled down
on the phone to submit an application.”
to convenience.”
Above: Erik Gr uber at work near P hiladelphia.
Propel® Card strategy: Listen,
learn, design, deploy
B Y C O N S U LT I N G C U S T O M E R S AT E V E R Y T U R N , T H I S T E A M
D E V E L O P E D A N O F F E R I N G W I T H A S T R O N G VA L U E P R O P O S I T I O N
F O R C U S T O M E R S A N D W E L L S FA R G O .
When Wells Fargo’s new Propel® Card received
by the Go Far® Rewards program, the Propel
a top industry rating in late 2018, a digital
Card also gives customers a range of options
celebration broke out among the hundreds of
for redeeming their rewards points, including
team members across the U.S. who had worked
for cash at Wells Fargo ATMs, online
hard to help make sure it provides just what
purchases, gift cards for charitable donations,
it was intended to — and also fits with the
gifts to friends, and sharing them with other
company’s strategy to develop services and
cardholders they know.
products for a range of different customers.
Creating products like the Propel Card to serve
“Based on what active-lifestyle consumers
existing customers and attract new ones —
36
-
told us, we developed a simple, easy to
-
while maintaining its risk discipline — is one of
understand card that rewards them for the
the key ways Wells Fargo creates value for its
things they are already doing every day,” said
shareholders. Anderson and the Propel Card
Beverly Anderson, head of Wells Fargo Cards
team undertook market research, conducted
and Retail Services. “Things like dining out
focus group studies, and interviewed
with friends, commuting to work, planning
customers for more than a year as they tested
a summer vacation, or downloading a favorite
and developed the concept, model, and
TV series to binge-watch.
implementation strategy. Anderson said the
team combined the scientific method with
-
“We also wanted to deliver a compelling, digital
common sense and intuitive insights into
first experience that lets people apply for the
people and their spending behavior.
card wherever they happened to be shopping
digitally. In an article published on Nov. 12, 2018,
Heather Philp, head of the Propel Card team,
Business Insider named the Propel Card ‘the
said her team’s biggest challenge — and highest
best no-fee card to open in 2018,’ and that
priority — was to identify the best value
recognition underscored our achievement.”
proposition for customers. “They wanted a
The enhanced rewards card — Wells Fargo’s
than having to make their lives work around
latest card with partner American Express —
the card,” she said. “We believe the Propel
was introduced in summer 2018. Supported
Card does just that.”
card that would work for their lives, rather
Rig ht: Wells Fargo s Beverly Anderson with her team in W ilmington, Delaware.
’
37
OPE RAT ING COM MI TTEE AND
OT H E R C O R P O R AT E O F F I C E R S
38
Wells Fargo Operating Committee† (left to right):
Mary T. Mack, Jonathan G. Weiss, Avid Modjtabai, David C. Galloreese, Timothy J. Sloan, John R. Shrewsberry,
Amanda G. Norton, C. Allen Parker, and Perry G. Pelos
†On January 9, 2019, Wells Fargo announced that Saul Van Beurden will join the company in April as head of Technology
and become a member of the Operating Committee. On February 6, 2019, Wells Fargo announced that Julie Scammahorn
will join the company in April as chief auditor and become a member of the Operating Committee.
T I M OT H Y J . S L O A N
C EO a n d P re s i d e n t*
R I C H A R D D . L E V Y
Con tro ller*
P E R R Y G . P E L O S
Head of W h olesale Bank ing*
A N T H O N Y R . A U G L I E R A
Cor porate Se cret ar y
M A R Y T. M A C K
H ea d o f Consumer Bank ing*
J A M E S H . R OW E
Head of Stak eh older Relati on s
N E A L A . B L I N D E
Tre as urer
AV I D M O D J TA B A I
H ea d of Payments, Vir tual
S ol uti ons a nd In nova tion*
J O H N R . S H R E W S B E R R Y
Ch ief Fi nanc ial Offi c er*
J O H N M . C A M P B E L L
Head of Investor Rel ati ons
D AV I D M O S K OW I T Z
H ea d of Govern ment Relatio ns
an d P ubli c Pol ic y
J O N AT H A N G . W E I S S
Head of Wea lth an d
Investment Management*
J O N R . C A M P B E L L
Head of Cor po rate Ph il an thropy
and Commun i ty Rel atio ns
A M A N D A G . N O R T O N
Chi ef Ri sk Offi c er*
M A R Y S . W E N Z E L
Head of Sustai nabili ty
and Corp orate Resp on si bili ty
D AV I D C . G A L L O R E E S E
Head of Hu man Re sourc e s*
C . A L L E N PA R K E R
Ge ner al Co unsel*
* “Executive officers” according to Securities and Exchange Commission rules.
| As of February 15, 2019
BOA RD OF DIR ECTORS
J O H N D. B A K E R I I 1, 3
K A R E N B . P E E T Z 6, 7
Executive Chairman and CEO
FRP Holdings, Inc.
(Real estate)
C E L E S T E A . C L A R K 2, 3, 5
Principal, Abraham Clark Consulting, LLC,
and Retired Senior Vice President, Global
Public Policy and External Relations and
Chief Sustainability Officer
Kellogg Company
(Food manufacturing)
Retired President
The Bank of New York
Mellon Corporation
(Banking and financial services)
J U A N A . P U J A D A S 2, 3, 4, 7
Retired Principal
PricewaterhouseCoopers LLP,
and Former Vice Chairman,
Global Advisory Services
PwC International
(Professional services)
T H E O D O R E F. C R AV E R , J R . 1, 4
J A M E S H . Q U I G L E Y 1, 3, 7
Retired Chairman, President and CEO
Edison International
(Energy)
CEO Emeritus and Retired Partner
Deloitte
(Audit, tax, financial advisory)
E L I Z A B E T H A . D U K E 3, 4, 5, 7
R O N A L D L . S A R G E N T 1, 5, 6
Retired Chairman and CEO
Staples, Inc.
(Office supply retailer)
39
T I M OT H Y J . S L O A N
CEO and President
Wells Fargo & Company
S U Z A N N E M . VA U T R I N OT 2, 3, 7
President
Kilovolt Consulting, Inc.
(Cyber and technology consulting)
Major General and Commander
United States Air Force (retired)
Chair
Wells Fargo & Company
Former member of the Federal
Reserve Board of Governors
(U.S. regulatory agency)
WAY N E M . H E W E T T 6, 7
Senior Advisor
Permira (Private equity),
and Chairman
DiversiTech Corporation
(HVAC-R manufacturing)
D O N A L D M . J A M E S 4, 5, 6
Retired Chairman
Vulcan Materials Company
(Construction materials)
M A R I A R . M O R R I S 6, 7
Retired Executive Vice President
and Head of Global Employee
Benefits business
MetLife, Inc.
(Health and life insurance)
Standing Committees
1. Audit and Examination 2. Corporate Responsibilty 3. Credit 4. Finance 5. Governance and Nominating 6. Human Resources 7. Risk
| As of February 15, 2019
O U R C O M M U N I T Y I M P A C T
2 0 1 8 C o r p o r a t e R e s p o n s i b i l i t y H i g h l i g h t s
Wells Fargo is committed to making a positive impact by helping people and communities
succeed financially — and creating solutions for a stronger, more sustainable future in which
everyone can grow and prosper. Read more at wellsfargo.com/about/corporate-responsibility.
Here is a snapshot of our community impact in 2018.
S T R E N G T H E N I N G
C O M M U N I T I E S
E M P O W E R I N G D I V E R S E
S M A L L B U S I N E S S E S
Contributed $444 million and volunteered
2+ million hours, improving lives and
supporting economic growth in the U.S. and
around the world.
Awarded $94.8 million in grants and capital
to grow diverse small businesses since 2015,
supporting economic equity and employment
opportunities for 36,000 people.
40
A C C E L E R AT I N G T O A
L O W - C A R B O N E C O N O M Y
E X P A N D I N G A C C E S S
T O C L E A N E N E R G Y
Met 100% of our global electricity needs with
renewable energy. Committed to providing
$200 billion in financing to sustainable
businesses and projects by 2030.
Provided 2,000 low-income and tribal
households with solar power to decrease
energy bills, and trained 3,500 people
for careers in clean energy.
A D VA N C I N G
A F F O R D A B L E H O U S I N G
I M P R O V I N G F I N A N C I A L
H E A LT H A N D C A P A B I L I T Y
Financed 31,800 affordable rental units. Created
3,900+ homeowners through NeighbhorhoodLIFT®
program, offering homebuyer education, down
Reached 1.7 million people to provide
financial education through Wells Fargo’s Hands
on Banking® program, including new content for
payment assistance, and grants to revitalize
veterans and people with disabilities.
neighborhoods.
Data for January 1 , 2018 – December 31 , 2018, unless otherwise noted.
W E L L S FA R G O & C O M P A N Y 2 0 1 8 F I N A N C I A L R E P O R T
Financial Review
Overview
Earnings Performance
Balance Sheet Analysis
Off-Balance Sheet Arrangements
Risk Management
Capital Management
Regulatory Matters
162
170
187
188
190
5
6
7
8
9
Available-for-Sale and Held-to-Maturity Debt Securities
Loans and Allowance for Credit Losses
Premises, Equipment, Lease Commitments and Other
Assets
Equity Securities
Securitizations and Variable Interest Entities
201
10
Mortgage Banking Activities
203
11
Intangible Assets
Critical Accounting Policies
205
12
Deposits
Current Accounting Developments
206
13
Short-Term Borrowings
Forward-Looking Statements
207
14
Long-Term Debt
Risk Factors
209
15
Commitments
Guarantees, Pledged Assets and Collateral, and Other
214
16
Legal Actions
Controls and Procedures
219
17
Derivatives
Disclosure Controls and Procedures
229
18
Fair Values of Assets and Liabilities
Internal Control Over Financial Reporting
249
19
Preferred Stock
Management’s Report on Internal Control over
Financial Reporting
Report of Independent Registered Public
Accounting Firm
252
20
Common Stock and Stock Plans
256
21
Revenue from Contracts with Customers
260
22
Employee Benefits and Other Expenses
Financial Statements
267
23
Income Taxes
Consolidated Statement of Income
Consolidated Statement of Comprehensive
Income
270
24
Earnings and Dividends Per Common Share
271
25
Other Comprehensive Income
Consolidated Balance Sheet
273
26
Operating Segments
Consolidated Statement of Changes in
Equity
275
27
Parent-Only Financial Statements
Consolidated Statement of Cash Flows
278
28
Regulatory and Agency Capital Requirements
Notes to Financial Statements
1
2
3
4
Summary of Significant Accounting Policies
Business Combinations
Cash, Loan and Dividend Restrictions
Trading Activities
279
280
282
Report of Independent Registered
Public Accounting Firm
Quarterly Financial Data
Glossary of Acronyms
42
48
67
69
71
102
110
113
117
119
120
137
137
137
138
139
140
141
142
146
147
159
160
161
41
Wells Fargo & Company
41
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, 2018
(2018 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. See the Glossary of Acronyms for
terms used throughout this Report.
Financial Review1
Overview
Wells Fargo & Company is a diversified, community-based
financial services company with $1.90 trillion in assets. Founded
in 1852 and headquartered in San Francisco, we provide
banking, investment and mortgage products and services, as well
as consumer and commercial finance, through 7,800 locations,
more than 13,000 ATMs, digital (online, mobile and social), and
contact centers (phone, email and correspondence), and we have
offices in 37 countries and territories to support customers who
conduct business in the global economy. With approximately
259,000 active, full-time equivalent team members, we serve
one in three households in the United States and ranked No. 26
on Fortune’s 2018 rankings of America’s largest corporations.
We ranked fourth in assets and third in the market value of our
common stock among all U.S. banks at December 31, 2018.
We use our Vision, Values & 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.
____________________________________________
Financial information for periods prior to 2018 has been revised to
1
reflect presentation changes made in connection with our adoption
in first quarter 2018 of Accounting Standards Update (ASU)
2016-01 Financial Instruments – Overall (Subtopic 825-10):
Recognition and Measurement of Financial Assets and Financial
Liabilities. See Note 1 (Summary of Significant Accounting Policies)
to Financial Statements in this Report for more information.
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.
•
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). As required by the consent order, the Board submitted to
the FRB a plan to further enhance the Board’s governance and
oversight of the Company, and the Company submitted to the
FRB a plan to further improve the Company’s compliance and
operational risk management program. The consent order
requires the Company, following the FRB’s acceptance and
approval of the plans and the Company’s adoption and
implementation of the plans, to complete third-party reviews of
the enhancements and improvements provided for in the plans.
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. The Company continues
to have constructive dialogue with the FRB on an ongoing basis
to clarify expectations, receive feedback, and assess progress
under the consent order. In order to have enough time to
incorporate this feedback into the Company’s plans in a
42
Wells Fargo & Company
42
thoughtful manner, adopt and implement the final plans as
accepted by the FRB, and complete the required third-party
reviews, the Company is planning to operate under the asset cap
through the end of 2019. As of the end of fourth quarter 2018,
our total consolidated assets, as calculated pursuant to the
requirements of the consent order, were below our level of total
assets as of December 31, 2017. Additionally, after removal of the
asset cap, a second third-party review must also be conducted to
assess the efficacy and sustainability of the enhancements and
improvements.
Consent Orders with the Consumer Financial
Protection Bureau and Office of the Comptroller
of the Currency Regarding Compliance Risk
Management Program, Automobile Collateral
Protection Insurance Policies, and Mortgage
Interest Rate Lock Extensions
On April 20, 2018, the Company entered into consent orders
with the Consumer Financial Protection Bureau (CFPB) and the
Office of the Comptroller of the Currency (OCC) to pay an
aggregate of $1 billion in civil money penalties to resolve matters
regarding the Company’s compliance risk management program
and past practices involving certain automobile collateral
protection insurance policies and certain mortgage interest rate
lock extensions. As required by the consent orders, the Company
submitted to the CFPB and OCC an enterprise-wide compliance
risk management plan and a plan to enhance the Company’s
internal audit program with respect to federal consumer
financial law and the terms of the consent orders. In addition, as
required by the consent orders, the Company submitted for non-
objection plans to remediate customers affected by the
automobile collateral protection insurance and mortgage
interest rate lock matters, as well as a plan for the management
of remediation activities conducted by the Company.
Retail Sales Practices Matters
As we have previously reported, in September 2016 we
announced settlements with the CFPB, the 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.
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 have completed financial
remediation for the customers identified through the expanded
account analysis. Additionally, customer outreach under the
$142 million class action lawsuit settlement concerning
improper retail sales practices (Jabbari v. Wells Fargo Bank,
N.A.), into which the Company entered to provide further
remediation to customers, concluded in June 2018 and the
period for customers to submit claims closed on July 7, 2018.
The settlement administrator will pay claims following the
calculation of compensatory damages and favorable resolution of
pending appeals in the case.
For additional information regarding sales practices
matters, including related legal matters, see the “Risk Factors”
section and Note 16 (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, and we have accrued for the reasonably
estimable remediation costs related to these matters, which
amounts may change based on additional facts and information,
as well as ongoing reviews and communications with our
regulators. As part of this effort, we are focused on the following
key areas:
• Automobile Lending Business The Company is
reviewing practices concerning the origination, servicing,
and/or collection of consumer automobile loans,
including matters related to certain insurance products,
and is providing remediation to the extent it identifies
affected customers. For example:
In July 2017, the Company announced it would
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 (based
on an understanding that the borrowers did not have
physical damage insurance coverage on their
automobiles as required during the term of their
automobile loans). The practice of placing CPI had
been previously discontinued by the Company. The
Company is in the process of providing remediation
to affected customers 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 has identified certain issues related to
the unused portion of guaranteed automobile
protection waiver or insurance agreements between
the customer and dealer and, by assignment, the
lender, which will result in remediation to customers
in certain states. The Company is in the process of
providing remediation to affected customers.
• 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 the Company believes a substantial
number of the rate lock extension fees during the period in
question were appropriately charged under its policy, due to
43
Wells Fargo & Company
43
Overview (continued)
our customer-oriented remediation approach, we have
issued refunds and interest to substantially all of our
customers who paid rate lock extension fees during the
period in question. We have substantially completed the
remediation process.
• Add-on Products The Company is reviewing 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,
as well as home and automobile warranty products, and
memberships in discount programs. The products were
sold to customers through a number of distribution
channels and, in some cases, were acquired by the
Company in connection with the purchase of loans. Sales
of certain of these products have been discontinued over
the past few years primarily due to decisions made by the
Company in the normal course of business, and by
mid-2017, the Company had ceased selling any of these
products to consumers. We are in the process of providing
remediation where we identify affected customers, and are
also providing refunds to customers who purchased
certain products. The review of the Company’s historical
practices with respect to these products is ongoing,
focusing on, among other topics, sales practices, adequacy
of disclosures, customer servicing, and volume and type of
customer complaints.
• Consumer Deposit Account Freezing/Closing
The Company is reviewing 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. This review is ongoing.
• 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 Board’s
review is substantially completed and has not, to date,
uncovered evidence of systemic or widespread issues in
these businesses. Federal government agencies continue
to review this matter.
• 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 both overcharges and undercharges to
customers. 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. These reviews are ongoing and, as a
result of its reviews to date, the Company has suspended
the charging of fees on some assets and accounts, has
notified the affected customers, and is continuing its
analysis of those assets and accounts. The review of
customer accounts is ongoing to determine the extent of
any additional necessary remediation, including with
respect to additional accounts not yet reviewed, which
may lead to additional accruals and fee suspensions.
• Foreign Exchange Business The Company has
completed an assessment, with the assistance of a third
party, of its policies, practices, and procedures in its
foreign exchange (FX) business. The FX business
continues to revise and implement new policies,
practices, and procedures, including those related to
pricing. The Company has begun providing remediation
to customers that may have received pricing inconsistent
with commitments made to those customers, and rebates
to customers where historic pricing, while consistent
with contracts entered into with those customers, does
not conform to the Company’s recently implemented
standards and pricing. The Company’s review of affected
customers is ongoing.
• Mortgage Loan Modifications An internal review of
the Company’s use of a mortgage loan modification
underwriting tool identified a calculation error regarding
foreclosure attorneys’ fees affecting certain accounts that
were in the foreclosure process between April 13, 2010,
and October 2, 2015, when the error was corrected. A
subsequent expanded review identified related errors
regarding the maximum allowable foreclosure attorneys’
fees permitted for certain accounts that were in the
foreclosure process between March 15, 2010, and
April 30, 2018, when new controls were implemented.
Similar to the initial calculation error, these errors
caused an overstatement of the attorneys’ fees that were
included for purposes of determining whether a
customer qualified for a mortgage loan modification or
repayment plan pursuant to the requirements of
government-sponsored enterprises (such as Fannie Mae
and Freddie Mac), the Federal Housing Administration
(FHA), and the U.S. Department of Treasury’s Home
Affordable Modification Program (HAMP). Customers
were not actually charged the incorrect attorneys’ fees.
As previously disclosed, the Company has identified
customers who, as a result of these errors, were
incorrectly denied a loan modification or were not
offered a loan modification or repayment plan in cases
where they otherwise would have qualified, as well as
instances where a foreclosure was completed after the
loan modification was denied or the customer was
deemed ineligible to be offered a loan modification or
repayment plan. The number of previously disclosed
customers affected by these errors may change as a
result of ongoing validation, but is not expected to have
changed materially upon completion of this validation.
The Company has contacted substantially all of the
identified customers affected by these errors and has
provided remediation as well as the option to pursue no-
cost mediation with an independent mediator. The
Company’s review of its mortgage loan modification
practices is ongoing, and we are providing remediation
to the extent we identify additional affected customers as
a result of this review.
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.
44
Wells Fargo & Company
44
For more information, including related legal and regulatory
risk, see the “Risk Factors” section and Note 16 (Legal Actions)
to Financial Statements in this Report.
Financial Performance
In 2018, we generated $22.4 billion of net income and diluted
earnings per common share (EPS) of $4.28, compared with
$22.2 billion of net income and EPS of $4.10 for 2017. We grew
average commercial and industrial, and average real estate 1-4
family first mortgage loans compared with 2017, maintained
strong capital and liquidity levels, and rewarded our
shareholders by increasing our dividend and continuing to
repurchase shares of our common stock. Our achievements
during 2018 continued to demonstrate the benefit of our
diversified business model and our ability to generate consistent
financial performance. We remain focused on meeting the
financial needs of our customers. Noteworthy financial
performance items for 2018 (compared with 2017) included:
revenue of $86.4 billion, down from $88.4 billion, which
•
included net interest income of $50.0 billion, up
$438 million, or 1%;
average loans of $945.2 billion, down 1%;
average deposits of $1.3 trillion, down $28.8 billion, or 2%;
return on assets (ROA) of 1.19% and return on equity (ROE)
of 11.53%, up from 1.15% and 11.35%, respectively, a year
ago;
•
•
•
• our credit results improved with a net charge-off rate of
0.29%, compared with 0.31% a year ago;
• nonaccrual loans of $6.5 billion, down $1.2 billion, or 15%,
from a year ago; and
• $25.8 billion in capital returned to our shareholders
through increased common stock dividends and additional
net share repurchases, up 78% from a year ago.
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 remained strong during 2018 with strong
credit quality and solid levels of liquidity and capital. Our total
assets were $1.90 trillion at December 31, 2018. Cash and other
short-term investments decreased $42.5 billion from
December 31, 2017, reflecting lower deposit balances. Debt
securities grew $11.3 billion, or 2%, from December 31, 2017.
Our loan portfolio declined $3.7 billion from December 31, 2017.
Growth in commercial and industrial loans 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, 2018, were down $49.8 billion, or
4%, from 2017. The decline was driven by a decrease in
commercial deposits from financial institutions, which includes
actions the Company took in the first half of 2018 in response to
the asset cap, and a decline in consumer and small business
banking deposits. Our average deposit cost increased 21 basis
points from a year ago driven by an increase in Wholesale
Banking and Wealth and Investment Management deposit rates.
Credit Quality
Credit quality remained solid in 2018, 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
were $2.7 billion, or 0.29% of average loans, in 2018, compared
with $2.9 billion, or 0.31%, in 2017.
Net losses in our commercial portfolio were $429 million, or
9 basis points of average commercial loans, in 2018, compared
with $446 million, or 9 basis points, in 2017, driven by
decreased losses in our commercial and industrial loan portfolio.
Net consumer losses decreased to 52 basis points of average
consumer loans in 2018, compared with 55 basis points in 2017.
Losses in our consumer real estate portfolios declined
$93 million in 2018 to a net recovery position. The consumer
loss levels reflected decreased losses in our automobile and other
revolving and installment loan portfolios, lower losses in our
residential real estate portfolios due to the benefit of the
improving housing market, and our continued focus on
originating high quality loans.
The allowance for credit losses of $10.7 billion at
December 31, 2018, declined $1.3 billion from the prior year.
Our provision for credit losses in 2018 was $1.7 billion,
compared with $2.5 billion in 2017, reflecting a release of
$1.0 billion in the allowance for credit losses, compared with a
release of $400 million in 2017. The release in 2018 and 2017
was due to strong underlying credit performance.
Nonperforming assets (NPAs) at the end of 2018 were
$6.9 billion, down 16% from the end of 2017. Nonaccrual loans
declined $1.2 billion from the prior year end while foreclosed
assets were down $191 million from 2017.
Capital
Our financial performance in 2018 allowed us to maintain a solid
capital position with total equity of $197.1 billion at
December 31, 2018, compared with $208.1 billion at
December 31, 2017. We returned $25.8 billion to shareholders in
2018 ($14.5 billion in 2017) through common stock dividends
and net share repurchases, and our net payout ratio (which is the
ratio of (i) common stock dividends and share repurchases less
issuances and stock compensation-related items, divided by (ii)
net income applicable to common stock) was 125%. During 2018
we increased our quarterly common stock dividend from $0.39
to $0.43 per share. Our common shares outstanding declined by
310.4 million shares, or 6%, as we continued to reduce our
common share count through the repurchase of 375.5 million
common shares during the year. We expect our share count to
continue to decline in 2019 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 11.74% as of December 31, 2018, down from 11.98% a year
ago, but still well above our internal target of 10%. 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.
45
Wells Fargo & Company
45
Overview (continued)
Table 1: Six-Year Summary of Selected Financial Data
2018
2017
2016
2015
2014
2013
%
Change
2018/
2017
Five-year
compound
growth
rate
(in millions, except per share
amounts)
Income statement
Net interest income
Noninterest income
Revenue
Provision for credit losses
$ 49,995
36,413
86,408
1,744
49,557
38,832
88,389
2,528
47,754
40,513
88,267
3,770
45,301
40,756
86,057
2,442
49,974
43,527
40,820
84,347
1,395
49,037
42,800
40,980
83,780
2,309
48,842
1%
(6)
(2)
(31)
(4)
Noninterest expense
56,126
58,484
52,377
Net income before noncontrolling
interests
Less: Net income from
noncontrolling interests
22,876
22,460
22,045
23,276
23,608
22,224
483
277
107
382
551
346
Wells Fargo net income
22,393
22,183
21,938
22,894
23,057
21,878
Earnings per common share
Diluted earnings per common share
4.31
4.28
4.14
4.10
4.03
3.99
4.18
4.12
4.17
4.10
3.95
3.89
Dividends declared per common
share
Balance sheet (at year end)
Debt securities
Loans
Allowance for loan losses
Goodwill
Equity securities
Assets
Deposits
1.640
1.540
1.515
1.475
1.350
1.150
$ 484,689
473,366
459,038
394,744
350,661
298,241
953,110
956,770
967,604
916,559
862,551
822,286
9,775
26,418
55,148
11,004
26,587
62,497
11,419
26,693
49,110
11,545
25,529
40,266
12,319
25,705
44,005
14,502
25,637
32,227
1,895,883
1,951,757
1,930,115
1,787,632
1,687,155
1,523,502
1,286,170
1,335,991
1,306,079
1,223,312
1,168,310
1,079,177
Long-term debt
229,044
225,020
255,077
199,536
183,943
152,998
Wells Fargo stockholders’ equity
196,166
206,936
199,581
192,998
184,394
170,142
Noncontrolling interests
900
1,143
916
893
868
866
Total equity
197,066
208,079
200,497
193,891
185,262
171,008
2
74
1
4
4
6
2%
—
(11)
(1)
(12)
(3)
(4)
2
(5)
(21)
(5)
3
(2)
1
(5)
3
1
7
—
2
2
7
10
3
(8)
1
11
4
4
8
3
1
3
46
Wells Fargo & Company
46
Table 2: Ratios and Per Common Share Data
Profitability ratios
Wells Fargo net income to average assets (ROA)
1.19%
1.15
1.16
Year ended December 31,
2018
2017
2016
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)
11.53
13.73
65.0
9.20
10.39
11.74
13.46
16.60
9.07
9.50
10.77
38.3
$
38.06
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
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
(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 securities, 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 28 (Regulatory and Agency Capital Requirements) to Financial Statements in this Report for additional information.
(4) The risk-based capital ratios were calculated under the lower of Standardized or Advanced Approach determined pursuant to Basel III. Beginning January 1, 2018, the
requirements for calculating common equity tier 1 and tier 1 capital, along with risk-weighted assets, became fully phased-in; Accordingly, the information presented
reflects fully phased-in common equity tier 1 capital, tier 1 capital and risk-weighted assets but reflects total capital still in accordance with Transition Requirements. See
the “Capital Management” section and Note 28 (Regulatory and Agency Capital Requirements) to Financial Statements in this Report for additional information.
(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.
47
Wells Fargo & Company
47
Earnings Performance
Wells Fargo net income for 2018 was $22.4 billion ($4.28
diluted earnings per common share), compared with
$22.2 billion ($4.10 diluted per share) for 2017 and $21.9 billion
($3.99 diluted per share) for 2016. Our financial performance in
2018 benefited from a $438 million increase in net interest
income, a $784 million decrease in our provision for credit
losses, and a $2.4 billion decrease in noninterest expense,
partially offset by a $2.4 billion decrease in noninterest income,
and a $745 million increase in income tax expense.
Revenue, the sum of net interest income and noninterest
income, was $86.4 billion in 2018, compared with $88.4 billion
in 2017 and $88.3 billion in 2016. The decrease in revenue for
2018 compared with 2017 was predominantly due to a decrease
in noninterest income, reflecting decreases in mortgage banking
income, insurance income, service charges on deposit accounts,
and net gains (losses) from debt and equity securities, partially
offset by an increase in all other noninterest income. Our
diversified sources of revenue generated by our businesses
continued to be balanced between net interest income and
noninterest income. In 2018, net interest income of $50.0 billion
represented 58% of revenue, compared with $49.6 billion (56%)
in 2017 and $47.8 billion (54%) in 2016. 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.
48
Wells Fargo & Company
48
Table 3: Net Interest Income, Noninterest Income and Noninterest Expense as a Percentage of Revenue
(in millions)
Interest income (on a taxable-equivalent basis)
2018
% of
revenue
2017
% of
revenue
2016
% of
revenue
Year ended December 31,
Debt securities
$
14,947
17% $
14,084
15% $
12,328
14%
Mortgage loans held for sale (MLHFS)
Loans held for sale (LHFS)
Loans
Equity securities
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 securities
Lease income
Other (1)
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)
777
140
44,086
999
4,359
65,308
5,622
1,719
6,703
610
14,654
50,654
(659)
49,995
4,716
14,509
3,907
3,384
3,017
429
602
108
1,515
1,753
2,473
36,413
17,834
10,264
4,926
2,444
2,888
1,058
1,110
3,124
3,306
9,172
56,126
1
—
51
1
5
76
7
2
8
1
17
59
(1)
58
5
17
5
4
3
—
1
—
2
2
3
42
21
12
6
3
3
1
1
4
4
11
65
786
50
41,551
821
2,941
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
542
479
1,779
1,907
1,603
1
3
47
1
3
68
3
1
6
—
11
57
(1)
56
6
16
4
4
5
1
1
1
2
2
2
784
38
39,630
669
1,457
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
610
942
1,103
1,927
1,289
1
—
45
1
2
62
2
—
5
—
7
55
(1)
54
6
16
5
4
7
2
1
1
1
2
1
38,832
44
40,513
46
17,363
10,442
5,566
2,237
2,849
1,152
1,287
5,492
3,813
8,283
20
12
6
3
3
1
1
6
4
9
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
58,484
66
52,377
59
$
86,408
$
88,389
$
88,267
(1) See Table 7 – Noninterest Income in this Report for additional detail.
(2) See Table 8 – Noninterest Expense in this Report for additional detail.
49
Wells Fargo & Company
49
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. 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 debt and equity securities
based on a 21% and 35% federal statutory tax rate for the periods
ending December 31, 2018 and 2017, respectively.
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, periodic dividends, and
collection of interest on nonaccrual loans, can vary from period
to period.
Net interest income on a taxable-equivalent basis was
$50.7 billion in 2018, compared with $50.9 billion in 2017, and
$49.0 billion in 2016. The decrease in net interest income in
2018, compared with 2017, was driven by:
•
lower loan swap income due to unwinding the receive-fixed
loan swap portfolio;
lower tax-equivalent net interest income from updated tax-
equivalent factors reflecting new tax law;
a smaller balance sheet and unfavorable mix;
•
unfavorable hedge ineffectiveness accounting results;
•
• higher premium amortization; and
•
partially offset by:
•
• higher variable income.
the net repricing benefit of higher interest rates; and
The slight increase in net interest margin in 2017, compared
with 2016, was due to the 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 decreased $38.1 billion in 2018
compared with 2017. The decrease was driven by:
average loans decreased $10.9 billion in 2018;
•
average interest-earning deposits decreased $45.5 billion in
•
2018;
partially offset by:
•
average federal funds sold and securities purchased under
resale agreements increased $3.9 billion in 2018;
average debt securities increased $13.8 billion in 2018; and
average equity securities increased $2.0 billion in 2018.
•
•
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 decreased to $1.28 trillion in 2018, compared with
$1.30 trillion in 2017, and represented 135% of average loans in
2018, compared with 136% in 2017. Average deposits were 73%
of average earning assets in both 2018 and 2017.
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 2018, are
analyzed in Table 6.
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 also increased in 2017,
largely due to an increase in wholesale and Wealth and
Investment Management (WIM) deposit pricing resulting from
higher interest rates.
Net interest margin on a taxable-equivalent basis
was 2.91% in 2018, compared with 2.87% in 2017 and 2.86% in
2016. The increase in net interest margin in 2018, compared
with 2017, was driven by:
•
•
•
partially offset by:
•
the net repricing benefit of higher interest rates;
runoff of lower yielding assets and other favorable mix; and
higher variable income;
lower loan swap income due to unwinding the receive-fixed
loan swap portfolio;
lower tax-equivalent net interest income from updated tax-
equivalent factors reflecting new tax law;
•
• higher premium amortization; and
• unfavorable hedge ineffectiveness accounting results.
50
Wells Fargo & Company
50
Table 4: Average Earning Assets and Funding Sources as a Percentage of Average Earning Assets
(in millions)
Earning assets
Year ended December 31,
2018
2017
Average
balance
% of earning
assets
Average
balance
% of earning
assets
Interest-earning deposits with banks
$
156,366
9%
$
201,864
12%
Federal funds sold, securities purchased under resale agreements
Debt securities:
Trading debt securities
Available-for-sale debt 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 securities
Total available-for-sale debt securities
Held-to-maturity debt 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 debt securities
Total debt securities
Mortgage loans held for sale (1)
Loans held for sale (1)
Commercial loans:
Commercial and industrial – U.S.
Commercial and industrial – Non-U.S.
Real estate mortgage
Real estate construction
Lease financing
Total commercial loans
Consumer loans:
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 loans
Total loans (1)
Equity securities
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.
78,547
83,526
6,618
47,884
156,052
7,769
163,821
46,875
265,198
44,735
6,253
94,216
361
145,565
494,289
18,394
2,526
275,656
60,718
122,947
23,609
19,392
502,322
284,178
36,687
36,780
48,115
37,115
442,875
945,197
38,092
5,071
5
5
—
3
9
—
9
3
15
3
—
5
—
8
28
1
—
16
4
7
1
1
29
16
2
2
3
2
25
54
2
1
74,697
74,475
15,966
52,658
145,310
11,839
157,149
48,714
274,487
44,705
6,268
78,330
2,194
131,497
480,459
20,780
1,487
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
36,105
5,069
4
4
1
3
8
1
9
3
16
3
—
4
—
7
27
1
—
16
3
7
1
1
28
16
3
2
3
2
26
54
2
—
$
1,738,482
100%
$
1,776,590
100%
$
63,243
684,882
20,653
84,822
63,945
917,545
104,267
224,268
27,648
1,273,728
464,754
4%
$
39
1
5
4
53
6
13
1
73
27
49,474
682,053
22,190
61,625
123,816
939,158
98,922
246,195
21,872
1,306,147
470,443
3%
39
1
3
7
53
6
14
1
74
26
$
1,738,482
100%
$
1,776,590
100%
$
$
$
$
$
18,777
26,453
105,180
150,410
358,312
53,496
203,356
(464,754)
150,410
1,888,892
18,622
26,629
111,164
156,415
365,464
55,740
205,654
(470,443)
156,415
1,933,005
51
Wells Fargo & Company
51
Earnings Performance (continued)
Table 5: Average Balances, Yields and Rates Paid (Taxable-Equivalent Basis) (1)(2)
Average
balance
Yields/
rates
2018
Interest
income/
expense
Average
balance
Yields/
rates
2017
Interest
income/
expense
$
156,366
78,547
1.82% $
1.82
2,854
1,431
83,526
3.42
2,856
(in millions)
Earning assets
Interest-earning deposits with banks (3)
Federal funds sold and securities purchased under resale agreements (3)
Debt securities (4):
Trading debt securities
Available-for-sale debt 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 securities
Total available-for-sale debt securities
Held-to-maturity debt 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 debt securities
Total debt securities
Mortgage loans held for sale (5)
Loans held for sale (5)
Commercial:
Commercial and industrial – U.S.
Commercial and industrial – Non-U.S.
Real estate mortgage
Real estate construction
Lease financing
Total commercial loans
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 loans
Total loans (5)
Equity securities
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
Net interest margin and net interest income on a taxable-
equivalent basis (6)
Noninterest-earning assets
Cash and due from banks
Goodwill
Other
Total noninterest-earning assets
Noninterest-bearing funding sources
Deposits
Other liabilities
Total equity
Noninterest-bearing funding sources used to fund earning assets
Net noninterest-bearing funding sources
Total assets
6,618
47,884
156,052
7,769
163,821
46,875
265,198
44,735
6,253
94,216
361
145,565
494,289
18,394
2,526
275,656
60,718
122,947
23,609
19,392
502,322
284,178
36,687
36,780
48,115
37,115
442,875
945,197
38,092
5,071
$ 1,738,482
$
63,243
684,882
20,653
84,822
63,945
917,545
104,267
224,268
27,648
1,273,728
464,754
$ 1,738,482
$
18,777
26,453
105,180
$
150,410
$
358,312
53,496
203,356
(464,754)
$
150,410
$ 1,888,892
201,864
74,697
74,475
15,966
52,658
145,310
11,839
157,149
48,714
274,487
44,705
6,268
78,330
2,194
131,497
480,459
20,780
1,487
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
36,105
5,069
1,776,590
49,474
682,053
22,190
61,625
123,816
939,158
98,922
246,195
21,872
1,306,147
470,443
1,776,590
1.07% $
0.98
3.16
1.49
3.95
2.60
5.33
2.81
3.68
3.11
2.19
5.32
2.34
2.50
2.43
2.93
3.78
3.40
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
2.27
0.85
3.40% $
0.49% $
0.14
0.30
1.43
0.68
0.32
0.77
2.09
1.94
0.72
—
0.53
2,162
735
2,356
239
2,082
3,782
631
4,413
1,794
8,528
979
334
1,832
55
3,200
14,084
786
50
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
821
44
60,233
242
983
67
880
841
3,013
761
5,157
424
9,355
—
9,355
1.70
3.77
2.79
4.62
2.87
4.22
3.24
2.19
4.34
2.36
4.00
2.40
3.02
4.22
5.56
4.16
3.53
4.29
4.94
4.74
4.18
4.04
5.38
12.72
5.18
6.70
5.22
4.66
2.62
1.46
3.76% $
0.96% $
0.31
0.57
2.25
1.30
0.61
1.65
2.99
2.21
1.15
—
0.85
112
1,806
4,348
358
4,706
1,980
8,604
980
271
2,221
15
3,487
14,947
777
140
11,465
2,143
5,279
1,167
919
20,973
11,481
1,975
4,678
2,491
2,488
23,113
44,086
999
74
65,308
606
2,157
118
1,906
835
5,622
1,719
6,703
610
14,654
—
14,654
2.91% $
50,654
2.87% $
50,878
18,622
26,629
111,164
156,415
365,464
55,740
205,654
(470,443)
156,415
1,933,005
(1) Our average prime rate was 4.91% for the year ended December 31, 2018, 4.10% for the year ended December 31, 2017, 3.51% for the year ended December 31, 2016,
and 3.26% for the year ended December 31, 2015, and 3.25% for the year ended December 31, 2014. The average three-month London Interbank Offered Rate (LIBOR)
was 2.31%, 1.26%, 0.74%, 0.32%, and 0.23% for the same years, respectively.
(2) Yield/rates and amounts include the effects of hedge and risk management activities associated with the respective asset and liability categories.
(3) Financial information for the prior periods has been revised to reflect the impact of our adoption of Accounting Standards Update (ASU) 2016-18 – Statement of Cash Flows
(Topic 230): Restricted Cash in which we changed the presentation of our cash and cash equivalents to include both cash and due from banks as well as interest-earning
deposits with banks, which are inclusive of any restricted cash.
52
Wells Fargo & Company
52
Average
balance
Yields/
rates
2016
Interest
income/
expense
Average
balance
Yields/
rates
2015
Interest
income/
expense
Average
balance
Yields/
rates
2014
Interest
income/
expense
$
225,955
61,763
0.51% $
0.48
70,195
29,418
52,959
110,637
18,725
129,362
52,731
264,470
44,675
2,893
39,330
4,043
90,941
425,606
22,412
1,361
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
27,417
—
1,714,474
42,379
663,557
25,912
55,846
103,206
890,900
115,187
239,471
16,702
1,262,260
452,214
$
1,714,474
$
$
$
$
$
18,617
26,700
125,650
170,967
359,666
62,825
200,690
(452,214)
170,967
1,885,441
1,161
296
2,082
457
2,225
2,764
1,029
3,793
1,771
8,246
979
154
786
81
2,000
12,328
784
38
9,243
1,219
4,371
824
916
16,573
11,096
2,183
3,970
3,458
2,350
23,057
39,630
669
—
54,906
60
449
91
508
287
1,395
333
3,830
354
5,912
—
5,912
222,773
44,059
51,551
32,093
47,404
100,218
22,490
122,708
48,515
250,720
44,173
2,087
21,967
5,821
74,048
376,319
21,603
1,651
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
23,921
—
1,575,758
38,640
625,549
31,887
51,790
107,138
855,004
87,465
185,078
16,545
1,144,092
431,666
1,575,758
0.27% $
0.30
3.16
1.58
4.23
2.73
5.73
3.28
3.32
3.25
2.19
5.40
2.23
1.73
2.26
3.04
3.63
2.59
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
2.94
—
3.20% $
0.05% $
0.06
0.63
0.45
0.13
0.11
0.07
1.40
2.15
0.35
—
0.25
605
133
1,627
505
2,007
2,733
1,289
4,022
1,609
8,143
968
113
489
101
1,671
11,441
785
43
7,836
877
3,984
749
577
14,023
11,002
2,391
3,664
3,374
2,209
22,640
36,663
703
—
50,373
20
367
201
232
143
963
64
2,592
357
3,976
—
3,976
209,686
31,596
43,108
10,400
43,138
114,076
26,475
140,551
45,759
239,848
17,239
246
5,921
5,913
29,319
312,275
19,018
5,585
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
21,125
—
1,433,717
39,729
585,854
38,111
51,434
95,889
811,017
60,111
167,420
14,401
1,052,949
380,768
1,433,717
0.26% $
0.38
3.23
1.64
4.29
2.84
6.03
3.44
3.57
3.54
2.23
4.93
2.55
1.85
2.24
3.37
4.03
2.02
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
3.08
—
3.39% $
0.07% $
0.07
0.85
0.40
0.14
0.14
0.10
1.49
2.65
0.38
—
0.28
554
119
1,392
171
1,852
3,235
1,597
4,832
1,635
8,490
385
12
151
109
657
10,539
767
113
6,869
867
4,100
744
690
13,270
10,961
2,686
3,294
3,377
2,127
22,445
35,715
650
—
48,457
26
403
323
207
137
1,096
62
2,488
382
4,028
—
4,028
2.97
1.56
4.20
2.50
5.49
2.93
3.36
3.12
2.19
5.32
2.00
2.01
2.20
2.90
3.50
2.76
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
2.44
—
3.21% $
0.14% $
0.07
0.35
0.91
0.28
0.16
0.29
1.60
2.12
0.47
—
0.35
2.86% $
48,994
2.95% $
46,397
3.11% $
44,429
17,327
25,673
124,161
167,161
339,069
68,174
191,584
(431,666)
167,161
1,742,919
16,361
25,687
117,584
159,632
303,127
56,985
180,288
(380,768)
159,632
1,593,349
(4) Yields and rates are based on interest income/expense amounts for the period. The average balance amounts represent amortized cost for the periods presented.
(5) Nonaccrual loans and related income are included in their respective loan categories.
(6) Includes taxable-equivalent adjustments of $659 million, $1.3 billion, $1.2 billion, $1.1 billion and $902 million for the years ended December 31, 2018, 2017, 2016, 2015
and 2014, respectively, predominantly related to tax-exempt income on certain loans and securities. The federal statutory tax rate utilized was 21% for the period ended
December 31, 2018, and 35% for the periods ended December 31, 2017, 2016, 2015 and 2014.
53
Wells Fargo & Company
53
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.
Federal funds sold and securities purchased under resale agreements (1)
40
$
(569)
1,261
656
298
202
(in millions)
Increase (decrease) in interest income:
Interest-earning deposits with banks (1)
Debt securities:
Trading debt securities
Available-for-sale debt 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 securities
Total available-for-sale debt securities
Held-to-maturity debt 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 debt securities
Mortgage loans held for sale
Loans held for sale
Commercial loans:
Commercial and industrial – U.S.
Commercial and industrial – Non-U.S.
Real estate mortgage
Real estate construction
Lease financing
Total commercial loans
Consumer loans:
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 loans
Total loans
Equity securities
Other
2018 over 2017
Year ended December 31,
2017 over 2016
Volume
Rate
Total
Volume
Rate
Total
692
696
500
(127)
(276)
566
(273)
293
186
76
1
(63)
389
(40)
287
(9)
90
30
(92)
281
(76)
205
256
399
—
(62)
16
22
(24)
86
43
1,131
1,269
399
692
201
194
504
420
150
204
2,617
2,547
27
225
177
(91)
196
534
275
(87)
323
(603)
80
(12)
3,151
2,535
131
30
178
30
(135)
73
1,136
366
1,001
439
134
140
274
(198)
(13)
902
(369)
533
(140)
182
—
180
893
(43)
1,030
(59)
3
135
142
97
59
57
490
48
(323)
170
(198)
(40)
(343)
147
201
44
(20)
(130)
116
(29)
87
163
100
—
—
153
17
170
61
9
818
278
391
134
(258)
1,363
62
202
215
(166)
98
411
(218)
(143)
1,018
(398)
620
23
282
—
180
1,046
(26)
1,200
2
12
953
420
488
193
(201)
1,853
110
(121)
385
(364)
58
68
1,774
1,921
(49)
—
152
44
(157)
(184)
285
(197)
88
(70)
(323)
1
(1)
373
(62)
311
(95)
47
138
105
(272)
(51)
10
(70)
248
(312)
146
(512)
(116)
(546)
(616)
47
—
Total increase in interest income (1)
(860)
5,935
5,075
1,620
3,707
5,327
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
$
82
4
(5)
407
(534)
(46)
43
(495)
122
(376)
(484)
282
1,170
56
619
528
2,655
915
2,041
64
5,675
260
364
1,174
51
1,026
(6)
2,609
958
1,546
186
5,299
11
14
(12)
57
68
138
(53)
111
102
298
(224)
1,322
171
520
(12)
315
486
1,480
481
1,216
(32)
3,145
562
182
534
(24)
372
554
1,618
428
1,327
70
3,443
1,884
(1) Financial information has been revised to reflect the impact of our adoption in first quarter 2018 of ASU 2016-18 – Statement of Cash Flows (Topic 230): Restricted Cash in
which we changed the presentation of our cash and cash equivalents to include both cash and due from banks as well as interest-earning deposits with banks, which are
inclusive of any restricted cash. See Note 1 (Summary of Significant Accounting Policies) to Financial Statements in this Report for more information.
54
Wells Fargo & Company
54
Noninterest Income
Table 7: Noninterest Income
(in millions)
2018
Service charges on deposit accounts
$ 4,716
2017
5,111
2016
5,372
Yea
r ended Dec
ember 31,
Trust and investment fees:
Brokerage advisory, commissions and
other fees
Trust and investment management
Investment banking
9,436
3,316
1,757
9,358
3,372
1,765
9,216
3,336
1,691
Total trust and investment fees
14,509
14,495
14,243
Card fees
Other fees:
3,907
3,960
3,936
Lending related charges and fees (1)
Cash network fees
1,526
481
1,568
506
1,562
537
Commercial real estate
brokerage commissions
Wire transfer and other remittance fees
All other fees (2)
468
477
432
462
448
573
494
401
733
Total other fees
3,384
3,557
3,727
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 securities
Lease income
Life insurance investment income
All other
1,373
1,427
1,765
1,644
3,017
429
602
108
1,515
1,753
651
1,822
2,923
4,350
1,049
542
479
1,779
1,907
594
1,009
4,331
6,096
1,268
610
942
1,103
1,927
587
702
Total
$ 36,413
38,832
40,513
(1) Represents combined amount of previously reported “Charges and fees on
loans” and “Letters of credit fees”.
(2) All other fees have been revised to include merchant processing fees for the
year ended 2016.
Noninterest income of $36.4 billion represented 42% of revenue
for 2018, compared with $38.8 billion, or 44%, for 2017 and
$40.5 billion, or 46%, for 2016. The decline in noninterest
income in 2018 compared with 2017 was predominantly due to
lower mortgage banking income, lower insurance income due to
the sale of Wells Fargo Insurance Services in fourth quarter
2017, lower service charges on deposit accounts, lower gains on
debt securities, and lower deferred compensation plan
investment results (offset in employee benefits expense). These
decreases were partially offset by higher gains from equity
securities and higher all other income. 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 gains from
the sale of Pick-a-Pay PCI loans. For more information on our
performance obligations and the nature of services performed
for certain of our revenues discussed below, see Note 21
(Revenue from Contracts with Customers) to Financial
Statements in this Report.
Service charges on deposit accounts were $4.7 billion in
2018, down from $5.1 billion in 2017 due to lower overdraft and
monthly service fees driven by customer-friendly initiatives that
help customers minimize monthly service charges and overdraft
fees, and the impact of a higher earnings credit rate applied to
commercial accounts due to increased interest rates. Service
charges on deposit accounts decreased $261 million in 2017
from 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.
Brokerage advisory, commissions and other fees increased
to $9.44 billion in 2018, from $9.36 billion in 2017, which
increased $142 million from 2016. The increase in these fees in
both 2018 and 2017 was due to higher asset-based fees, partially
offset by lower transactional commission revenue. Retail
brokerage client assets totaled $1.49 trillion at December 31,
2018, compared with $1.65 trillion and $1.49 trillion at
December 31, 2017 and 2016, respectively. All retail brokerage
services are 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 largely
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 $3.3 billion in 2018
declined slightly from 2017 as a decrease in corporate trust fees
due to the sale of Wells Fargo Shareowner Services in first
quarter 2018 was only partially offset by growth in management
fees for investment advice on mutual funds. Trust and
investment management fees of $3.4 billion in 2017 were
relatively stable compared with 2016. Our AUM totaled
$638.3 billion at December 31, 2018, compared with
$690.3 billion and $652.2 billion at December 31, 2017 and
2016, 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 both December 31, 2018 and 2017,
compared with $1.6 trillion at December 31, 2016.
Investment banking fees of $1.8 billion in 2018 were
relatively stable compared with 2017. Investment banking fees in
2017 increased $74 million compared with 2016 due to higher
equity and debt originations, partially offset by lower advisory
fees.
Card fees were $3.9 billion in 2018, compared with
$4.0 billion in 2017 and $3.9 billion in 2016. The decrease in
2018 reflected the impact of the new revenue recognition
accounting standard, which reduced noninterest expense and
lowered card fees in 2018 by an equal amount due to the netting
of card payment network charges against related interchange
and network revenues in card fees. This decrease in card fees in
2018 was partially offset by higher interchange fees. Card fees
increased in 2017, compared with 2016, predominantly due to
increased purchase activity.
Other fees were $3.4 billion in 2018, compared with
$3.6 billion in 2017 and $3.7 billion in 2016. Other fees declined
in both 2018 and 2017 predominantly due to lower all other fees.
All other fees were $432 million in 2018, compared with
$573 million in 2017 and $733 million in 2016. The decrease in
2018 compared with 2017 was driven by lost fees from
discontinued products. The decrease in all other fees in 2017
compared with 2016 was driven by lower fees from discontinued
55
Wells Fargo & Company
55
Table 7a: Selected Mortgage Production Data
Year ended December 31,
2018
2017
2016
Net gains on mortgage
loan origination/sales
activities (in millions):
Residential
Commercial
Residential pipeline
and unsold/
repurchased loan
management (1)
(A)
$ 1,174
2,140
3,168
265
358
400
205
425
763
Total
$ 1,644
2,923
4,331
Residential real estate
originations (in
billions):
Held-for-sale
(B)
$ 132
45
$ 177
160
52
212
186
63
249
Held-for-investment
Total
Production margin on
residential held-for
sale mortgage
originations
(A)/(B)
0.89%
1.34
1.71
(1) Predominantly includes the results of Government National Mortgage
Association (GNMA) loss mitigation activities, interest rate management
activities and changes in estimate to the liability for mortgage loan repurchase
losses.
The production margin was 0.89% for 2018, compared with
1.34% for 2017 and 1.71% for 2016. The decline in the production
margin in 2018 was due to lower margins in both retail and
correspondent production channels and a shift to more
correspondent origination volume, which has a lower production
margin. The decrease in the production margin in 2017 was due
to a shift in origination channel mix from retail to
correspondent.
Mortgage applications were $230 billion in 2018, compared
with $278 billion in 2017 and $347 billion in 2016. The 1-4
family first mortgage unclosed pipeline was $18 billion at
December 31, 2018, compared with $23 billion at December 31,
2017, and $30 billion at December 31, 2016. 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 10 (Mortgage Banking Activities) and Note 18 (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.
Earnings Performance (continued)
products and the impact of the sale of our global fund services
business in fourth quarter 2016.
Mortgage banking income, consisting of net servicing
income and net gains on loan origination/sales activities, totaled
$3.0 billion in 2018, compared with $4.4 billion in 2017 and
$6.1 billion in 2016. As further discussed below, the decrease in
mortgage banking income in both 2018 and 2017 was primarily
driven by overall reductions in the size of the residential
mortgage market as well as declines in production margins.
In addition to servicing fees, net 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 2018 included a $112 million
net MSR valuation loss ($960 million increase in the fair value of
the MSRs and a $1.1 billion hedge loss). 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), and 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 MSRs and a
$261 million hedge gain). The decline in net MSR valuation
results in 2018, compared with 2017, was predominantly due to
negative MSR valuation adjustments in fourth quarter 2018 for
servicing and foreclosure costs, discount rates and prepayment
estimates recognized as a result of recent market observations
related to an acceleration of prepayments, including for
Department of Veterans Affairs (VA) loans. The decrease in net
MSR valuation gains in 2017, compared with 2016, was largely
due 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. Net servicing
income in 2018 was also favorably impacted by lower
unreimbursed servicing and foreclosure costs as we continued to
reduce our inventory of aged FHA loans in foreclosure.
Our portfolio of loans serviced for others was $1.71 trillion
at December 31, 2018, $1.70 trillion at December 31, 2017, and
$1.68 trillion at December 31, 2016. At December 31, 2018, the
ratio of combined residential and commercial MSRs to related
loans serviced for others was 0.94%, compared with 0.88% at
December 31, 2017, and 0.85% at December 31, 2016. 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
$1.6 billion in 2018, compared with $2.9 billion in 2017 and
$4.3 billion in 2016. The decrease in both 2018 and 2017 was
driven by decreased origination volumes and margins.
Mortgage loan originations were $177 billion in 2018,
compared with $212 billion in 2017 and $249 billion in 2016.
The production margin on residential held-for-sale mortgage
loan originations, which represents net gains on residential
mortgage loan origination/sales activities divided by total
residential held-for-sale mortgage loan originations, provides a
measure of the profitability of our residential mortgage
origination activity. Table 7a presents the information used in
determining the production margin.
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Wells Fargo & Company
56
Insurance income was $429 million in 2018 compared with
$1.0 billion in 2017 and $1.3 billion in 2016. The decrease in
both 2018 and 2017 was driven by the sale of Wells Fargo
Insurance Services in fourth quarter 2017. The decrease in 2017
was also driven by the divestiture of our crop insurance business
in first quarter 2016.
Net gains from trading activities, which reflect unrealized
changes in fair value of our trading positions and realized gains
and losses, were $602 million in 2018, compared with
$542 million in 2017 and $610 million in 2016. The increase in
2018 was due to growth in equity trading driven by market
volatility, partially offset by lower foreign exchange trading
income. The decrease in 2017, compared with 2016, was driven
by lower customer accommodation trading activity. 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 and Note 4 (Trading Activities) to Financial
Statements in this Report.
Net gains on debt and equity securities totaled $1.6 billion
for 2018 and $2.3 billion and $2.0 billion for 2017 and 2016,
respectively, after other-than-temporary impairment (OTTI)
write-downs of $380 million, $606 million and $642 million,
respectively, for the same periods. The decrease in 2018 was
predominantly driven by lower deferred compensation gains
(offset in employee benefits expense) and lower net gains on
debt securities, partially offset by higher net gains from
nonmarketable equity securities and $313 million of unrealized
gains from the impact of the new accounting standard for
financial instruments which requires any gain or loss associated
with the fair value measurement of equity securities to be
reflected in earnings. The decrease in OTTI in 2018 was
predominantly driven by lower write-downs in municipal debt
securities, commercial mortgage-backed securities and corporate
debt securities. 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
nonmarketable equity securities.
Lease income was $1.8 billion in 2018, compared with
$1.9 billion in 2017, driven by lower rail and equipment lease
income. Lease income in 2017 was stable compared with 2016.
All other income was $1.8 billion in 2018, compared with
$1.0 billion in 2017 and $702 million in 2016. All other income
includes losses on low income housing tax credit investments,
foreign currency adjustments, income from investments
accounted for under the equity method, hedge accounting results
related to hedges of foreign currency risk, and the results of
certain economic hedges, any of which can cause decreases and
net losses in other income. The increase in other income in 2018,
compared with 2017, was predominantly driven by $2.0 billion
higher pre-tax gains from the sales of purchased credit-impaired
(PCI) Pick-a-Pay loans, a pre-tax gain from the sale of Wells
Fargo Shareowner Services, and gains from the previously
announced sale of 52 retail branches. The increase was partially
offset by a gain from the sale of our insurance services business
in 2017, a realized loss related to the previously announced sale
of certain assets and liabilities of Reliable Financial Services, Inc.
(a subsidiary of Wells Fargo’s automobile financing business),
and a lower benefit from hedge ineffectiveness accounting. 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 PCI Pick-a-Pay loan portfolio in
second quarter 2017, as well as the impact of our adoption in
fourth quarter 2017 of Accounting Standards Update (ASU)
2017-12 – Derivatives and Hedging (Topic 815): Targeted
Improvements to Accounting for Hedging Activities, 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 2017 Tax Cuts & Jobs Act (Tax Act).
57
Wells Fargo & Company
57
with 2016, due to an increase in deposit assessments as a result
of the FDIC temporary surcharge which became effective on
July 1, 2016. See the “Regulation and Supervision” section in our
2018 Form 10-K for additional information.
Year ended December 31,
Operating losses were down $2.4 billion in 2018, compared
Earnings Performance (continued)
Noninterest Expense
Table 8: Noninterest Expense
(in millions)
Salaries
Commission and incentive
compensation
Employee benefits
Equipment
Net occupancy
Core deposit and other intangibles
FDIC and other deposit
assessments
Outside professional services
Operating losses
Contract services (1)
Operating leases
Advertising and promotion
Outside data processing
Travel and entertainment
Postage, stationery and supplies
Telecommunications
Foreclosed assets
Insurance
All other (1)
Total
2018
2017
2016
$ 17,834
17,363
16,552
10,264
10,442
10,247
4,926
2,444
2,888
1,058
1,110
3,306
3,124
2,192
1,334
857
660
618
515
361
188
101
5,566
2,237
2,849
1,152
1,287
3,813
5,492
1,638
1,351
614
891
687
544
364
251
100
5,094
2,154
2,855
1,192
1,168
3,138
1,608
1,497
1,329
595
888
704
622
383
202
179
2,346
1,843
1,970
$ 56,126
58,484
52,377
(1) The periods prior to 2018 have been revised to conform with the current
period presentation whereby temporary help is included in contract services
rather than in all other noninterest expense.
Noninterest expense was $56.1 billion in 2018, down 4% from
$58.5 billion in 2017, which was up 12% from $52.4 billion in
2016. The decrease in 2018, compared with 2017, was driven by
lower operating losses, personnel expenses, outside data
processing, and FDIC expense, partially offset by higher
advertising and promotion, equipment, and other expense. 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.
Personnel expenses, which include salaries, commissions,
incentive compensation and employee benefits, were down
$347 million, or 1% in 2018, compared with 2017, due to lower
deferred compensation costs (offset in net gains from equity
securities), and lower commission and incentive compensation,
partially offset by salary and minimum pay increases, and higher
company health plan and retirement plan expenses. Personnel
expenses were up $1.5 billion, or 5% in 2017, compared with
2016, due to annual salary increases, higher deferred
compensation costs (offset in net gains from equity securities),
and higher employee benefits.
Equipment expense was up 9% in 2018, compared with
2017, due to increased computer purchases and equipment
expense related to the Company’s migration to Windows 10,
higher software license and maintenance expense, as well as
higher depreciation expense. Equipment expense was up 4% in
2017, compared with 2016, primarily due to higher depreciation
expense.
FDIC and other deposit assessments were down 14% in
2018, compared with 2017, due to the completion of the FDIC
temporary surcharge which ended September 30, 2018. FDIC
and other deposit assessments were up 10% in 2017, compared
with 2017, due to lower litigation accruals, partially offset by
higher remediation accruals for previously disclosed matters.
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.
Outside professional and contract services expense was up
1% in 2018, compared with 2017, driven by higher project and
technology spending on regulatory and compliance related
initiatives. Outside professional and contract services expense
was up 18% in 2017, compared with 2016, 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 data processing expense was down 26% in 2018,
compared with 2017, reflecting lower data processing expense
related to the GE Capital business acquisitions and the impact of
the new revenue recognition accounting standard, which
reduced noninterest expense and lowered card fees by an equal
amount due to the netting of card payment network charges
against related interchange and network revenues in card fees.
Outside data processing expense was relatively stable in 2017,
compared with 2016.
Advertising and promotion expense was up 40% in 2018,
compared with 2017, due to higher advertising expense,
including expense for the “Re-Established” advertising
campaign launched in second quarter 2018. Advertising and
promotion expense was up 3% in 2017, compared with 2016,
due to higher advertising expense, including higher media and
production expense, partially offset by lower sales promotion
expense.
Foreclosed assets expense was down 25% in 2018,
compared with 2017, predominantly due to lower operating
expenses. 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.
Insurance expense was relatively stable in 2018, compared
with 2017, and was down 44% in 2017, compared with 2016,
predominantly driven by the sale of our crop insurance business
in first quarter 2016.
All other noninterest expense was up 27% in 2018,
compared with 2017, predominantly due to higher charitable
donations expense, higher insurance premium payments, a
pension plan settlement expense, and lower gains on the sale of
corporate properties. All other noninterest expense was down
6% 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 in 2018 included a $305 million
contribution to the Wells Fargo Foundation, compared with a
$199 million contribution in 2017 and a $107 million
contribution in 2016.
Our full year 2018 efficiency ratio was 65.0%, compared
with 66.2% in 2017 and 59.3% in 2016.
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Wells Fargo & Company
58
Income Tax Expense
The 2018 annual effective income tax rate was 20.2%, compared
with 18.1% in 2017 and 31.5% in 2016. The 2018 effective income
tax rate reflected the reduction to the U.S. federal income tax
rate from 35% to 21% resulting from the 2017 Tax Act. It also
included income tax expense related to non-deductible litigation
accruals and the reconsideration of reserves for state income
taxes following the U.S. Supreme Court opinion in South Dakota
v. Wayfair, Inc. In addition, we recognized $164 million of
income tax expense associated with the final re-measurement of
our initial estimates for the impacts of the 2017 Tax Act, in
accordance with ASC Topic 740, Income Taxes and SEC
Accounting Bulletin 118. The 2017 effective income tax rate
included an 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 income tax
expense for the estimated deemed repatriation of the Company’s
previously undistributed foreign earnings. The 2017 effective
income tax rate also included income tax expense of $1.3 billion
related to the effect of discrete non tax-deductible items,
predominantly consisting of 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. See Note 23 (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 Wealth and Investment Management (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). Effective first quarter 2018, we adopted a
new funds transfer pricing methodology to allow for better
comparability of performance across the Company. Under the
new methodology, assets and liabilities now receive a funding
charge or credit that considers interest rate risk, liquidity risk,
and other product characteristics on a more granular level. This
methodology change affects results across all three of our
reportable operating segments and operating segment results for
periods prior to 2018 have been revised to reflect this
methodology change. Our previously reported consolidated
financial results were not impacted by the methodology change;
however, in connection with our adoption of ASU 2016-01 in
first quarter 2018, certain reclassifications have occurred within
noninterest income. 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 26 (Operating Segments) to Financial
Statements in this Report.
(in millions, except average balances which are in billions)
2018
Revenue
Provision (reversal of provision) for credit losses
Net income (loss)
Average loans
Average deposits
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
Community
Banking
Wholesale
Wealth and
Investment
Banking Management
Other (1)
Consolidated
Company
Year ended December 31,
$
46,913
28,706
16,376
(5,587)
86,408
1,783
(58)
10,394
11,032
$
463.7
757.2
465.7
423.7
(5)
2,580
74.6
165.0
24
1,744
(1,613)
22,393
(58.8)
(70.0)
945.2
1,275.9
$
47,018
30,000
17,072
(5,701)
2,555
10,938
475.7
729.6
$
(19)
9,914
465.6
464.2
(5)
2,770
71.9
189.0
(3)
(1,439)
(57.1)
(78.2)
$
46,513
31,047
16,278
(5,571)
2,691
10,818
485.2
703.6
$
1,073
9,942
451.0
436.2
(5)
2,637
67.3
189.7
11
(1,459)
(53.5)
(78.9)
88,389
2,528
22,183
956.1
1,304.6
88,267
3,770
21,938
950.0
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 WIM customers served
through Community Banking distribution channels.
59
Wells Fargo & Company
59
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 and private equity partnerships. We continue to
wind down the personal insurance business and expect to
substantially complete these activities in the first half of 2019.
Table 9a provides additional financial information for
Community Banking.
(in millions, except average balances which are in billions)
2018
2017 % Change
2016 % Change
Year ended December 31,
$ 29,219
28,658
2% $ 27,333
5%
2,641
2,909
(9)
3,111
Brokerage advisory, commissions and other fees (1)
1,887
1,830
Net interest income
Noninterest income:
Service charges on deposit accounts
Trust and investment fees:
Trust and investment management (1)
Investment banking (2)
Total trust and investment fees
Card fees
Other fees
Mortgage banking
Insurance
Net gains (losses) from trading activities
Net gains (losses) on debt securities
Net gains from equity securities (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
910
(35)
2,762
3,543
1,359
2,659
83
28
(3)
1,505
3,117
889
(59)
2,660
3,613
1,497
3,895
139
(251)
709
1,455
1,734
17,694
18,360
21,252
20,381
2,356
2,166
404
624
1,560
2,656
2,157
2,111
446
715
1,875
5,312
(527)
(382)
30,491
32,615
3
2
41
4
(2)
(9)
(32)
(40)
111
NM
3
80
(4)
1,854
849
(141)
2,562
3,598
1,636
5,624
112
(148)
933
804
948
19,180
4
9
3
(9)
(13)
(17)
(50)
(38)
(7)
24
497
67
19,382
2,040
2,114
505
651
1,264
1,454
245
27,655
16,167
5,213
136
46,913
47,018
—
46,513
1,783
2,555
(30)
2,691
(6)
(1)
5
58
4
—
(8)
(31)
24
(70)
(24)
81
83
(4)
1
(5)
5
6
—
(12)
10
48
265
NM
18
(27)
(88)
103
1
(2)
4
Income before income tax expense and noncontrolling interests
14,639
11,848
Income tax expense
Net income from noncontrolling interests (4)
3,784
461
634
276
Net income
Average loans
Average deposits
$ 10,394
10,938
(5)
$ 10,818
$ 463.7
757.2
475.7
729.6
(3) $
485.2
4
703.6
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) Largely 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.
60
Wells Fargo & Company
60
The provision for credit losses in 2018 decreased
$772 million from 2017 due to credit improvement in the
consumer real estate and automobile portfolios. The provision
for credit losses in 2017 decreased $136 million from 2016 due to
credit improvement in the consumer real estate portfolio.
Income tax expense was $3.8 billion in 2018, up $3.2 billion
from $634 million in 2017, which was down $4.6 billion from
2016. Income tax expense in 2018 included the adverse impact
of non-deductible litigation accruals, the reconsideration of
reserves for state income taxes following the U.S. Supreme Court
opinion in South Dakota v. Wayfair, Inc., and the expense
associated with the final re-measurement of our initial estimates
for the impacts of the 2017 Tax Act. Income tax expense in 2017
included the estimated net benefit from the impact of the 2017
Tax Act to the Company, partially offset by the impact of discrete
non tax-deductible items, predominantly litigation accruals.
Community Banking reported net income of $10.4 billion in
2018, down $544 million, or 5%, from $10.9 billion in 2017,
which was up $120 million, or 1%, from 2016. Revenue was
$46.9 billion in 2018, down $105 million from $47.0 billion in
2017, which was up $505 million, or 1%, compared with 2016.
The decrease in revenue in 2018 was due to lower mortgage
banking revenue driven by lower mortgage loan originations and
a decrease in servicing income, lower gains on debt securities,
lower service charges on deposit accounts, and lower other fees.
These decreases were partially offset by higher other income,
including gains from the sales of PCI mortgage loans and the sale
of 52 branches, and higher net interest income. The increase in
revenue in 2017 was due to higher net interest income, higher
gains on equity securities, higher deferred compensation plan
investment results (offset in employee benefits expense), and
higher other income (including higher net hedge ineffectiveness
income and a gain on the sale of PCI mortgage loans), partially
offset by lower mortgage banking revenue, lower gains on debt
securities, and lower service charges on deposit accounts.
Average deposits increased $27.6 billion in 2018, or 4%,
from 2017, which increased $26.0 billion, or 4%, from 2016.
Noninterest expense of $30.5 billion decreased $2.1 billion
in 2018, or 7%, from 2017, which increased $5.0 billion, or 18%,
from 2016. The decrease in 2018 was predominantly driven by
lower operating losses due to lower litigation accruals, partially
offset by higher outside professional and contract services
expense driven by project and technology spending on
regulatory and compliance-related initiatives. The increase in
2017 was substantially due to higher operating losses driven by
higher litigation accruals, higher personnel expense, and higher
outside professional services, partially offset by lower foreclosed
assets expense driven by improvement in the residential real
estate portfolio, lower telephone and supplies expenses, and
lower other expense.
61
Wells Fargo & Company
61
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
Commercial Banking, Commercial Real Estate, Corporate and
Investment Banking, Credit Investment Portfolio, Treasury
Management, and Commercial Capital. Table 9b provides
additional financial information for Wholesale Banking.
Table 9b: Wholesale Banking
(in millions, except average balances which are in billions)
2018
2017 % Change
2016 % Change
Year ended December 31,
$ 18,690
18,810
(1)% $ 18,699
1%
2,074
2,201
(6)
2,260
(3)
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 securities
Other income of the segment
Total noninterest income
317
445
1,783
2,545
362
2,019
362
312
516
102
293
1,431
304
523
1,827
2,654
345
2,054
458
872
701
(232)
116
2,021
10,016
11,190
4
(15)
(2)
(4)
5
(2)
(21)
(64)
(26)
144
153
(29)
(10)
368
473
1,833
2,674
336
2,085
475
1,156
677
8
199
2,478
12,348
Total revenue
28,706
30,000
(4)
31,047
Provision (reversal of provision) for credit losses
(58)
(19)
NM
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
5,567
6,603
48
403
378
419
958
246
8,138
55
425
414
481
1,134
74
7,438
16,157
16,624
Income before income tax expense and noncontrolling interest
12,607
13,395
Income tax expense
Net income (loss) from noncontrolling interest
Net income
Average loans
Average deposits
NM - Not meaningful
1,555
3,496
20
(15)
$ 11,032
$ 465.7
423.7
9,914
465.6
464.2
(16)
(13)
(5)
(9)
(13)
(16)
232
9
(3)
(6)
(56)
233
11
—
(9)
6,456
68
423
385
428
989
115
7,037
15,901
14,073
4,159
(28)
9,942
451.0
436.2
$
$
(17)
11
—
(1)
3
(1)
(4)
(25)
4
NM
(42)
(18)
(9)
(3)
NM
2
(19)
—
8
12
15
(36)
6
5
(5)
(16)
46
—
3
6
62
Wells Fargo & Company
62
Noninterest expense of $16.2 billion in 2018 decreased
$467 million, or 3%, compared with 2017, which increased
$723 million, or 5%, compared with 2016. The decrease in 2018
was primarily due to lower personnel expense related to the sale
of WFIS and lower variable compensation, lower project related
spending, and lower FDIC expense, partially offset by higher
operating losses and increased regulatory, risk, cyber and
technology expenses. The increase in 2017 was predominantly
due to increased project and technology spending on compliance
and regulatory requirements. The provision for credit losses in
2018 decreased $39 million from 2017, from lower losses. The
provision for credit losses in 2017 decreased from $1.1 billion in
2016, predominantly due to lower 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 $11.0 billion in
2018, up $1.1 billion from 2017, which was down $28 million
from 2016. The increase in 2018 was due to the reduced U.S.
federal statutory income tax rate as well as lower noninterest
expense, partially offset by lower revenue. The decrease in 2017
compared with 2016 was due to lower noninterest income and
higher noninterest expense, partially offset by higher net interest
income and lower loan loss provision. Revenue in 2018 of
$28.7 billion decreased $1.3 billion, or 4%, from 2017, which
decreased $1.0 billion, or 3%, from 2016. Net interest income of
$18.7 billion in 2018 decreased $120 million, or 1%, from 2017,
which increased $111 million, or 1%, from 2016. The decrease in
net interest income in 2018 was due to lower income on trading
assets, debt securities, and loans, partially offset by the impact of
higher interest rates and the increased income on leveraged
leases related to the basis adjustment in 2017 associated with the
Tax Act. The increase in net interest income in 2017 was due to
strong deposit growth and the impact of rising interest rates,
partially offset by lower income on debt securities and trading
assets as well as the 2017 leveraged lease adjustment.
Average loans of $465.7 billion in 2018 were relatively flat
compared with 2017, which increased $14.6 billion, or 3%, from
2016. Loan growth in 2018 from commercial and industrial
loans was substantially offset by declines in commercial real
estate loans. Loan growth in 2017 was broad based across many
Wholesale Banking businesses and included the impact of the
GE Capital business acquisitions in 2016. Average deposits of
$423.7 billion in 2018 decreased $40.5 billion, or 9%, which
increased $28 billion, or 6%, from 2016. The decline in 2018 was
driven by actions taken in the first half of 2018 in response to the
asset cap included in the FRB consent order on
February 2, 2018, and declines across many businesses as
commercial customers allocated more cash to higher-rate
alternatives.
Noninterest income of $10.0 billion in 2018 decreased
$1.2 billion, or 10%, from 2017, which decreased $1.2 billion, or
9%, from 2016. The decrease in 2018 was driven by the impact of
the 2017 sale of Wells Fargo Insurance Services USA (WFIS), as
well as lower trading, operating lease income, service charges on
deposits and mortgage banking fees, partially offset by losses
taken in fourth quarter 2017 from adjustments to tax advantaged
businesses due to the Tax Act as well as the gain on the sale of
Wells Fargo Shareowner Services in 2018. The decrease in 2017,
compared with 2016, 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 and equity securities. These declines were
partially offset by a gain on the sale of our insurance services
business in 2017.
63
Wells Fargo & Company
63
Earnings Performance (continued)
Table 9c: Wealth and Investment Management
(in millions, except average balances which are in billions)
2018
2017 % Change
2016 % 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 (losses) from equity securities
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
$ 4,441
4,641
(4)% $
4,249
9%
16
17
(6)
19
(11)
9,161
2,893
9
9,072
2,877
1
1
8,870
2,891
2
—
(2)
550
(1)
(100)
12,063
11,947
6
17
(11)
82
57
9
(283)
(21)
6
18
(10)
88
92
2
208
63
11,935
12,431
16,376
17,072
(5)
(5)
8,085
8,126
42
440
276
116
815
232
2,932
12,938
3,443
861
2
$ 2,580
$
74.6
165.0
28
431
292
154
834
115
2,643
12,623
4,454
1,668
16
2,770
71.9
189.0
1
—
(6)
(10)
(7)
(38)
350
NM
NM
(4)
(4)
—
(1)
50
2
(5)
(25)
(2)
102
11
2
(23)
(48)
(88)
(7)
4
(13)
11,760
6
18
(9)
—
81
1
100
53
12,029
16,278
(5)
7,704
51
436
302
152
916
50
2,440
12,051
4,232
1,596
(1)
2,637
67.3
189.7
$
$
2
—
—
(11)
NM
14
100
108
19
3
5
—
5
(45)
(1)
(3)
1
(9)
130
8
5
5
5
NM
5
7
—
NM - Not meaningful
(1)
Includes syndication and underwriting fees paid to Wells Fargo Securities which are offset in our Wholesale Banking segment.
WIM reported net income of $2.6 billion in 2018, down
$190 million, or 7%, from 2017, which was up $133 million, or
5%, from 2016. Revenue of $16.4 billion in 2018 decreased
$696 million from 2017, which was up $794 million from 2016.
The decrease in revenue in 2018 was due to lower noninterest
income and net interest income. The increase in revenue in 2017
was due to growth in net interest income and asset-based fees.
Net interest income decreased 4% in 2018 primarily due to lower
deposit balances, partially offset by higher interest rates. Net
interest income increased 9% in 2017 predominantly due to
higher interest rates. Average loan balances of $74.6 billion in
2018 increased $2.7 billion from $71.9 billion in 2017, which was
up 7% from 2016. Average deposits of $165.0 billion in 2018
decreased 13% from $189.0 billion in 2017, which was relatively
flat compared with 2016. Noninterest income in 2018 decreased
4% from 2017 due to net losses from equity securities on lower
deferred compensation plan investment results (offset in
employee benefits expense), the impairment on the sale of our
ownership stake in RockCreek, and lower transaction revenue,
partially offset by higher asset-based fees.
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 expense of
$12.9 billion in 2018 increased 2% from $12.6 billion in 2017 due
to higher project and technology spending on compliance and
regulatory requirements, higher broker commissions, higher
operating losses and higher other personnel expense, partially
offset by lower employee benefits from deferred compensation
plan expense (offset in deferred compensation plan
investments). 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 employee
benefits from deferred compensation plan expense (offset in
deferred compensation plan investments). The provision for
credit losses was flat in both 2018 and 2017.
64
Wells Fargo & Company
64
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
brokerage commissions, the fees from those accounts generally
Table 9d: Retail Brokerage Client Assets
(in billions)
Retail brokerage client assets
Advisory account client assets
Advisory account client assets as a percentage of total client assets
Retail Brokerage advisory accounts include assets that are
financial advisor-directed and separately managed by third-
party managers, as well as certain client-directed brokerage
assets where we earn a fee for advisory and other services, but do
not have investment discretion. These advisory accounts
generate fees as a percentage of the market value of the assets as
of the beginning of the quarter, which vary across the account
types based on the distinct
Table 9e: Retail Brokerage Advisory Account Client Assets
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, are priced at the
beginning of the quarter, 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,
2018, 2017 and 2016.
Year ended December 31,
2018
$
1,487.6
501.1
34%
2017
1,651.3
542.8
33
2016
1,486.1
463.8
31
services provided, and are affected by investment performance
as well as asset inflows and outflows. For the years ended
December 31, 2018, 2017 and 2016, 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, 2018, 2017
and 2016.
(in billions)
December 31, 2018
Client directed (4)
Financial advisor directed (5)
Separate accounts (6)
Mutual fund advisory (7)
Total advisory client assets
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
Balance, beginning
of period
Inflows (1)
Outflows (2)
Market impact (3)
Year ended
Balance, end
of period
$
$
$
$
$
$
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
33.6
30.0
23.8
12.8
(41.0)
(32.9)
(29.1)
(13.8)
100.2
(116.8)
37.1
30.6
26.1
13.1
106.9
36.0
28.6
26.0
8.7
99.3
(39.2)
(24.5)
(23.5)
(11.1)
(98.3)
(37.5)
(18.7)
(21.9)
(11.6)
(89.7)
(12.0)
(2.2)
(7.4)
(3.5)
(25.1)
13.9
25.2
20.8
10.5
70.4
5.9
13.9
11.2
3.3
34.3
151.5
141.9
136.4
71.3
501.1
170.9
147.0
149.1
75.8
542.8
159.1
115.7
125.7
63.3
463.8
(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.
65
Wells Fargo & Company
65
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,
2018, 2017 and 2016.
(in billions)
December 31, 2018
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, 2017
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, 2016
Assets managed by WFAM (4):
Money market funds (5)
Other assets managed
Assets managed by Wealth and Retirement (6)
Total assets under management
Balance, beginning
of period
Inflows (1)
Outflows (2)
Market impact (3)
Year ended
Balance, end of
period
$
$
$
$
$
$
108.2
395.7
186.2
690.1
102.6
379.6
168.5
650.7
123.6
366.1
162.1
651.8
4.2
85.5
36.3
126.0
5.6
116.0
41.1
162.7
—
114.0
37.0
151.0
—
(120.2)
(39.5)
(159.7)
—
(130.9)
(39.4)
(170.3)
(21.0)
(125.0)
(35.9)
(181.9)
—
(7.5)
(12.3)
(19.8)
—
31.0
16.0
47.0
—
24.5
5.3
29.8
112.4
353.5
170.7
636.6
108.2
395.7
186.2
690.1
102.6
379.6
168.5
650.7
(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.
(6) Includes $4.9 billion, $5.5 billion and $6.9 billion as of December 31, 2018, 2017 and 2016, respectively, of client assets invested in proprietary funds managed by WFAM.
66
Wells Fargo & Company
66
Balance Sheet Analysis
At December 31, 2018, our assets totaled $1.9 trillion, down
$55.9 billion from December 31, 2017. Asset decline was
predominantly due to interest-earning deposits with banks,
which declined $42.8 billion.
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 28 (Regulatory and Agency
Capital Requirements) to Financial Statements in this Report.
Available-for-Sale and Held-to-Maturity Debt Securities
Table 10: Available-for-Sale and Held-to-Maturity Debt Securities
(in millions)
Available-for-sale
Held-to-maturity
Total (1)
December 31, 2018
December 31, 2017
Amortized
Net
unrealized
Cost gain (loss)
Fair
value
Amortized
Cost
Net
unrealized
gain (loss)
Fair
value
$ 272,471
(2,559)
269,912
144,788
(2,673)
142,115
417,259
(5,232)
412,027
275,096
139,335
414,431
1,311
276,407
(350)
138,985
961
415,392
(1) Available-for-sale debt securities are carried on the balance sheet at fair value. Held-to-maturity debt securities are carried on the balance sheet at amortized cost.
Table 10 presents a summary of our available-for-sale and
The held-to-maturity debt securities portfolio consists of
held-to-maturity debt securities, which decreased $1.0 billion in
balance sheet carrying value from December 31, 2017, largely
due to higher net unrealized losses, partially offset by purchases
outpacing paydowns and maturities.
The total net unrealized losses on available-for-sale debt
securities were $2.6 billion at December 31, 2018, down from net
unrealized gains of $1.3 billion at December 31, 2017, primarily
due to higher interest rates and wider credit spreads.
The size and composition of our available-for-sale and held
to-maturity debt securities 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 debt 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 debt 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 debt 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
debt 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.
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 debt securities portfolio may
also provide yield enhancement over short-term assets.
We analyze debt securities for other-than-temporary
impairment (OTTI) quarterly or more often if a potential loss-
triggering event occurs. In 2018, we recognized $28 million of
OTTI write-downs on debt securities. For a discussion of our
OTTI accounting policies and underlying considerations and
analysis, see Note 1 (Summary of Significant Accounting
Policies) and Note 5 (Available-for-Sale and Held-to-Maturity
Debt Securities) to Financial Statements in this Report.
At December 31, 2018, debt securities included $55.6 billion
of municipal bonds, of which 93.4% were rated “A-” or better
based predominantly on external and, in some cases, internal
ratings. Additionally, some of the debt 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 6.2 years at December 31, 2018. The
expected remaining maturity is shorter than the remaining
contractual maturity for the 59.4% of this portfolio that is MBS
because borrowers generally have the right to prepay obligations
before the underlying mortgages mature. The estimated effects
of a 200 basis point increase or decrease in interest rates on the
fair value and the expected remaining maturity of the MBS
available-for-sale portfolio are shown in Table 11.
67
Wells Fargo & Company
67
Balance Sheet Analysis (continued)
Table 11: Mortgage-Backed Securities Available for Sale
(in billions)
At December 31, 2018
Fair
value
Net
unrealized
gain (loss)
Expected
remaining
maturity
(in years)
Actual
160.2
(2.6)
5.8
Assuming a 200 basis point:
Increase in interest rates
Decrease in interest rates
143.3
171.7
(19.5)
8.9
7.8
3.1
The weighted-average expected maturity of debt securities
held-to-maturity was 5.6 years at December 31, 2018. See Note 5
(Available-for-Sale and Held-to-Maturity Debt Securities) to
Financial Statements in this Report for a summary of debt
securities by security type.
Table 12: Loan Portfolios
(in millions)
Commercial
Consumer
Total loans
Change from prior year
Loan Portfolios
Table 12 provides a summary of total outstanding loans by
portfolio segment. Total loans decreased $3.7 billion from
December 31, 2017, driven by a decline in consumer loans,
partially offset by an increase in commercial loans. Commercial
loan growth reflected growth in commercial and industrial loans,
partially offset by a decline in commercial real estate loans
reflecting continued credit discipline. The decrease in consumer
loans reflected paydowns, sales of 1-4 family first mortgage PCI
Pick-a-Pay loans, a continued decline in junior lien mortgage
loans, the sale of Reliable Financial Services, Inc., and an
expected decline in automobile loans as originations were more
than offset by paydowns.
December 31, 2018
December 31, 2017
$
$
513,405
439,705
953,110
(3,660)
503,388
453,382
956,770
(10,834)
A discussion of average loan balances and a comparative
detail of average loan balances is included in Table 5 under
“Earnings Performance – Net Interest Income” earlier in this
Report. Additional information on total loans outstanding by
portfolio segment and class of financing receivable is included in
the “Risk Management – Credit Risk Management” section in
this Report. Period-end balances and other loan related
Table 13: Maturities for Selected Commercial Loan Categories
information are in Note 6 (Loans and Allowance for Credit
Losses) to Financial Statements in this Report.
Table 13 shows contractual loan maturities for loan
categories normally not subject to regular periodic principal
reduction and the contractual distribution of loans in those
categories to changes in interest rates.
(in millions)
Selected loan maturities:
December 31, 2018
December 31, 2017
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
$ 109,566
213,425
27,208
350,199
105,327
201,530
26,268
333,125
Real estate mortgage
Real estate construction
16,413
63,648
40,953
121,014
20,069
64,384
42,146
126,599
9,958
11,343
1,195
22,496
9,555
13,276
1,448
24,279
Total selected loans
$ 135,937
288,416
69,356
493,709
134,951
279,190
69,862
484,003
Distribution of loans to changes in interest
rates:
Loans at fixed interest rates
$ 17,619
28,545
28,163
74,327
18,587
30,049
26,748
75,384
Loans at floating/variable interest rates
118,318
259,871
41,193
419,382
116,364
249,141
43,114
408,619
Total selected loans
$ 135,937
288,416
69,356
493,709
134,951
279,190
69,862
484,003
68
Wells Fargo & Company
68
Deposits
Deposits were $1.3 trillion at December 31, 2018, down
$49.8 billion from December 31, 2017, due to a decrease in
commercial deposits from financial institutions and a decline in
consumer and small business banking deposits. The decline in
commercial deposits from financial institutions was due to
actions taken in the first half of 2018 in response to the asset cap
included in the consent order issued by the FRB on
February 2, 2018, and declines across many businesses as
commercial customers allocated more cash to higher-rate
alternative investments. The decline in consumer and small
business banking deposits was due to higher balance customers
moving a portion of those balances to other cash alternatives
offering higher rates. Table 14 provides additional information
regarding deposits. Information regarding the impact of deposits
on net interest income and a comparison of average deposit
balances is provided in “Earnings Performance – Net Interest
Income” and Table 5 earlier in this Report.
Table 14: Deposits
($ 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,
2018
% of
total
deposits
Dec 31,
2017
% of
total
deposits
% Change
$
349,534
27%
$
373,722
28%
56,797
703,338
22,648
95,602
58,251
4
55
2
7
5
51,928
690,168
20,415
71,715
128,043
4
52
2
4
10
$ 1,286,170
100% $ 1,335,991
100%
(6)
9
2
11
33
(55)
(4)
(1)
Includes Eurodollar sweep balances of $31.8 billion and $80.1 billion at December 31, 2018 and 2017, respectively.
Equity
Total equity was $197.1 billion at December 31, 2018, compared
with $208.1 billion at December 31, 2017. The decrease was
driven by a $17.3 billion increase in treasury stock, a $4.2 billion
decline in cumulative other comprehensive income
predominantly due to fair value adjustments to available-for-sale
securities caused by an increase in long-term interest rates, and
a $2.1 billion decline in preferred stock, partially offset by a
$12.9 billion increase in retained earnings from earnings net of
dividends paid. The increase in treasury stock was the result of
the repurchase of 375.5 million shares of common stock in 2018,
an increase of 91% from 2017.
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 debt and equity 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 Debt and
Equity 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 also enter into commitments to purchase securities
under resale agreements. For more information on
commitments to purchase securities under resale agreements,
see Note 15 (Guarantees, Pledged Assets and Collateral, and
Other Commitments) 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 the “Off-Balance
Sheet Arrangements – Contractual Cash Obligations” section in
this report and Note 15 (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 9 (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 15 (Guarantees, Pledged Assets and Collateral, and
Other Commitments) to Financial Statements in this Report.
69
Wells Fargo & Company
69
Off-Balance Sheet Arrangements (continued)
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 17 (Derivatives) to Financial Statements in this Report.
Other Commitments
We also have other off-balance sheet transactions, including
obligations to make rental payments under noncancelable
operating leases. Our operating lease obligations are discussed in
Note 7 (Premises, Equipment, Lease Commitments and Other
Assets) to Financial Statements in this Report.
Table 15: Contractual Cash Obligations
Contractual Cash Obligations
In addition to the contractual commitments and arrangements
previously described, which, depending on the nature of the
obligation, may or may not require use of our resources, we enter
into other contractual obligations that may require future cash
payments in the ordinary course of business, including debt
issuances for the funding of operations and leases for premises
and equipment.
Table 15 summarizes these contractual obligations as of
December 31, 2018, 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 13 (Short-Term Borrowings) and Note 22
(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
12 $
88,435
14
46,547
7
23
15
8,496
1,174
4
2,436
777
32,310
73,239
11,082
1,936
—
409
811
6,188
36,892
6,669
1,290
—
—
258
December 31, 2018
Indeterminate
maturity
Total
1,155,525
1,286,170
—
—
—
3,939
—
—
229,044
51,038
6,054
3,943
2,845
2,177
More
than
5 years
3,712
72,366
24,791
1,654
—
—
331
Total contractual obligations
$ 147,869
119,787
51,297
102,854
1,159,464
1,581,271
(1) Includes interest-bearing and noninterest-bearing checking, and market rate and other savings accounts.
(2) Balances are presented net of unamortized debt discounts and premiums and purchase accounting adjustments.
(3) Represents the future interest obligations related to interest-bearing time deposits and long-term debt in the normal course of business including a net reduction of
$2.3 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, 2018, rates, which we held constant until maturity. We have excluded interest related to structured notes where our payment obligation is contingent
on the performance of certain benchmarks.
(4) Includes unfunded commitments to purchase debt and equity securities, excluding trade date payables, of $335 million and $2.5 billion, respectively. We have presented
predominantly all of our contractual obligations on equity securities 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 23 (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, 2018,
2017 and 2016. The Company has included within its disclosures
information on its equity securities, relationships with variable
interest entities, and employee benefit plan arrangements. See
Note 8 (Equity Securities), Note 9 (Securitizations and Variable
Interest Entities) and Note 22 (Employee Benefits and Other
Expenses) to Financial Statements in this Report.
70
Wells Fargo & Company
70
•
•
•
A company-wide statement of risk appetite that
guides 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 the
Company is willing to assume in pursuit of its business and
strategic objectives, consistent with capital, liquidity and
other regulatory requirements.
A risk management governance structure, including
escalation requirements and a committee structure that
helps provide comprehensive oversight of the risks we face.
A company-wide risk inventory that promotes a
standardized and systematic process to identify and
quantify risks at the business group and enterprise level to
guide strategic business decisions and capital planning
efforts.
• Policies, procedures, and controls which form an
integrated risk management program that promotes active,
prompt, and consistent identification, measurement,
assessment, control, mitigation, reporting, and monitoring
of current and emerging risk exposures across Wells Fargo
and are integrated with clear enterprise risk roles and
responsibilities for the three lines of defense.
• Three lines of defense that are closely integrated, each
with specific roles and responsibilities for risk management
and a clear engagement model that promotes challenge and
appropriate escalation of issues and information.
Board and Management-level Committee Structures
Wells Fargo’s Board committee and management-level
governance committee structures are designed to ensure that key
risks are identified and escalated and, if necessary, decided upon
at the appropriate level of the Company. Accordingly, the
structure is built upon defined escalation and reporting paths
from the front line to independent risk management and
management-level governance committees and, ultimately, to
the Board as appropriate. Each management-level governance
committee has defined escalation processes, authorities and
responsibilities as outlined in its charter. Our Board committee
and management-level governance committee structures, and
the primary risk oversight responsibilities of each of those
committees, is presented in Table 16.
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. We operate under a Board approved risk
management 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. We believe that
enhancements made during 2018 to our risk management
framework transform and clarify our risk management approach
by emphasizing the role of risk management when setting
corporate strategy and by further rationalizing and integrating
certain risk management organizational, governance and
reporting practices.
Risk Management Framework
Our risk management framework defines how we manage risk in
a comprehensive, integrated and consistent manner and lays out
our vision for the risk management of the organization. It
reinforces each team member’s personal accountability for risk
management and is built on a foundation that begins with a deep
understanding of the Company’s processes, risks and controls.
Our risk management framework also supports members of
senior management in achieving the Company’s strategic
objectives and priorities, and it supports the Board as it carries
out its risk oversight responsibilities.
The risk management framework consists of three lines of
defense: (1) the front line which consists of Wells Fargo’s risk-
generating activities, including all activities of its four primary
business groups (Consumer Banking; Wholesale Banking;
Wealth and Investment Management; and Payments, Virtual
Solutions & Innovation) and certain activities of its enterprise
functions (Human Resources, Enterprise Finance, Technology,
Legal Department, Corporate Risk, Stakeholder Relations, and
Wells Fargo Audit Services); (2) independent risk management,
which consists of our Corporate Risk function and is led by our
Chief Risk Officer (CRO) who reports to the Board’s Risk
Committee; and (3) internal audit, which is Wells Fargo Audit
Services and is led by our Chief Auditor who reports to the
Board’s Audit & Examination Committee. In addition to the
three lines of defense, our risk management framework includes
enterprise control activities, which are certain specialized
activities performed within centralized enterprise functions
(such as Human Resources and the Legal Department) with a
focus on controlling specific risks. Key elements of our risk
management framework include:
•
A strong culture that emphasizes each team member’s
ownership and understanding of risk. We want to cultivate
an environment that expects and promotes robust
communication and cooperation among the three lines of
defense and supports identifying, escalating and addressing
current and emerging risk issues.
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Wells Fargo & Company
71
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)
Finance
Committee
Corporate
Responsibility
Committee
Risk
Committee (2)
Financial, regulatory
and risk reporting
and controls
Interest Rate
Risk
Market Risk
Social and public
responsibility
matters
COMPANY-WIDE
RISKS
- Compliance
(includes Conduct
and Financial Crimes)
- Liquidity
- Model
- Operational
(includes
Data Management,
Information
Security/Cyber
and Technology)
- Reputation
- Strategic
Governance
&
Nominating
Committee
Board-level
governance
matters
Credit
Committee
Credit Risk
Human
Resources
Committee
Culture, ethics,
human capital
management and
compensation
Management-level Governance Committees (3)
Enterprise
Risk & Control
Committee (4)
Corporate
Allowance
for Credit
Losses
Approval
Governance
Committee
Incentive
Compensation
Committee
Regulatory
and Risk
Reporting
Oversight
Committee
SOX
Disclosure
Committee
Capital
Adequacy
Process
Committee
Capital
Management
Committee
Corporate
Asset and
Liability
Committee
Recovery and
Resolution
Committee
Management
Reporting
Oversight
Committee
(1) The Audit & Examination Committee additionally oversees the internal audit function, external auditor independence, activities, and 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 a compliance subcommittee and a technology subcommittee to assist it in providing oversight of those risks as discussed herein.
(3) Pursuant to their charters, many of the management-level governance committees have formed one or more sub-committees to address specific risk matters.
(4) Certain committees report to the Enterprise Risk & Control Committee and have dual escalation and informational reporting paths to Board committees.
Board Oversight of Risk
The business and affairs of the Company are managed under the
direction of the Board, whose responsibilities include overseeing
management’s implementation of the Company’s risk
management framework and ongoing oversight and governance
of the Company’s risk management activities. 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 risk management framework. 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 Company’s risk profile
relative to the approved risk appetite.
The full Board receives reports at each of its regular
meetings from the Board committee chairs about committee
activities, including risk oversight matters, and the Risk
Committee receives periodic reports from management
regarding current or emerging risk matters.
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Wells Fargo & Company
72
Management Oversight of Risk
The Company’s management-level governance committees are
designed to enable understanding, consideration and decision-
making of significant risk and control matters at the appropriate
level of the Company and by the appropriate mix of executives.
Each committee has a defined set of authorities and
responsibilities as set forth in its charter, and each committee
has defined escalation paths and risk reporting responsibilities,
including to the Board or Board committees, as appropriate.
The Enterprise Risk & Control Committee is the
management-level governance committee that governs the
management of financial risks, non-financial risks and
enterprise and other risk programs. The Enterprise Risk &
Control Committee is co-chaired by the Company’s CEO and
CRO and has an escalation path to the Board’s Risk Committee.
It considers and decides risk and control matters, addresses
escalated issues, actively oversees risk mitigation, and provides
regular updates to the Board’s Risk Committee regarding
emerging risks and senior management’s assessment of the
effectiveness of the Company’s risk management program. It
may escalate certain risk and control matters to other Board
committees as appropriate based on their primary risk oversight
responsibilities.
Each business group and enterprise function has a Risk &
Control Committee that reports to the Enterprise Risk & Control
Committee and has a mandate that mirrors the Enterprise Risk
& Control Committee but is limited to the relevant business
group or enterprise function. These committees focus on the
risks that each group or function generates and is responsible for
managing, and on the controls that are expected to be in place.
Additionally, there are standalone specific risk type- or program-
specific risk governance committees reporting to the Enterprise
Risk & Control Committee to help provide complete and
comprehensive governance for certain risk areas.
While the Enterprise Risk & Control Committee and the
committees that report to it serve as the focal point for the
management of company-wide risk matters, the management of
certain 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 Corporate Risk function, which is the Company’s
independent risk management organization, is headed by the
Company’s CRO who, among other things, is responsible for
setting the strategic direction and driving the execution of Wells
Fargo’s risk management activities. The Corporate Risk function
provides senior management and the Board with an independent
perspective of the level of risk to which the Company is exposed.
Corporate Risk develops the Company’s 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 & Control Committee on a quarterly basis
and to the Board’s Risk Committee. Our business groups also
have business-specific risk appetite statements based on the
enterprise statement of risk appetite. The metrics included in the
business group 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.
The Company’s senior management, including the CRO and
Chief Auditor, work closely with the Board’s committees and
provide ongoing reports and updates on risk matters during and
outside of regular committee meetings, as appropriate.
Operational Risk Management
Operational risk is the risk resulting from inadequate or failed
internal controls, processes, people and systems, or from
external events. Operational risk is inherent in all Wells Fargo
activities.
The Board’s Risk Committee has primary oversight
responsibility for all aspects of operational risk, including
significant policies and programs regarding the Company’s
business continuity, data management, information security,
privacy, technology, and third-party risk management. As part of
its oversight responsibilities, the Board’s Risk Committee
approves the operational risk statement of risk appetite
including inner and outer boundary thresholds, reviews and
approves significant operational risk policies, and oversees the
Company’s ongoing operational risk management program.
At the management level, the Operational Risk function,
which is part of Corporate Risk, has primary oversight
responsibility for operational risk. The Operational Risk function
reports to the CRO and also provides periodic reporting related
to operational risk to the Board’s Risk Committee. Within the
Operational Risk function, Information Security Risk
Management has oversight responsibility for information
security risk, and Technology Risk Management Oversight has
oversight responsibility for technology risk. Oversight of data
management risk, an operational risk, is an enterprise control
activity performed within the Data Management & Insight
function, and oversight of human capital risk, an operational
risk, is an enterprise control activity performed within the
Human Resources function. In addition, the Risk & Control
Committee for each business group and enterprise function
reports operational risk matters to the Enterprise Risk & Control
Committee.
Information security is a significant operational risk for
financial institutions such as Wells Fargo, and includes the risk
resulting from cyber attacks and other information security
events relating to Wells Fargo technology, systems, networks,
and data that would disrupt Wells Fargo’s businesses, result in
the disclosure of confidential data which could damage Wells
Fargo’s reputation, cause losses or increase costs. Wells Fargo’s
Board is actively engaged in the oversight of the Company’s
information security risk management and cyber defense
programs. The Board’s Risk Committee has primary oversight
responsibility for information security risk and approves the
Company’s information security program, which includes the
information security policy and the cyber defense program. The
Risk Committee formed a Technology Subcommittee to assist it
in providing oversight of technology, information security, and
cyber risks as well as data management risk. The Technology
Subcommittee reviews and recommends to the Risk Committee
for approval any significant supporting information security
(including cybersecurity) risk, technology risk, and data
management risk programs and/or policies, including the
Company’s data management strategy. The Technology
Subcommittee reports to the Risk Committee and both provide
updates to the full Board.
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, commit fraud, or obtain
confidential, proprietary or other information. Cyber attacks
have also focused on targeting online applications and services,
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Risk Management (continued)
such as online banking, as well as cloud-based services provided
by third parties, and have targeted 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 types
of cyber attacks. Cybersecurity risk 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.
Wells Fargo is 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, and other regulatory
requirements, and the failure to appropriately address and limit
violations of law and any associated impact to customers.
Compliance risk encompasses other standards of self-regulatory
organizations applicable to the banking industry as well as
nonconformance with applicable internal policies and
procedures.
The Board’s Risk Committee has primary oversight
responsibility for all aspects of compliance risk, including
financial crimes risk. As part of its oversight responsibilities, the
Board’s Risk Committee approves the compliance risk and
financial crimes risk statement of risk appetites including inner
and outer boundary thresholds, reviews and approves significant
compliance risk and financial crimes risk policies and programs,
and oversees the Company’s ongoing compliance risk
management and financial crimes risk management programs.
The Compliance Subcommittee of the Risk Committee assists the
Risk Committee in providing oversight of the Company’s
compliance program and compliance risk management. The
Compliance Subcommittee reports to the Risk Committee and
both provide updates to the full Board.
At the management level, Wells Fargo Compliance, which is
part of Corporate Risk, monitors the implementation of the
Company’s compliance program. Financial Crimes Risk
Management, which is part of Wells Fargo Compliance, oversees
and monitors financial crimes risk. Wells Fargo Compliance
reports to the CRO and also provides periodic reporting related
to compliance risk to the Board’s Risk Committee and
Compliance Subcommittee. In addition, the Risk & Control
Committee for each business group and enterprise function
reports compliance risk matters to the Enterprise Risk & Control
Committee. We continue to enhance our oversight of operational
and compliance risk management, including as required by the
FRB’s February 2, 2018, and the CFPB/OCC’s April 20, 2018,
consent orders.
Conduct Risk Management
Conduct risk, a sub-category of compliance risk, is the risk
resulting from inappropriate, unethical, or unlawful behavior on
the part of team members or individuals acting on behalf of the
Company, caused by deliberate actions or business practices.
The 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 & Goals and Code
of Ethics and Business Conduct. The Board’s Risk Committee
has primary oversight responsibility for company-wide conduct
risk and risk management components of the Company’s
culture, while the responsibilities of the Board’s Human
Resources Committee include oversight of the Company’s
company-wide culture, Code of Ethics and Business Conduct,
conflicts of interest program, human capital management
(including talent management and succession planning),
performance management program, and incentive compensation
risk management program.
At the management level, the Conduct Management Office
has primary oversight responsibility for key elements of conduct
risk, including internal investigations, sales practices oversight,
complaints oversight, and ethics oversight. The Conduct
Management Office reports to the CRO and also provides
periodic reporting related to conduct risk to the relevant Board
committees. In addition, the Risk & Control Committee for each
business group and enterprise function reports conduct risk
matters to the Enterprise Risk & Control Committee.
The Company’s incentive compensation risk management
program is overseen by the management-level Incentive
Compensation Committee, which is chaired by the Head of
Human Resources and provides periodic reporting related to
incentive compensation risk to the Board’s Human Resources
Committee. The Human Resources function, which reports to
the CEO, also oversees the Company’s culture program, which
promotes compliance with laws, consideration of risks when
making decisions, and facilitates open dialogue and
transparency among the lines of defense.
Strategic Risk Management
Strategic risk is the risk to earnings, capital, and/or liquidity
arising from adverse or poorly executed business decisions or ill-
timed or inadequate responses to changes in the internal and
external operating environment.
The Board has primary oversight responsibility for strategic
planning and oversees management’s development and
implementation of and approves the Company’s strategic plan,
and considers whether it is aligned with the Company’s risk
appetite. Management develops, executes and recommends
strategic corporate transactions and the Board evaluates
management’s proposals, including their impact on the
Company’s risk profile and financial position. The Board’s Risk
Committee has primary oversight responsibility for the
Company’s strategic risk and the adequacy of the Company’s
strategic risk management program, including associated risk
management practices, processes and controls. The Board’s
Risk Committee also reviews and approves significant strategic
risk governance documents, and receives periodic reporting
from management regarding risks related to new products, and
changes to products, as appropriate.
At the management level, the Strategic Risk function, which
is part of Corporate Risk, has primary oversight responsibility
for strategic risk. The Strategic Risk function reports into the
CRO and also provides periodic reporting related to strategic risk
to the Board’s Risk Committee. In addition, the Risk & Control
Committee for each business group and enterprise function
reports strategic risk matters to the Enterprise Risk & Control
Committee.
Model Risk Management
Model risk is the risk arising from decisions based on incorrect
or misused model outputs or reports.
The Board’s Risk Committee has primary oversight
responsibility for model risk. As part of its oversight
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Wells Fargo & Company
74
responsibilities, the Board’s Risk Committee oversees the
Company’s model risk management policy, model validation
activities, model performance, model issue remediation status,
and adherence to model risk appetite metrics.
At the management level, the Corporate Model Risk
function, which is part of Corporate Risk, has primary oversight
responsibility for model risk and is responsible for ongoing
governance, validation and monitoring of model risk across the
Company. The Corporate Model Risk function reports to the
CRO and also provides periodic reporting related to model risk
to the Board’s Risk Committee. In addition, the Risk & Control
Committee for each business group and enterprise function
reports model risk matters to the Enterprise Risk & Control
Committee.
Reputation Risk Management
Reputation risk is the risk arising from negative perceptions by
stakeholders, whether real or not, resulting in potential loss of
trust in the Company’s competence or integrity. Key external
stakeholders include customers, potential and non-customers,
shareholders, regulators, elected officials, advocacy groups, and
the media.
The Board’s Risk Committee has primary oversight
responsibility for company-wide reputation risk, while each
Board committee has reputation risk oversight responsibilities
related to their primary oversight responsibilities. As part of its
oversight responsibilities, the Board’s Risk Committee receives
reports from management that help it monitor how effectively
the Company is managing reputation risk. As part of its
oversight responsibilities for social and public responsibility
matters, the Board’s Corporate Responsibility Committee also
receives reports from management relating to the Company’s
brand and stakeholder perception of the Company.
At the management level, the Reputation Risk Oversight
function, which is part of Corporate Risk, has primary oversight
responsibility for reputation risk. The Reputation Risk Oversight
function reports into the CRO and also provides periodic
reporting related to reputation risk to the Board’s Risk
Committee. In addition, the Risk & Control Committee for each
business group and enterprise function reports reputation risk
matters to the Enterprise Risk & Control Committee.
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 Board’s Credit Committee has primary oversight
responsibility for credit risk. At the management level, the
Corporate Credit function, which is part of Corporate Risk, has
primary oversight responsibility for credit risk. The Corporate
Credit function reports to the CRO and also provides periodic
reporting related to credit risk to the Board’s Credit Committee.
In addition, the Risk & Control Committee for each business
group and enterprise function reports credit risk matters to the
Enterprise Risk & Control Committee.
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,
2018
Dec 31,
2017
Commercial and industrial
$ 350,199
Real estate mortgage
Real estate construction
Lease financing
121,014
22,496
19,696
333,125
126,599
24,279
19,385
Total commercial
513,405
503,388
Consumer:
Real estate 1-4 family first mortgage
285,065
284,054
Real estate 1-4 family junior lien
mortgage
Credit card
Automobile
Other revolving credit and installment
Total consumer
Total loans
34,398
39,025
45,069
36,148
39,713
37,976
53,371
38,268
439,705
453,382
$ 953,110
956,770
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.
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75
Risk Management – Credit Risk Management (continued)
Credit Quality Overview Solid credit quality continued in
2018, as our net charge-off rate remained low at 0.29% of
average total loans. We continued to benefit from improvements
in the performance of our commercial and consumer real estate
portfolios. In particular:
• Nonaccrual loans were $6.5 billion at December 31, 2018,
down from $7.6 billion at December 31, 2017. Commercial
nonaccrual loans declined to $2.2 billion at December 31,
2018, compared with $2.6 billion at December 31, 2017, and
consumer nonaccrual loans declined to $4.3 billion at
December 31, 2018, compared with $5.0 billion at
December 31, 2017. The decline in nonaccrual loans
reflected an improved housing market and credit
improvement in commercial and industrial loans.
Nonaccrual loans represented 0.68% of total loans at
December 31, 2018, compared with 0.80% at December 31,
2017.
• Net charge-offs as a percentage of average total loans
decreased to 0.29% in 2018, compared with 0.31% in 2017.
Net charge-offs as a percentage of our average commercial
and consumer portfolios were 0.09% and 0.52% in 2018,
respectively, compared with 0.09% and 0.55%, respectively,
in 2017.
• Loans that are not government insured/guaranteed and
90 days or more past due and still accruing were
$94 million and $885 million in our commercial and
consumer portfolios, respectively, at December 31, 2018,
compared with $49 million and $1.0 billion at December 31,
2017.
• Our provision for credit losses was $1.7 billion during 2018,
compared with $2.5 billion in 2017.
• The allowance for credit losses declined to $10.7 billion, or
1.12% of total loans, at December 31, 2018, compared with
$12.0 billion, or 1.25%, at December 31, 2017.
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,
2018, totaled $5.0 billion, compared with $12.8 billion at
December 31, 2017, and $58.8 billion at December 31, 2008. The
decrease from December 31, 2017, was due to the sales of
$6.2 billion of Pick-a-Pay PCI loans during 2018, as well as
portfolio runoff. 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, 2018,
was $3.0 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, 2018, $480 million in nonaccretable
difference remained to absorb losses on PCI loans.
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 in this Report, Note 1 (Summary of Significant
Accounting Policies ) and Note 6 (Loans and Allowance for
Credit Losses) to Financial Statements in this Report.
Significant Loan Portfolio Reviews Measuring and
monitoring our credit risk is an ongoing process that tracks
delinquencies, collateral values, 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 among special mention, substandard, doubtful
and loss categories.
The commercial and industrial loans and lease financing
portfolio totaled $369.9 billion, or 39% of total loans, at
December 31, 2018. The net charge-off rate for this portfolio was
0.13% in 2018, compared with 0.15% in 2017. At December 31,
2018, 0.43% of this portfolio was nonaccruing, compared with
0.56% at December 31, 2017, reflecting a decrease of
$399 million in nonaccrual loans, predominantly due to credit
improvement in the oil and gas portfolio. Also, $15.8 billion of
the commercial and industrial loan and lease financing portfolio
was internally classified as criticized in accordance with
regulatory guidance at December 31, 2018, compared with
$17.9 billion at December 31, 2017. The decrease in criticized
loans, which also includes the decrease in nonaccrual loans, was
mostly 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 $63.7 billion
of foreign loans at December 31, 2018. Foreign loans totaled
$21.8 billion within the investors category, $19.1 billion within
the financial institutions category and $1.2 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
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Wells Fargo & Company
76
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 $19.1 billion of foreign loans in the financial institutions
category were predominantly originated by our Corporate and
Investment Banking business.
The oil and gas loan portfolio totaled $12.2 billion, or 1% of
total outstanding loans at December 31, 2018, compared with
$12.5 billion, or 1% of total outstanding loans at December 31,
2017. Oil and gas nonaccrual loans decreased to $416 million at
December 31, 2018, compared with $1.1 billion at December 31,
2017, due to continued credit improvement in the portfolio.
Table 18: Commercial and Industrial Loans and Lease
Financing by Industry (1)
(in millions)
Investors
Financial institutions
Cyclical retailers
Food and beverage
Healthcare
Technology
Industrial equipment
Real estate lessor
Oil and gas
Transportation
Business services
Public administration
Other
Total
December 31, 2018
Nonaccrual
loans
Total
portfolio (2)
% of total
loans
$
24
159
81
53
126
15
63
6
416
51
27
7
73,880
43,054
27,875
17,175
16,611
16,379
14,780
14,711
12,221
8,773
8,245
7,659
548
108,532 (3)
8%
5
3
2
2
2
2
2
1
1
1
1
9
$
1,576
369,895
39%
(1) 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.
(2) Includes $4 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 $6.0 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.
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 segmented among special mention, substandard,
doubtful and loss categories. The CRE portfolio, which included
$7.7 billion of foreign CRE loans, totaled $143.5 billion, or 15%
of total loans, at December 31, 2018, and consisted of
$121.0 billion of mortgage loans and $22.5 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
concentrations of CRE loans are in California, New York, Florida
and Texas, which combined represented 50% of the total CRE
portfolio. By property type, the largest concentrations are office
buildings at 27% and apartments at 16% of the portfolio. CRE
nonaccrual loans totaled 0.4% of the CRE outstanding balance at
December 31, 2018, compared with 0.4% at December 31, 2017.
At December 31, 2018, we had $4.5 billion of criticized CRE
mortgage loans, compared with $4.3 billion at December 31,
2017, and $289 million of criticized CRE construction loans,
compared with $298 million at December 31, 2017.
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Risk Management – Credit Risk Management (continued)
Table 19: CRE Loans by State and Property Type
(in millions)
By state:
California
New York
Florida
Texas
Arizona
North Carolina
Georgia
Washington
Virginia
Illinois
Other
Total
By property:
Office buildings
Apartments
Industrial/warehouse
Retail (excluding shopping center)
Shopping center
Hotel/motel
Mixed use properties (2)
Institutional
Agriculture
1-4 family structure
Other
Total
Real estate mortgage
Real estate construction
Nonaccrual
loans
Total
portfolio
Nonaccrual
loans
Total
portfolio
Nonaccrual
loans
$
143
$
$
10
29
64
33
31
12
11
12
7
228
580
142
12
95
99
6
19
81
43
46
—
37
34,396
10,676
7,708
7,796
4,246
3,679
3,615
3,390
2,864
2,958
39,686
121,014
36,089
16,107
15,366
14,512
11,217
9,649
5,943
3,135
2,468
9
6,519
$
580
121,014
7
—
2
1
—
6
—
1
—
—
15
32
2
—
—
7
—
—
2
—
—
6
15
32
4,559
2,796
2,044
1,451
366
849
606
593
941
429
7,862
22,496
3,079
7,484
1,295
569
1,184
1,832
524
1,946
33
2,210
2,340
150
10
31
65
33
37
12
12
12
7
243
612
144
12
95
106
6
19
83
43
46
6
52
December 31, 2018
Total
Total
portfolio
38,955
13,472
9,752
9,247
4,612
4,528
4,221
3,983
3,805
3,387
47,548 (1)
% of
total
loans
4%
1
1
1
*
*
*
*
*
*
5
143,510
15%
39,168
23,591
16,661
15,081
12,401
11,481
6,467
5,081
2,501
2,219
8,859
4%
2
2
2
1
1
1
1
*
*
1
22,496
612
143,510
15%
Less than 1%.
*
(1) Includes 40 states; no state had loans in excess of $3.4 billion.
(2) Mixed use properties are primarily owner occupied real estate, including data centers, flexible space leased to multiple tenants, light manufacturing and other specialized
uses.
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,
2018, foreign loans totaled $71.9 billion, representing
approximately 8% of our total consolidated loans outstanding,
compared with $70.4 billion, or approximately 7% of total
consolidated loans outstanding, at December 31, 2017. Foreign
loans were approximately 4% of our consolidated total assets at
both December 31, 2018, and December 31, 2017.
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, 2018, was the United Kingdom, which totaled
$27.2 billion, or approximately 1% of our total assets, and
included $3.1 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
implement plans for Brexit. Our primary goal is to continue to
serve our existing clients in the United Kingdom and the
European Union as well as to continue to meet the needs of our
domestic clients as they do business in the United Kingdom and
the European Union. We have an existing authorized bank in
Ireland and an asset management entity in Luxembourg. We are
also in the process of obtaining regulatory approvals to establish
a broker dealer in France. We continue to explore options to
leverage these entities in order to continue to serve clients in the
European Union. In addition, the impact of Brexit on our
supplier contracts, staffing and business operations in the
European Union is subject to an ongoing review, and we are
implementing mitigating actions where possible. For additional
information on risks associated with Brexit, see the “Risk
Factors” section in this Report.
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
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78
consideration to the country of any guarantors and/or
underlying collateral.
Table 20: Select Country Exposures
(in millions)
Top 20 country exposures:
United Kingdom
Canada
Cayman Islands
Germany
Ireland
Bermuda
China
Guernsey
Netherlands
India
Luxembourg
Brazil
Chile
Japan
Australia
France
South Korea
Switzerland
Mexico
Virgin Islands (British)
Lending (1)
Securities (2)
Derivatives and other (3)
Total exposure
Sovereign
Non-
sovereign
Sovereign
Non-
sovereign
Sovereign
Non-
sovereign
Sovereign
Non
sovereign (4)
Total
December 31, 2018
$
3,102
31
—
3,840
20
—
—
—
—
—
—
—
1
271
—
—
—
—
—
—
22,227
16,651
7,208
1,871
3,897
3,841
2,754
2,606
2,180
2,120
1,502
1,967
1,654
1,082
1,288
1,220
1,254
1,206
1,164
1,018
—
(27)
—
(10)
—
—
(1)
—
43
—
—
—
—
3
—
—
11
—
—
—
19
33
—
—
—
—
33
1,694
190
—
(7)
132
98
(28)
—
315
156
617
—
(3)
55
94
81
9
(22)
5
64
3,450
1,138
116
17
(67)
74
1,278
3
—
—
—
—
—
25
—
—
—
—
22
—
—
—
8
—
—
—
—
58
8
—
—
—
—
8
215
135
182
340
74
56
17
2
28
—
30
—
5
11
10
3
5
17
3
—
3,105
4
—
3,830
20
—
24
—
43
—
—
22
1
274
—
8
11
—
—
—
24,136
16,976
27,241
16,980
7,390
2,204
4,103
3,995
2,743
2,608
2,523
2,276
2,149
1,967
1,656
1,148
1,392
1,304
1,268
1,201
1,172
1,082
7,390
6,034
4,123
3,995
2,767
2,608
2,566
2,276
2,149
1,989
1,657
1,422
1,392
1,312
1,279
1,201
1,172
1,082
1,133
7,342
83,293
90,635
475
3,901
12,283
16,184
—
35
—
—
—
—
—
23
796
480
255
261
796
480
255
284
510
3,924
14,075
17,999
Total top 20 country exposures
$
7,265
78,710
Eurozone exposure:
Eurozone countries included in Top 20 above (5) $
3,860
10,670
Austria
Spain
Belgium
Other Eurozone countries (6)
—
—
—
23
680
428
322
187
Total Eurozone exposure
$
3,883
12,287
(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 $478 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, 2018, the gross notional amount of our CDS sold that reference assets in the Top 20 or Eurozone countries was $332 million, which was offset by the
notional amount of CDS purchased of $484 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 $41.3 billion exposure to financial institutions and $43.8 billion to non-financial corporations
at December 31, 2018.
(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 $141 million, $19 million and $14 million, respectively. We had no sovereign exposure in
these countries at December 31, 2018.
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Risk Management – Credit Risk Management (continued)
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, 2018
December 31, 2017
Balance
% of
portfolio
Balance
% of
portfolio
$ 285,065
89%
$
284,054
34,398
11
39,713
88%
12
Total real estate 1-4 family mortgage loans
$ 319,463
100%
$ 323,767
100%
The real estate 1-4 family mortgage loan portfolio includes
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, 2018, located predominantly
within the larger metropolitan areas, with no single California
metropolitan area consisting of more than 5% of total loans. We
monitor changes in real estate values and underlying economic
or market conditions for all geographic areas of our real estate
1-4 family 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.
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% of total loans at both December 31,
2018 and 2017. 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. 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.
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 2018 on the
non-PCI mortgage portfolio. Loans 30 days or more delinquent
at December 31, 2018, totaled $4.0 billion, or 1% of total non-
PCI mortgages, compared with $5.3 billion, or 2%, at
December 31, 2017. Loans with FICO scores lower than
640 totaled $9.7 billion, or 3% of total non-PCI mortgages at
December 31, 2018, compared with $11.7 billion, or 4%, at
December 31, 2017. Mortgages with a LTV/CLTV greater than
100% totaled $3.9 billion at December 31, 2018, or 1% of total
non-PCI mortgages, compared with $6.1 billion, or 2%, at
December 31, 2017. 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.
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80
First Lien Mortgage Portfolio Our total real estate 1-4
family first lien mortgage portfolio increased $1.0 billion in
2018, as growth in held for investment nonconforming mortgage
loans was partially offset by payoffs and Pick-a-Pay PCI loan
sales of $6.2 billion. In addition, $1.3 billion of nonconforming
mortgage loan originations that would have otherwise been
included in this portfolio, were designated as held for sale in
2018 in anticipation of the future issuance of residential
mortgage-backed securities. We retained $42.0 billion in
nonconforming originations, consisting of loans that exceed
conventional conforming loan amount limits established by
federal government-sponsored entities (GSEs) in 2018.
The credit performance associated with our real estate 1-4
family first lien mortgage portfolio continued to improve in
2018, 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
0.03% in 2018, compared with a net recovery of 0.02% in 2017.
Nonaccrual loans were $3.2 billion at December 31, 2018,
compared with $3.7 billion at December 31, 2017. The decrease
in nonaccrual loans from December 31, 2017, was driven by
nonaccrual loan sales and an improving housing environment.
Table 23 shows certain delinquency and loss information for
the first lien mortgage portfolio and lists the top five states by
outstanding balance.
Table 22: Real Estate 1-4 Family First and Junior Lien
Mortgage Loans by State
December 31, 2018
Real
estate
1-4 family
first
mortgage
Real
estate
1-4
family
junior
lien
mortgage
Total real
estate
1-4
family
mortgage
% of
total
loans
$ 109,092
9,338
118,430
12%
28,954
13,811
12,350
9,677
8,343
8,566
5,888
5,422
1,714
3,152
3,140
30,668
16,963
15,490
759
10,436
2,020
10,363
658
1,608
1,929
9,224
7,496
7,351
65,042
10,063
75,105
12,932
—
12,932
3
2
2
1
1
1
1
1
8
1
280,077
34,381
314,458
33
4,988
17
5,005
1
(in millions)
Real estate 1-4 family
loans (excluding PCI):
California
New York
New Jersey
Florida
Washington
Virginia
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
$ 285,065
34,398
319,463
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).
Table 23: First Lien Mortgage Portfolio Performance
(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,
2018
2017
$
109,092
101,464
2018
0.68%
28,954
13,811
12,350
9,677
26,624
13,212
13,083
8,845
93,261
92,961
267,145
256,189
12,932
4,988
15,143
12,722
1.12
1.91
2.58
0.57
1.70
1.23
2017
1.06
1.65
2.74
3.95
0.85
2.25
1.78
2018
(0.06)
0.04
0.03
(0.17)
(0.06)
(0.02)
(0.03)
2017
(0.07)
0.03
0.16
(0.16)
(0.08)
0.02
(0.02)
Total first lien mortgages
$ 285,065
284,054
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81
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 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, 2018. As a result of our loan modification and loss
mitigation efforts as well as borrower payoffs, Pick-a-Pay option
payment loans have been reduced to $8.8 billion at
December 31, 2018, from $99.9 billion at acquisition. Total
Table 24: Pick-a-Pay Portfolio – Comparison to Acquisition Date
adjusted unpaid principal balance of Pick-a-Pay PCI loans was
$6.6 billion at December 31, 2018, compared with $61.0 billion
at acquisition. Due to loan modification and loss mitigation
efforts as well as borrower payoffs, the adjusted unpaid principal
balance of option payment PCI loans has declined to 19% of the
total Pick-a-Pay portfolio at December 31, 2018, compared with
51% at acquisition. As favorable sale opportunities arise, we may
sell portions of this portfolio. We expect to close on the sale of
approximately $2.4 billion unpaid principal balance of Pick-a-
Pay PCI loans in first quarter 2019.
December 31, 2018
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)
$
$
$
8,813
2,848
6,080
17,741
16,115
50%
$
99,937
16
34
15,763
—
% of total
86%
14
—
100%
$ 115,700
100%
$
95,315
(1) Adjusted unpaid principal balance includes write-downs taken on loans where severe delinquency (normally 180 days) or other indications of severe borrower financial
stress exist that indicate there will be a loss of contractually due amounts upon final resolution of the loan.
Pick-a-Pay option payment loans may have fixed or
During 2018, we sold $6.2 billion of Pick-a-Pay PCI loans
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.
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
$9.3 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, prepayments,
modifications and short sales, can also affect the accretable yield
and the estimated weighted-average life of the portfolio.
that resulted in a gain of $2.4 billion. The accretable yield
balance related to our Pick-a-Pay PCI loan portfolio declined
$5.9 billion during 2018, driven by realized accretion of
$1.0 billion, $2.4 billion from the gain on the loan sales, a
$2.1 billion reduction in expected interest cash flows resulting
from the loan sales, and a $752 million reduction in cash flows
resulting from higher prepayments, partially offset by a
$372 million reclassification from nonaccretable difference. An
increase in expected prepayments and passage of time lowered
our estimated weighted-average life to approximately 5.5 years
at December 31, 2018, from 6.8 years at December 31, 2017. The
accretable yield percentage for Pick-a-Pay PCI loans for fourth
quarter 2018 was 11.47%, up from 9.83% in fourth quarter 2017,
due to an increase in the amount of accretable yield relative to
the shortened weighted-average life. Based on loan sales in
fourth quarter 2018, we expect the accretable yield percentage to
increase to approximately 11.49% for first quarter 2019.
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.
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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
first 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, 2017, predominantly reflects loan paydowns. As of
December 31, 2018, 6% 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%,
2.93% 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 2% of the junior lien mortgage portfolio at
December 31, 2018. 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
New Jersey
Florida
Virginia
Pennsylvania
Other
Total
PCI
Outstanding balance
% of loans 30 days or
more past due
Loss (recovery) rate
December 31,
December 31,
Year ended December 31,
$
2018
9,338
3,152
3,140
2,020
1,929
14,802
34,381
17
2017
10,599
3,606
3,688
2,358
2,210
17,225
39,686
27
2018
1.67%
2.57
2.73
1.91
2.10
2.12
2.08
2017
2.09
2.86
3.05
2.34
2.37
2.33
2.38
2018
(0.46)
0.25
—
0.19
0.15
(0.07)
(0.11)
2017
(0.40)
0.64
0.10
0.29
0.39
0.08
0.03
Total junior lien mortgages
$
34,398
39,713
83
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83
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 first and junior lien lines of credit portfolios.
In December 2018, approximately 44% of these borrowers paid
only the minimum amount due and approximately 50% 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
30% paid only the minimum amount due and approximately
63% 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 first 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 $109 million, because they are
predominantly insured by the FHA, and it excludes PCI loans,
which total $34 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 First 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, 2018
2019
2020
$
$
34,381
11,802
46,183
100%
456
169
625
1
499
197
696
2
Scheduled end of draw/term
2024 and
2021
1,107
509
1,616
3
2022
3,964
1,887
5,851
13
2023
thereafter (1)
Amortizing
2,754
1,419
4,173
9
14,291
5,616
19,907
43
11,310
2,005
13,315
29
(1) Substantially all lines and loans are scheduled to convert to amortizing loans by the end of 2028, with annual scheduled amounts through 2028 ranging from $2.4 billion to
$5.8 billion and averaging $3.9 billion per year.
(2) Junior and first lien lines are primarily interest-only during their draw period. The unfunded credit commitments for junior and first lien lines totaled $60.1 billion at
December 31, 2018.
(3) Includes scheduled end-of-term balloon payments for lines and loans totaling $179 million, $223 million, $365 million, $172 million, $7 million and $30 million for 2019,
2020, 2021, 2022, 2023, and 2024 and thereafter, respectively. Amortizing lines and loans include $56 million of end-of-term balloon payments, which are past due. At
December 31, 2018, $488 million, or 4% of outstanding lines of credit that are amortizing, are 30 days or more past due compared to $553 million or 2% for lines in their
draw period.
CREDIT CARDS Our credit card portfolio totaled $39.0 billion
at December 31, 2018, which represented 4% of our total
outstanding loans. The net charge-off rate for our credit card
portfolio was 3.51% for 2018, compared with 3.49% for 2017.
AUTOMOBILE Our automobile portfolio, predominantly
composed of indirect loans, totaled $45.1 billion at December 31,
2018. The net charge-off rate for our automobile portfolio was
1.21% for 2018, compared with 1.18% for 2017.
OTHER REVOLVING CREDIT AND INSTALLMENT Other
revolving credit and installment loans totaled $36.1 billion at
December 31, 2018, and primarily included student and
securities-based loans. Our private student loan portfolio totaled
$11.2 billion at December 31, 2018. The net charge-off rate for
other revolving credit and installment loans was 1.53% for 2018,
compared with 1.52% for 2017.
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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), such as in bankruptcy or other
circumstances;
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; or
•
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.
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 $6.5 billion at December 31, 2018,
down $1.2 billion from a year ago, due to a $413 million decrease
in commercial and industrial nonaccruals reflecting continued
credit improvement in the portfolio, as well as a decrease of
$690 million 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
Real estate 1-4 family junior lien mortgage
Automobile
Other revolving credit and installment
Total consumer
Total nonaccrual loans (1)(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
2018
2017
2016
2015
2014
December 31,
$
1,486
580
32
90
1,899
628
37
76
3,199
685
43
115
1,363
969
66
26
537
1,490
187
24
2,188
2,640
4,042
2,424
2,238
3,183
945
130
50
4,308
$
6,496
0.68%
$
88
363
451
$
6,947
0.73%
3,732
1,086
130
58
5,006
7,646
0.80
120
522
642
8,288
0.87
4,516
1,206
106
51
5,879
9,921
1.03
197
781
978
10,899
1.13
6,829
1,495
121
49
8,494
10,918
1.19
446
979
1,425
12,343
1.35
8,056
1,848
137
41
10,082
12,320
1.43
982
1,627
2,609
14,929
1.73
(1) Financial information for periods prior to December 31, 2018, has been revised to exclude mortgage loans held for sale (MLHFS), loans held for sale (LHFS) and loans held
at fair value of $390 million, $463 million, $464 million, and $528 million at December 31, 2017, 2016, 2015, and 2014, 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 are not placed on nonaccrual status because they are insured or
guaranteed.
(4) See Note 6 (Loans and Allowance for Credit Losses) to Financial Statements in this Report for further information on impaired loans.
(5) Consistent with regulatory reporting requirements, foreclosed real estate resulting from government insured/guaranteed loans are classified as nonperforming. However,
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.
Foreclosure of certain government guaranteed residential real estate mortgage loans that meet criteria specified by Accounting Standards Update (ASU) 2014-14,
Classification of Certain Government-Guaranteed Mortgage Loans Upon Foreclosure, effective as of January 1, 2014, 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.
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Risk Management – Credit Risk Management (continued)
Table 28 provides a summary of nonperforming assets
during 2018.
Table 28: Nonperforming Assets by Quarter During 2018
(in millions)
Nonaccrual loans:
Commercial:
December 31, 2018
September 30, 2018
June 30, 2018
March 31, 2018
% of
total
% of
total
% of
total
Balance
loans
Balance
loans
Balance
loans
Balance
% of
total
loans
Commercial and industrial
$ 1,486
0.42% $ 1,555
0.46% $ 1,559
0.46% $ 1,516
0.45%
Real estate mortgage
Real estate construction
Lease financing
Total commercial
Consumer:
Real estate 1-4 family first mortgage
Real estate 1-4 family junior lien mortgage
Automobile
Other revolving credit and installment
Total consumer
Total nonaccrual loans (1)
Foreclosed assets:
Government insured/guaranteed
Non-government insured/guaranteed
Total foreclosed assets
0.48
0.14
0.46
0.43
1.12
2.75
0.29
0.14
0.98
0.68
580
32
90
2,188
3,183
945
130
50
4,308
6,496
88
363
451
0.50
0.19
0.49
0.46
1.15
2.78
0.26
0.13
1.00
0.71
603
44
96
2,298
3,267
983
118
48
4,416
6,714
87
435
522
0.62
0.22
0.41
0.49
1.23
2.82
0.25
0.14
1.06
0.75
765
51
80
2,455
3,469
1,029
119
54
4,671
7,126
90
409
499
0.60
0.19
0.48
0.48
1.30
2.87
0.24
0.14
1.11
0.77
755
45
93
2,409
3,673
1,087
117
53
4,930
7,339
103
468
571
Total nonperforming assets
$ 6,947
0.73% $ 7,236
0.77% $ 7,625
0.81% $ 7,910
0.83%
Change in NPAs from prior quarter
$
(289)
(389)
(285)
(378)
(1) Financial information for periods prior to December 31, 2018, has been revised to exclude MLHFS, LHFS and loans held at fair value of $339 million, $360 million, and $380
million, at September 30, June 30, and March 31, 2018, respectively.
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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
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,
2018
2018
2018
2018
2018
2017
Quarter ended
$
2,298
662
(45)
(12)
(193)
(522)
(772)
2,455
774
2,409
726
2,640
605
2,640
2,767
(122)
—
(191)
(618)
(931)
(43)
—
(133)
(504)
(680)
(113)
—
(119)
(604)
(836)
(323)
(12)
(636)
(2,248)
(3,219)
2,188
2,298
2,455
2,409
2,188
4,059
2,893
(417)
(20)
(630)
(3,245)
(4,312)
2,640
5,879
3,093
4,416
569
(269)
(35)
(57)
(316)
(677)
4,308
4,671
572
(319)
(41)
(65)
(402)
(827)
4,416
6,714
4,930
578
(342)
(40)
(84)
(371)
(837)
4,671
7,126
5,006
714
5,006
2,433
(374)
(1,304)
(1,583)
(50)
(86)
(280)
(790)
4,930
7,339
(166)
(292)
(1,369)
(3,131)
4,308
6,496
(218)
(468)
(1,697)
(3,966)
5,006
7,646
Total nonaccrual loans (1)
$
6,496
(1) Financial information for periods prior to December 31, 2018, has been revised to exclude MLHFS, LHFS and loans held at fair value of $339 million, $360 million, and $380
million, at September 30, June 30, and March 31, 2018, respectively, and $390 million at December 31, 2017.
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, 2018:
• Over 96% of total commercial nonaccrual loans and 99% of
•
total consumer nonaccrual loans are secured. Of the
consumer nonaccrual loans, 96% are secured by real estate
and 87% have a combined LTV (CLTV) ratio of 80% or less.
losses of $358 million and $1.5 billion have already been
recognized on 20% of commercial nonaccrual loans and
45% 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.
• 82% 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.
•
•
•
72% 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 $1.9 billion of consumer loans in bankruptcy or
discharged in bankruptcy, and classified as nonaccrual,
$1.3 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 our
proprietary modification 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 $446 million of
interest would have been recorded as income on these loans,
compared with $426 million actually recorded as interest
income in 2018, versus $500 million and $395 million,
respectively, in 2017.
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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,
2018
2018
2018
2018
2018
2017
Quarter ended
Government insured/guaranteed
$
88
PCI loans:
Commercial
Consumer
Total PCI loans
All other loans:
Commercial
Consumer
Total all other loans
Total foreclosed assets
Analysis of changes in foreclosed assets
Balance, beginning of period
Net change in government insured/guaranteed (2)
Additions to foreclosed assets (3)
$
$
24
72
96
103
164
267
451
522
1
193
Reductions:
Sales
Write-downs and gains (losses) on sales
Total reductions
Balance, end of period
(274)
9
(265)
$
451
87
31
63
94
170
171
341
522
499
(3)
209
(181)
(2)
(183)
522
90
42
61
103
134
172
306
499
571
(13)
191
(257)
7
(250)
499
103
59
58
117
162
189
351
571
642
(17)
185
88
24
72
96
103
164
267
451
642
(32)
778
120
57
62
119
207
196
403
642
978
(77)
899
(245)
(957)
(1,125)
6
(239)
571
20
(33)
(937)
(1,158)
451
642
(1) Foreclosed government insured/guaranteed loans are temporarily transferred to and held by us as servicer, until reimburseme nt 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 MLHFS, and outflows when we are reimbursed
by FHA/VA.
(2) Includes loans moved into foreclosure from nonaccrual status, PCI loans transitioned directly to foreclosed assets and repossessed automobiles.
Foreclosed assets at December 31, 2018, included
$317 million of foreclosed residential real estate, of which 28% is
predominantly FHA insured or VA guaranteed and expected to
have minimal or no loss content. The remaining foreclosed
assets balance of $134 million has been written down to
estimated net realizable value. Of the $451 million in foreclosed
assets at December 31, 2018, 65% have been in the foreclosed
assets portfolio one year or less.
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TROUBLED DEBT RESTRUCTURINGS (TDRs)
Table 31: Troubled Debt Restructurings (TDRs)
(in millions)
Commercial:
Commercial and industrial
Real estate mortgage
Real estate construction
Lease financing
Total commercial TDRs
Consumer:
2018
2017
2016
2015
2014
December 31,
$
1,623
704
39
56
2,096
901
44
35
2,584
1,119
91
6
2,422
3,076
3,800
1,123
1,456
125
1
2,705
724
1,880
314
2
2,920
Real estate 1-4 family first mortgage
Real estate 1-4 family junior lien mortgage
10,629
1,639
12,080
1,849
14,134
2,074
16,812
2,306
18,226
2,437
Credit Card
Automobile
Other revolving credit and installment
Trial modifications
Total consumer TDRs
Total TDRs
TDRs on nonaccrual status
TDRs on accrual status:
Government insured/guaranteed
Non-government insured/guaranteed
449
89
154
149
13,109
15,531
4,058
1,299
10,174
$
$
Total TDRs
$
15,531
Table 32: TDRs Balance by Quarter During 2018
(in millions)
Commercial:
Commercial and industrial
Real estate mortgage
Real estate construction
Lease financing
Total commercial TDRs
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
Total consumer TDRs
Total TDRs
TDRs on nonaccrual status
TDRs on accrual status:
Government insured/guaranteed
Non-government insured/guaranteed
Total TDRs
356
87
126
194
14,692
17,768
4,801
1,359
11,608
17,768
300
85
101
299
16,993
20,793
6,193
1,526
13,074
20,793
299
105
73
402
19,997
22,702
6,506
1,771
14,425
22,702
338
127
49
452
21,629
24,549
7,104
2,078
15,367
24,549
Dec 31,
Sep 30,
2018
2018
Jun 30,
2018
Mar 31,
2018
$
1,623
704
39
56
1,837
782
49
65
1,792
904
40
50
1,703
939
45
53
2,422
2,733
2,786
2,740
10,629
1,639
10,967
1,689
11,387
1,735
11,782
1,794
449
89
154
149
13,109
15,531
4,058
1,299
10,174
$
$
$
15,531
431
91
146
163
13,487
16,220
4,298
1,308
10,614
16,220
410
81
141
200
13,954
16,740
4,454
1,368
10,918
16,740
386
83
137
198
14,380
17,120
4,428
1,375
11,317
17,120
Table 31 and Table 32 provide information regarding the
recorded investment of loans modified in TDRs. The allowance
for loan losses for TDRs was $1.2 billion and $1.6 billion at
December 31, 2018 and 2017, 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
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Risk Management – Credit Risk Management (continued)
re-underwrite loans at the time of restructuring to determine
whether there is sufficient evidence of sustained repayment
capacity based on the borrower’s documented income, debt to
income ratios, and other factors. Loans lacking sufficient
evidence of sustained repayment capacity at the time of
modification are charged down to the fair value of the collateral,
if applicable. For an accruing loan that has been modified, if the
borrower has demonstrated performance under the previous
terms and the underwriting process shows the capacity to
continue to perform under the restructured terms, the loan will
generally remain in accruing status. Otherwise, the loan will be
placed in nonaccrual status and may be returned to accruing
status when the borrower demonstrates a sustained period of
performance, generally six consecutive months of payments, or
Table 33: Analysis of Changes in TDRs
equivalent, inclusive of consecutive payments made prior to
modification. Loans will also be placed on nonaccrual, and a
corresponding charge-off is recorded to the loan balance, when
we believe that principal and interest contractually due under
the modified agreement will not be collectible.
Table 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)(2)
Outflows
Charge-offs
Foreclosure
Payments, sales and other (2)(3)
Balance, end of period
Consumer TDRs
Balance, beginning of period
Inflows (1)
Outflows
Charge-offs
Foreclosure
Payments, sales and other (3)
Net change in trial modifications (4)
Balance, end of period
Total TDRs
Dec 31,
Sep 30,
Jun 30,
Mar 31,
Year ended Dec 31,
2018
2018
2018
2018
2018
2017
Quarter ended
$
2,733
374
(88)
(2)
(595)
2,786
588
(92)
(13)
(536)
2,740
481
(41)
—
(394)
3,076
321
3,076
1,764
(63)
—
(284)
(15)
3,800
2,117
(306)
(15)
(594)
(2,119)
(2,520)
2,422
2,733
2,786
2,740
2,422
3,076
13,487
379
(57)
(90)
(595)
(15)
13,109
$
15,531
13,954
414
(56)
(116)
(672)
(37)
13,487
16,220
14,380
467
(56)
(133)
(706)
2
13,954
16,740
14,692
487
14,692
1,747
(54)
(131)
(618)
4
14,380
17,120
(223)
(470)
(2,591)
(46)
13,109
15,531
16,993
1,817
(205)
(619)
(3,189)
(105)
14,692
17,768
(1) Inflows include loans that modify, even if they resolve within the period, as well as gross advances on term loans that modified in a prior period and net advances on
revolving commercial TDRs that modified in a prior period.
(2) Information for the quarter ended June 30, 2018, has been revised to offset payments and advances (i.e., inflows) on revolving commercial TDRs, for consistent
presentation of this activity for all periods.
(3) Other outflows include normal amortization/accretion of loan basis adjustments and loans transferred to held-for-sale. It also includes $59 million and $5 million of loans
refinanced or restructured at market terms and qualifying as new loans and removed from TDR classification for the quarters ended December 31 and March 31, 2018,
respectively, while no loans were removed from TDR classification for the quarters ended September 30 and June 30, 2018. During 2017, $6 million of loans refinanced or
structured as new loans and were removed from TDR classification.
(4) 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.
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90
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.
Excluding insured/guaranteed loans, loans 90 days or more
past due and still accruing at December 31, 2018, were down
$78 million, or 7%, from December 31, 2017, due to payoffs,
modifications and other loss mitigation activities and credit
stabilization.
Table 34: Loans 90 Days or More Past Due and Still Accruing (1)
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 $7.7 billion at
December 31, 2018, down from $10.5 billion at December 31,
2017, due to an improvement in delinquencies, loan
modification activity, as well as runoff. 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.
Table 34 reflects non-PCI loans 90 days or more past due
and still accruing by class for loans not government insured/
guaranteed. For additional information on delinquencies by loan
class, see Note 6 (Loans and Allowance for Credit Losses) to
Financial Statements in this Report.
(in millions)
Total (excluding PCI)(2):
2018
2017
2016
2015
2014
$
8,704
11,532
11,437
13,866
17,183
December 31,
Less: FHA insured/VA guaranteed (3)
7,725
10,475
10,467
12,863
16,204
Less: Student loans guaranteed under the FFELP (4)
—
—
Total, not government insured/guaranteed
$
979
1,057
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
Real estate 1-4 family junior lien mortgage
Credit card
Automobile
Other revolving credit and installment
Total consumer
Total, not government insured/guaranteed
$
43
51
—
94
124
32
513
114
102
885
979
26
23
—
49
213
60
492
143
100
1,008
1,057
3
967
28
36
—
64
170
56
452
112
113
903
967
26
977
97
13
4
114
220
65
397
79
102
863
977
63
916
31
16
—
47
256
83
364
73
93
869
916
(1) Financial information for periods prior to December 31, 2018, has been revised to exclude MLHFS, LHFS and loans held at fair value, which reduced “Total, not government
insured/guaranteed” by $6 million, $5 million, $4 million and $4 million at December 31, 2017, 2016, 2015 and 2014, respectively.
(2) PCI loans totaled $370 million, $1.4 billion, $2.0 billion, $2.9 billion and $3.7 billion at December 31, 2018, 2017, 2016, 2015 and 2014, respectively.
(3) Represents loans whose repayments are predominantly insured by the FHA or guaranteed by the VA.
(4) Represents loans whose repayments are largely guaranteed by agencies on behalf of the U.S. Department of Education under the FFELP. All remaining student loans
guaranteed under the FFELP were sold as of March 31, 2017.
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Risk Management – Credit Risk Management (continued)
NET CHARGE-OFFS
Table 35: Net Charge-offs
($ in millions)
2018
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
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
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
Total
423
(28)
(13)
47
429
0.13% $
132
0.15% $
148
0.18% $
(0.02)
(0.05)
0.24
0.09
(12)
(1)
13
132
(0.04)
(0.01)
0.26
0.10
(1)
(2)
7
152
—
(0.04)
0.14
0.12
58
—
(6)
15
67
0.07% $
—
(0.09)
0.32
0.05
85
(15)
(4)
12
78
0.10%
(0.05)
(0.07)
0.25
0.06
(88)
(0.03)
(22)
(0.03)
(25)
(0.04)
(23)
(0.03)
(18)
(0.03)
(40)
(0.11)
(10)
(0.11)
(9)
(0.10)
(13)
(0.13)
(8)
(0.09)
1,292
584
567
2,315
3.51
1.21
1.53
0.52
$ 2,744
0.29% $
338
133
150
589
721
3.54
1.16
1.64
0.53
0.30% $
299
130
133
528
680
3.22
1.10
1.44
0.47
0.29% $
323
113
135
535
602
3.61
0.93
1.44
0.49
0.26% $
492
(44)
(30)
28
446
0.15 % $
(0.03)
(0.12)
0.15
0.09
118
(10)
(3)
10
115
0.14 % $
(0.03)
(0.05)
0.20
0.09
125
(3)
(15)
6
113
0.15 % $
(0.01)
(0.24)
0.12
0.09
78
(6)
(4)
7
75
0.10 % $
(0.02)
(0.05)
0.15
0.06
(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
277
202
140
604
717
—
3.08
1.41
1.44
0.53
0.30 % $
(4)
(0.03)
320
126
154
580
655
3.67
0.86
1.58
0.51
0.27 % $
23
309
167
156
662
805
0.21
3.54
1.10
1.60
0.59
0.34 %
332
208
149
663
741
171
(25)
(8)
5
143
3.69
1.64
1.60
0.60
0.32%
0.21 %
(0.08)
(0.15)
0.11
0.11
(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 2018 and 2017. Net charge-offs in 2018 were $2.7 billion
(0.29% of average total loans outstanding), compared with
$2.9 billion (0.31%) in 2017.
The decrease in commercial and industrial net charge-offs
in 2018 reflected continued improvement in our oil and gas
portfolio. Our commercial real estate portfolios were in a net
recovery position every quarter in 2018 and 2017. Total net
charge-offs decreased from the prior year across all consumer
portfolios, except for the credit card portfolio, which had a slight
increase.
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
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.
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92
Table 36 presents the allocation of the allowance for credit
losses by loan segment and class for the last five years.
Table 36: Allocation of the Allowance for Credit Losses (ACL)
Dec 31, 2018
Dec 31, 2017
Dec 31, 2016
Dec 31, 2015
Dec 31, 2014
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
$ 3,628
37% $ 3,752
35% $ 4,560
34% $ 4,231
33% $ 3,506
32%
Real estate mortgage
Real estate construction
Lease financing
Total commercial
Consumer:
1,282
1,200
307
6,417
13
2
2
54
1,374
1,238
268
13
3
2
1,320
1,294
220
14
2
2
1,264
1,210
167
13
3
1
1,576
1,097
198
13
2
1
6,632
53
7,394
52
6,872
50
6,377
48
Real estate 1-4 family first mortgage
750
30
1,085
30
1,270
29
1,895
30
2,878
31
Real estate 1-4 family junior lien
mortgage
Credit card
Automobile
431
2,064
475
Other revolving credit and installment
570
3
4
5
4
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
Total consumer
Total
4,290
46
5,328
47
5,146
48
5,640
50
6,792
52
$10,707
100% $11,960
100% $12,540
100% $12,512
100% $13,169
100%
Dec 31, 2018
Dec 31, 2017
Dec 31, 2016
Dec 31, 2015
Dec 31, 2014
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 (1)
$
$
9,775
932
10,707
1.03%
356
1.12
165
11,004
956
11,960
1.15
376
1.25
156
11,419
1,121
12,540
1.18
324
1.30
126
11,545
967
12,512
1.26
399
1.37
115
12,319
850
13,169
1.43
418
1.53
107
(1) Financial information for periods prior to December 31, 2018, has been revised to exclude MLHFS, LHFS and loans held at fair value from nonaccrual loans.
In addition to the allowance for credit losses, there was
$480 million at December 31, 2018, and $474 million at
December 31, 2017, of nonaccretable difference to absorb losses
for PCI loans, which totaled $5.0 billion at December 31, 2018.
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 $1.3 billion, or
10%, in 2018, due to continued improvement in the credit
quality of our residential real estate portfolios and a decrease in
allowance for our automobile portfolio reflecting an
improvement in our outlook for hurricane-related losses in
Puerto Rico, partially offset by an increase in allowance for the
credit card portfolio. Total provision for credit losses was
$1.7 billion in 2018, $2.5 billion in 2017, and $3.8 billion in
2016. The provision for credit losses was $1.0 billion less than
net charge-offs in 2018, reflecting the same changes mentioned
above for the allowance for credit losses, compared with
$400 million less than net charge-offs in 2017. The 2016
provision was $250 million more than net charge-offs.
We believe the allowance for credit losses of $10.7 billion at
December 31, 2018, was appropriate to cover credit losses
inherent in the loan portfolio, including unfunded credit
commitments, at that date. 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
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Risk Management – Credit Risk Management (continued)
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.
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.
The overall level of unresolved repurchase demands and
mortgage insurance rescissions outstanding at December 31,
2018, was $49 million, representing 230 loans, down from
$108 million, or 482 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 in third
quarter 2018.
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.
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
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
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94
•
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 debt 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 37, 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 37:
•
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 interest rate scenarios,
customer activity that shifts balances into higher-yielding
products could reduce expected net interest income.
• We hold the size of the projected debt and equity securities
portfolios constant across scenarios.
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.
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 market risk 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 debt securities portfolio may pay down slower
than anticipated, which could impact portfolio income); or
•
•
•
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Risk Management – Asset/Liability Management (continued)
Table 37: 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
$
(0.9) - (0.4)
0.9 - 1.4
0.9 - 1.4
($ in billions)
Base
First Year of
Forecasting
Horizon
Net Interest Income
Sensitivity to
Base Scenario
Key Rates at
Horizon End
Fed Funds Target
3.00 %
10-year CMT (1)
3.72
2.00
2.72
4.00
4.72
5.00
5.72
Second Year of
Forecasting
Horizon
Net Interest Income
Sensitivity to
Base Scenario
Key Rates at
Horizon End
$
(1.7) - (1.2)
1.4 - 1.9
2.3 - 2.8
Fed Funds Target
3.00 %
10-year CMT (1)
4.01
2.00
3.01
4.00
5.01
5.00
6.01
(1) U.S. Constant Maturity Treasury Rate
The sensitivity results above do not capture interest rate
sensitive noninterest income and expense impacts. Our interest
rate sensitive noninterest income and expense is predominantly
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.
Interest rate sensitive noninterest income also results from
changes in earnings credit for noninterest-bearing deposits that
reduce treasury management deposit service fees. Furthermore,
for the trading portfolio, interest rate changes may result in net
interest income compression (generally as interest rates rise) or
expansion (generally as interest rates fall) that does not reflect
the offsetting effects of certain economic hedges. Instead, as a
result of GAAP requirements, the effects of such economic
hedges are recorded in noninterest income.
We use the debt securities portfolio and exchange-traded
and over-the-counter (OTC) interest rate derivatives to hedge
our interest rate exposures. See the “Balance Sheet Analysis –
Available-for-Sale and Held-to-Maturity Debt 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, 2018, and December 31, 2017, are presented in
Note 17 (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
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 MLHFS.
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 MLHFS
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 MLHFS, 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 MLHFS 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 MLHFS
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
2016, 2017, and 2018, in response to continued secondary
market illiquidity, as well as our desire to retain high quality
loans on our balance sheet, we continued to originate certain
prime non-agency loans to be substantially held for investment.
We did however designate a small portion of our non-agency
originations in 2018 to MLHFS in support of future issuances of
private label residential mortgage backed securities (RMBS). We
issued $441 million of RMBS in fourth quarter 2018.
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
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96
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.”
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 fair value 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 2018, 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
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
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Risk Management – Asset/Liability Management (continued)
interest rates decreases, the overall level of hedges changes
as interest rates change, or there are other changes in the
market for mortgage forwards that affect the implied carry.
The total carrying value of our residential and commercial
MSRs was $16.1 billion and $15.0 billion at December 31, 2018
and 2017, respectively. The weighted-average note rate on our
portfolio of loans serviced for others was 4.32% and 4.23% at
December 31, 2018 and 2017, respectively. The carrying value of
our total MSRs represented 0.94% and 0.88% of mortgage loans
serviced for others at December 31, 2018 and 2017, 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 can be either a
floating rate commitment, where the interest rate is not yet
determined, or it can be 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 (interest rate
“locks”) expose us to the risk that the price of the mortgage loans
underlying the commitments might decline due to increases in
mortgage interest rates from inception of the rate lock to the
funding of the loan. To minimize this risk, we employ mortgage
forwards and options 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 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 and
commodity prices, and the risk of possible loss due to
counterparty risk. This includes implied volatility risk, basis risk,
and market liquidity risk. Market risk also includes counterparty
credit risk, price risk in the trading book, mortgage servicing
rights and the associated hedge effectiveness risk associated with
the mortgage book, and impairment on private equity
investments.
The Board’s Finance Committee has primary oversight
responsibility for market risk and oversees the Company’s
market risk exposure and market risk management strategies. In
addition, the Board’s Risk Committee has certain oversight
responsibilities with respect to market risk, including adjusting
the Company’s market risk appetite with input from the Finance
Committee. The Finance Committee also reports key market risk
matters to the Risk Committee.
At the management level, the Market and Counterparty Risk
Management function, which is part of Corporate Risk, has
primary oversight responsibility for market risk. The Market and
Counterparty Risk Management function reports into the CRO
and also provides periodic reporting related to market risk to the
Board’s Finance Committee. In addition, the Risk & Control
Committee for each business group and enterprise function
reports market risk matters to the Enterprise Risk & Control
Committee.
MARKET RISK – TRADING ACTIVITIES We engage in trading
activities to accommodate the investment and risk management
activities of our customers and to execute economic hedging to
manage certain balance sheet risks. These trading activities
predominantly occur within our Wholesale Banking businesses
and to a lesser extent other divisions of the Company. Debt
securities held for trading, equity securities held for trading,
trading loans and trading derivatives are financial instruments
used in our trading activities, and all are carried at fair value.
Income earned on the financial instruments used in our trading
activities include net interest income, changes in fair value and
realized gains and losses. Net interest income earned from our
trading activities is reflected in the interest income and interest
expense components of our income statement. Changes in fair
value of the financial instruments used in our trading activities
are reflected in net gains on trading activities, a component of
noninterest income in our income statement. For more
information on the financial instruments used in our trading
activities and the income from these trading activities, see
Note 4 (Trading Activities) to Financial Statements in this
Report.
Value-at-risk (VaR) is a statistical measure used to estimate
the potential loss from adverse moves in the financial markets.
The Company uses 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.
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 on our
balance sheet.
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98
Table 38 shows the Company’s Trading General VaR by risk
category. As presented in Table 38, average Company Trading
General VaR was $16 million for the quarter ended December 31,
2018, compared with $12 million for the quarter ended
September 30, 2018, and $13 million for the quarter ended
Table 38: Trading 1-Day 99% General VaR by Risk Category
December 31, 2017. The increase in average Company Trading
General VaR for the quarter ended December 31, 2018, was
mainly driven by changes in portfolio composition.
(in millions)
end Average
Low
High
Period
Period
end
Average
Low
High
Period
end
Average
Low
High
December 31, 2018
September 30, 2018
December 31, 2017
Quarter ended
Company Trading
General VaR Risk
Categories
Credit
Interest rate
Equity
Commodity
Foreign exchange
$18
28
5
2
1
16
20
5
2
1
13
24
13
14
28
18
2
1
0
7
4
2
5
2
0
17
18
5
1
1
11
6
4
1
0
55
52
7
2
1
12
13
10
1
0
16
10
11
1
0
11
6
10
1
0
28
17
14
2
1
Diversification benefit (1)
(33)
(28)
(25)
(30)
(24)
(25)
Company Trading
General VaR
$
21
16
13
12
12
13
(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.
MARKET RISK – EQUITY SECURITIES We are directly and
indirectly affected by changes in the equity markets. We make
and manage direct 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 equity
securities, 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. Investments in
nonmarketable equity securities include private equity
investments accounted for under the equity method, fair value
through net income, and the measurement alternative.
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 16 (Legal Actions) to Financial Statements in this Report.
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Risk Management – Asset/Liability Management (continued)
As part of our business to support our customers, we trade
The FRB, OCC and FDIC have proposed a rule that would
public equities, listed/OTC equity derivatives and convertible
bonds. We have parameters that govern these activities. We also
have marketable equity securities that include investments
relating to our venture capital activities. We manage these
marketable equity securities within capital risk limits approved
by management and the Board and monitored by Corporate
ALCO and the Market Risk Committee. The fair value changes in
these marketable equity securities are recognized in net income.
For more information, see Note 8 (Equity Securities) to
Financial Statements in this Report.
Changes in equity market prices may also indirectly affect
our net income by (1) the value of third-party assets under
management and, hence, fee income, (2) borrowers whose
ability to repay principal and/or interest may be affected by the
stock market, or (3) brokerage activity, related commission
income and other business activities. Each business line
monitors and manages these indirect risks.
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 In September 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.
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, 2018, the
consolidated Company and Wells Fargo Bank, N.A. were above
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 39 presents the Company’s quarterly
average values for the daily-calculated LCR and its components
calculated pursuant to the LCR rule requirements.
Table 39: Liquidity Coverage Ratio
(in millions, except ratio)
HQLA (1)(2)
Projected net cash outflows
LCR
Average for Quarter ended
December 31, 2018
$
366,578
303,158
121%
(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 debt
securities. These assets make up our primary sources of liquidity
which are presented in Table 40. 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. Debt 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 debt securities portfolio. We believe these debt
securities provide quick sources of liquidity through sales or by
pledging to obtain financing, regardless of market conditions.
Some of these debt securities are within the held-to-maturity
portion of our debt 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.
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Table 40: Primary Sources of Liquidity
December 31, 2018
December 31, 2017
(in millions)
Total Encumbered Unencumbered
Total
Encumbered Unencumbered
Interest-earning deposits with banks
$ 149,736
—
149,736
192,580
Debt securities of U.S. Treasury and federal agencies
57,688
Mortgage-backed securities of federal agencies (1)
244,211
Total
$ 451,635
1,504
35,656
37,160
56,184
51,125
208,555
246,894
414,475
490,599
—
964
46,062
47,026
192,580
50,161
200,832
443,573
(1)
Included in encumbered securities at December 31, 2018, were securities with a fair value of $261 million which were purchased in December 2018, but settled in January
2019.
In addition to our primary sources of liquidity shown in
Table 40, liquidity is also available through the sale or financing
of other debt securities including trading and/or available-for
sale debt securities, as well as through the sale, securitization or
financing of loans, to the extent such debt securities and loans
are not encumbered. In addition, other debt securities in our
held-to-maturity portfolio, to the extent not encumbered, may be
pledged to obtain financing.
Deposits have historically provided a sizable source of
relatively low-cost funds. Deposits were 135% of total loans at
December 31, 2018, and 140% at December 31, 2017.
Table 41: Short-Term Borrowings
(in millions)
Balance, period end
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.
Table 41 shows selected information for short-term
borrowings, which generally mature in less than 30 days.
Dec 31,
2018
Sep 30,
2018
Jun 30,
2018
Mar 31,
2018
Dec 31,
2017
Quarter ended
Federal funds purchased and securities sold under agreements to repurchase
$ 92,430
Other short-term borrowings
Total
Average daily balance for period
Other short-term borrowings
Total
Maximum month-end balance for period
Federal funds purchased and securities sold under agreements to repurchase
$ 93,483
13,357
92,418
13,033
89,307
15,189
80,916
16,291
88,684
14,572
$ 105,787
105,451
104,496
97,207
103,256
12,479
92,141
13,331
89,138
14,657
86,535
15,244
88,197
13,945
$ 105,962
105,472
103,795
101,779
102,142
Federal funds purchased and securities sold under agreements to repurchase (1)
$ 93,918
Other short-term borrowings (2)
13,357
92,531
14,270
92,103
15,272
88,121
16,924
91,604
14,948
(1) Highest month-end balance in each of the last five quarters was in November, July, May and January 2018, and November 2017.
(2) Highest month-end balance in each of the last five quarters was in December, July, May and January 2018, and November 2017.
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, 2018, the
Parent was authorized by the Board to issue up to $180 billion in
outstanding long-term debt. The Parent’s long-term debt
issuance authority granted by the Board includes debt issued to
affiliates and others. At December 31, 2018, the Parent had
available $38.1 billion in long-term debt issuance authority. In
2018, the Parent issued $2.0 billion of senior notes, of which
$1.5 billion were registered with the SEC. In addition, the Parent
issued $5.5 billion of registered senior notes in January 2019
and issued CAD $1.0 billion of senior notes in February 2019
that were registered in the U.S. and distributed on a private
placement basis in Canada. 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 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, 2018,
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
$99.1 billion in short-term debt issuance authority and
$96.4 billion in long-term debt issuance authority. In April 2018,
Wells Fargo Bank, N.A. established a new $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, 2018, Wells Fargo Bank, N.A. had remaining
issuance capacity under the new bank note program of
$50.0 billion in short-term senior notes and $39.8 billion in
long-term senior or subordinated notes. In 2018, Wells Fargo
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101
Risk Management – Asset/Liability Management (continued)
Bank, N.A. issued $17.8 billion of unregistered senior notes,
including $1.0 billion of senior redeemable floating rate notes
issued in September 2018 with an interest rate indexed to the
new Secured Overnight Financing Rate (SOFR) published by the
Federal Reserve Bank of New York, and $6.0 billion of which
were issued under a prior bank note program. SOFR is an
alternative to the London Interbank Offered Rate (LIBOR) and is
a broad measure of the cost of borrowing cash overnight
collateralized by U.S. Treasury securities. Due to the uncertainty
surrounding the future of LIBOR, it is expected that a transition
away from the widespread use of LIBOR to alternative
benchmark rates will occur by the end of 2021. Accordingly, the
FASB recently issued a pronouncement that includes SOFR,
among others, as a permitted benchmark interest rate for the
application of hedge accounting. We have a significant amount
of assets and liabilities referenced to LIBOR such as commercial
loans, adjustable rate mortgage loans, derivatives, securities, and
long-term debt. We have established a LIBOR Transition Office
to develop and direct a coordinated strategy to transition
numerous products and exposures away from LIBOR. The
LIBOR Transition Office has initiated a comprehensive,
company-wide process to address certain challenges and risks
associated with the transition away from the widespread use of
LIBOR and has directed an evaluation of the provisions in our
contracts that could apply in connection with any
discontinuation of, or change to, LIBOR, as well as the
operational issues that could arise. In addition, regulators and
trade associations periodically issue guidance, consultations and
recommendations relating to LIBOR-transition matters, which
will inform our overall planning. See the “Risk Factors” section
in this Report for additional information regarding the potential
impact of a benchmark rate, such as LIBOR, or other referenced
financial metric being significantly changed, replaced or
discontinued.
Table 42: Credit Ratings as of December 31, 2018
Moody’s
S&P Global Ratings
Fitch Ratings, Inc.
DBRS
In addition, during 2018, Wells Fargo Bank, N.A. executed
advances of $29.2 billion with the Federal Home Loan Bank of
Des Moines, and as of December 31, 2018, Wells Fargo Bank,
N.A. had outstanding advances of $49.6 billion across the
Federal Home Loan Bank System. In addition, Wells Fargo
Bank, N.A. executed $3.0 billion in Federal Home Loan Bank
advances in February 2019.
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.
There were no actions undertaken by the rating agencies
with regard to our credit ratings during fourth quarter 2018.
Both the Parent and Wells Fargo Bank, N.A. remain among the
highest-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
and operations, as well as Note 17 (Derivatives) to Financial
Statements in this Report for information regarding additional
collateral and funding obligations required for certain derivative
instruments in the event our credit ratings were to fall below
investment grade.
The credit ratings of the Parent and Wells Fargo Bank, N.A.
as of December 31, 2018, are presented in Table 42.
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 Agency. 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 working 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
$12.9 billion from December 31, 2017, predominantly from
Wells Fargo net income of $22.4 billion, less common and
preferred stock dividends of $9.5 billion. During 2018, we issued
65.1 million shares of common stock. During 2018, we
repurchased 375.5 million shares of common stock in open
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Wells Fargo & Company
102
market transactions, including through forward repurchase
transactions, and from employee benefit plans, at a cost of
$20.6 billion. The amount of our repurchases are subject to
various factors as discussed in the “Securities Repurchases”
section below. For additional information about our forward
repurchase agreements, see Note 1 (Summary of Significant
Accounting Policies) to Financial Statements in this Report.
On September 17, 2018, we redeemed all of our 8.00% Non-
Cumulative Perpetual Class A Preferred Stock, Series J, at a
redemption price equal to $1,000 per share.
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 2017 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).
•
•
•
•
•
under the Standardized Approach and under the Advanced
Approach.
On April 10, 2018, the FRB issued a proposed rule that
would add a stress capital buffer and a stress leverage buffer to
the minimum capital and tier 1 leverage ratio requirements.
The buffers would be calculated based on the decrease in a
financial institution’s risk-based capital and tier 1 leverage
ratios under the supervisory severely adverse scenario in
CCAR, plus four quarters of planned common stock dividends.
The stress capital buffer would replace the 2.5% capital
conservation buffer under the Standardized Approach,
whereas the stress leverage buffer would be added to the
current 4% minimum tier 1 leverage ratio.
Because the Company has been designated as a G-SIB, we
are also 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) considers our size, interconnectedness,
cross-jurisdictional activity, substitutability, and complexity,
consistent with the methodology developed by the BCBS and the
Financial Stability Board (FSB). The second (method two) uses
similar inputs, but replaces substitutability with use of short-
term wholesale funding and will generally result in higher
surcharges than the BCBS methodology. The G-SIB surcharge
became fully effective on January 1, 2019. Based on year-end
2017 data, our 2019 G-SIB surcharge under method two is 2.0%
of the 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
11.74% exceeded the minimum of 9.0% by 274 basis points at
December 31, 2018.
The tables that follow provide information about our risk-
based capital and related ratios as calculated under Basel III
capital guidelines. For banking industry regulatory reporting
purposes, we continue to report our tier 2 and total 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 28 (Regulatory and Agency
Capital Requirements) to Financial Statements in this Report.
We were required to comply with the final Basel III
capital rules beginning January 2014, with certain provisions
subject to phase-in periods. Beginning January 1, 2018, the
requirements for calculating CET1 and tier 1 capital, along
with RWAs, became fully phased-in. However, the
requirements for calculating tier 2 and total capital are still in
accordance with Transition Requirements. The entire Basel III
capital rules are scheduled to be fully phased in by the end of
2021. The Basel III capital rules contain two frameworks for
calculating capital requirements, a Standardized Approach,
which replaced Basel I, and an Advanced Approach applicable
to certain institutions, 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
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103
Capital Management (continued)
Table 43 summarizes our CET1, tier 1 capital, total capital,
risk-weighted assets and capital ratios on a fully phased-in basis
at December 31, 2018 and December 31, 2017. As of
December 31, 2018, our CET1, tier 1, and total capital ratios were
lower using RWAs calculated under the Standardized Approach.
Table 43: Capital Components and Ratios (Fully Phased-In) (1)
(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, 2018
Advanced
Approach
Standardized
Approach
$
146,363
167,866
198,103
146,363
167,866
206,346
Advanced
Approach
154,022
177,466
208,395
December 31, 2017
Standardized
Approach
154,022
177,466
218,159
1,177,350
1,247,210
1,225,939
1,285,563
12.43%
14.26
16.83
11.74 *
13.46 *
16.54 *
12.56
14.48
17.00
11.98 *
13.80 *
16.97 *
(A)
(B)
(C)
(D)
(A)/(D)
(B)/(D)
(C)/(D)
Denotes the lowest capital ratio as determined under the Advanced and Standardized Approaches.
*
(1) Beginning January 1, 2018, the requirements for calculating CET1 and tier 1 capital, along with RWAs, became fully phased-in. However, the requirements for calculating
tier 2 and total capital are still in accordance with Transition Requirements. Accordingly, fully phased-in total capital amounts and ratios 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 44 for
information regarding the calculation and components of CET1, tier 1 capital, total capital and RWAs, as well as the corresponding reconciliation of our fully phased-in
regulatory capital amounts to GAAP financial measures.
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104
Table 44 provides information regarding the calculation and
composition of our risk-based capital under the Advanced and
Standardized Approaches at December 31, 2018 and
December 31, 2017.
Table 44: 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 (3)
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 (3)
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 (4)
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) (5)(6):
Credit risk
Market risk
Operational risk
December 31, 2018
December 31, 2017
Advanced
Approach
Standardized
Approach
$
197,066
197,066
Advanced
Approach
208,079
Standardized
Approach
208,079
(23,214)
(95)
1,502
(900)
(23,214)
(95)
1,502
(900)
174,359
174,359
(26,418)
(559)
(2,187)
785
383
(26,418)
(559)
(2,187)
785
383
146,363
146,363
—
—
146,363
146,363
146,363
23,214
95
(1,502)
(304)
146,363
23,214
95
(1,502)
(304)
$
$
(A)
167,866
167,866
—
—
167,866
167,866
$
$
(B)
167,866
27,946
2,463
(172)
30,237
695
$
30,932
(A)+(B) $
198,103
695
$
198,798
167,866
27,946
10,706
(172)
38,480
695
39,175
206,346
695
207,041
$
803,273
1,201,246
45,964
328,113
45,964
N/A
(25,358)
(122)
1,678
(1,143)
183,134
(26,587)
(1,624)
(2,155)
962
292
154,022
743
154,765
(25,358)
(122)
1,678
(1,143)
183,134
(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
177,466
28,994
2,196
(261)
30,929
1,195
32,124
208,395
1,938
210,333
890,171
36,168
299,600
25,358
122
(1,678)
(358)
177,466
743
178,209
177,466
28,994
11,960
(261)
40,693
1,195
41,888
218,159
1,938
220,097
1,249,395
36,168
N/A
Total RWAs (Fully Phased-In) (3)
$
1,177,350
1,247,210
1,225,939
1,285,563
(1) Represents goodwill and other intangibles on nonmarketable equity securities, 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) Beginning January 1, 2018, the requirements for calculating CET1 and tier 1 capital, along with RWAs, became fully phased-in, so the effect of the transition requirements
was $0 at December 31, 2018.
(4) 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.
(5) 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.
(6) 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.
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105
Capital Management (continued)
Table 45 presents the changes in Common Equity Tier 1
under the Advanced Approach for the year ended December 31,
2018.
Table 45: Analysis of Changes in Common Equity Tier 1
(in millions)
Common Equity Tier 1 (Fully Phased-In) at December 31, 2017
$
154,022
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
20,689
(7,889)
(17,881)
170
1,065
(32)
(177)
(3,604)
(7,659)
Common Equity Tier 1 (Fully Phased-In) at December 31, 2018
$
146,363
(1) Represents goodwill and other intangibles on nonmarketable equity securities, 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 46 presents net changes in the components of RWAs
under the Advanced and Standardized Approaches for the year
ended December 31, 2018.
Table 46: Analysis of Changes in RWAs
(in millions)
RWAs (Fully Phased-In) at December 31, 2017
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, 2018
Advanced Approach
Standardized Approach
$
$
1,225,939
(86,898)
9,796
28,513
(48,589)
1,177,350
1,285,563
(48,149)
9,796
N/A
(38,353)
1,247,210
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106
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 securities, 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 47 provides a reconciliation of these non-GAAP
financial measures to GAAP financial measures.
Table 47: Tangible Common Equity
(in millions, except ratios)
Total equity
Adjustments:
Preferred stock
Additional paid-in capital on ESOP preferred stock
Unearned ESOP shares
Noncontrolling interests
Balance at period end
Average balance for the year ended
Dec 31,
2018
Dec 31,
2017
Dec 31,
2016
Dec 31,
2018
Dec 31,
2017
Dec 31,
2016
$ 197,066
208,079
200,497
203,356
205,654
200,690
(23,214)
(25,358)
(24,551)
(24,956)
(25,592)
(24,363)
(95)
1,502
(122)
1,678
(900)
(1,143)
(126)
1,565
(916)
(125)
2,159
(929)
(139)
2,143
(948)
(161)
2,011
(936)
Total common stockholders’ equity
(A)
174,359
183,134
176,469
179,505
181,118
177,241
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)
(26,418)
(26,587)
(26,693)
(26,453)
(26,629)
(26,700)
(559)
(1,624)
(2,723)
(2,187)
(2,155)
(2,088)
785
962
1,772
(1,088)
(2,197)
866
(2,176)
(3,254)
(2,184)
(2,117)
1,570
1,897
$ 145,980
153,730
146,737
150,633
151,699
147,067
4,581.3
4,891.6
5,016.1
N/A
N/A
N/A
Book value per common share
(A)/(C)
$
38.06
Tangible book value per common share
(B)/(C)
31.86
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
37.44
31.43
N/A
N/A
N/A
$ 20,689
20,554
20,373
35.18
29.25
N/A
N/A
N/A
N/A
11.53 %
13.73
N/A
N/A
11.35
13.55
N/A
N/A
11.49
13.85
(1) Represents goodwill and other intangibles on nonmarketable equity securities, 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.
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Capital Management (continued)
SUPPLEMENTARY LEVERAGE RATIO In April 2014, federal
banking regulators finalized a rule that enhances the SLR
requirements for BHCs, like Wells Fargo, and their insured
depository institutions. The SLR consists of Tier 1 capital 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 April 2018, the FRB and OCC proposed
rules (the “Proposed SLR Rules”) that would replace the 2%
supplementary leverage buffer with a buffer equal to one-half of
the firm’s G-SIB capital surcharge. The Proposed SLR Rules
would similarly tailor the current 6% SLR requirement for our
insured depository institutions. At December 31, 2018, our SLR
for the Company was 7.7% calculated under 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. See Table 48
for information regarding the calculation and components of the
SLR.
Table 48: Supplementary Leverage Ratio
$
(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
Quarter ended
December 31, 2018
167,866
1,879,047
28,748
1,850,299
68,753
5,350
250,162
324,265
Total leverage exposure
$
2,174,564
Supplementary leverage ratio
7.7%
(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 became
effective on January 1, 2019, U.S. G-SIBs are 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
are 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 to be added to the 18% minimum and (ii) an external
TLAC leverage buffer equal to 2.0% of total leverage exposure to
be added to the 7.5% minimum, in order to avoid restrictions on
capital distributions and discretionary bonus payments. The
rules 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 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. Under the
Proposed SLR Rules, the 2% external TLAC leverage buffer
would be replaced with a buffer equal to one-half of the firm’s G
SIB capital surcharge. Additionally, the Proposed SLR Rules
would modify the leverage component for calculating the
minimum amount of eligible unsecured long-term debt from
4.5% of total leverage exposure to 2.5% of total leverage
exposure plus one-half of the firm’s G-SIB capital surcharge. As
of December 31, 2018, our eligible external TLAC as a percentage
of total risk-weighted assets was 23.35% compared with a
required minimum of 22.0%. Similar to the risk-based capital
requirements, we determine minimum required TLAC based on
the greater of RWAs determined under the Standardized and
Advanced approaches.
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. As
discussed above in “Regulatory Capital Guidelines”, the FRB has
proposed including a stress capital buffer (SCB) to replace the
current capital conservation buffer as part of the capital
requirements for large U.S. banks. The proposal is not final, but
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108
it is expected that the adoption of CECL accounting would be
included in the SCB calculation. We expect that implementation
of the SCB may increase the level and volatility of minimum
capital requirements, which may cause our current 10% CET1
long-term target ratio to increase.
Under the FRB’s capital plan rule, large BHCs are required
to submit capital plans annually for review to determine if the
FRB has any objections before making any capital distributions.
The rule requires updates to capital plans in the event of
material changes in a BHC’s risk profile, including as a result of
any significant acquisitions. The FRB assesses the overall
financial condition, risk profile, and capital adequacy of BHCs
while considering both quantitative and qualitative factors when
evaluating capital plans.
Our 2018 capital plan, which was submitted on April 4,
2018, 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 2018 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 21, 2018. On June 28, 2018, the FRB notified us that
it did not object to our capital plan included in the 2018 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 2018. In October 2018, the
FRB proposed a rule that would, among other things, eliminate
the mid-cycle stress test requirement for banks beginning in
2020.
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 repurchase 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 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. Due to the various factors impacting the amount of our
share repurchases and the fact that we tend to be in the market
regularly to satisfy repurchase considerations under our capital
plan, our repurchases occur at various price levels. We may
suspend repurchase activity at any time.
In January 2018, the Board authorized the repurchase of
350 million shares of our common stock. In October 2018, the
Board authorized the repurchase of an additional 350 million
shares of our common stock. At December 31, 2018, we had
remaining authority to repurchase approximately 395 million
shares, subject to regulatory and legal conditions. For more
information about share repurchases during fourth quarter
2018, see Part II, Item 5 in our 2018 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. The warrants expired
on October 29, 2018, and the holders of 110,646 unexercised
warrants as of the expiration date are no longer entitled to
receive any shares of our common stock.
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Regulatory Matters
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 2018 Form 10-K, and the “Capital
Management,” “Forward-Looking Statements” and “Risk
Factors” sections and Note 28 (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
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 finalized enhanced prudential standards
that implement single counterparty credit limits, and has
proposed a rule to 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, deceptive 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 and report to the CFPB. 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.
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 the
Commodity Futures Trading Commission (CFTC)
(collectively, the Volcker supervisory regulators) jointly
released a final rule to implement the Volcker Rule’s
restrictions, and the FRB has proposed further rules to
streamline and modify compliance with the Volcker Rule’s
requirements. 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 initial and variation margin requirements for
swaps and security-based swaps not centrally cleared, rules
placing restrictions on a party’s right to exercise default
rights under derivatives and other qualified financial
contracts against applicable banking organizations, and
record-keeping requirements for qualified financial
contracts. All of these new rules, as well as others being
considered by regulators in other jurisdictions, may
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negatively impact customer demand for over-the-counter
derivatives, impact our ability to offer customers new
derivatives or amendments to existing derivatives, and may
increase our costs for engaging in swaps, security-based
swaps, and other derivatives activities.
• 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, which the FRB published in
August 2015. The plaintiffs did not file a petition for
rehearing with the Court of Appeals but filed a petition for
writ of certiorari with the U.S. Supreme Court. In January
2015, the U.S. Supreme Court denied the petition for writ of
certiorari.
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
Wells Fargo’s 2017 resolution plan submission did not have any
deficiencies; however, they identified a specific shortcoming that
would need to be addressed in the Company’s next submission.
Our national bank subsidiary, Wells Fargo Bank, N.A. (the
“Bank”), is also required to prepare a resolution plan and
submitted its 2018 resolution plan to the FDIC on June 29,
2018. 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. 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,
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Regulatory Matters (continued)
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
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
•
Broker-dealer standards of conduct. In April 2018, the SEC
proposed a rule that would require broker-dealers to act in
the best interest of a retail customer when making a
recommendation of any securities transaction or investment
strategy involving securities. This rule may impact the
manner in which business is conducted with customers
seeking investment advice and may affect certain
investment product offerings.
• 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. As required by the consent order, the Board
submitted to the FRB a plan to further enhance the Board’s
governance and oversight of the Company, and the
Company submitted to the FRB a plan to further improve
the Company’s compliance and operational risk
management program. The consent order requires the
Company, following the FRB’s acceptance and approval of
the plans and the Company’s adoption and implementation
of the plans, to complete third-party reviews of the
enhancements and improvements provided for in the plans.
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.
The Company continues to have constructive dialogue with
the FRB on an ongoing basis to clarify expectations, receive
feedback, and assess progress under the consent order. In
order to have enough time to incorporate this feedback into
the Company’s plans in a thoughtful manner, adopt and
implement the final plans as accepted by the FRB, and
complete the required third-party reviews, the Company is
planning to operate under the asset cap through the end of
2019. Additionally, after removal of the asset cap, a second
third-party review must also be conducted to assess the
efficacy and sustainability of the enhancements and
improvements.
Consent orders with the CFPB and OCC regarding
compliance risk management program, automobile
collateral protection insurance policies, and mortgage
interest rate lock extensions. On April 20, 2018, the
Company entered into consent orders with the CFPB and
OCC to pay an aggregate of $1 billion in civil money
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penalties to resolve matters regarding the Company’s
compliance risk management program and past practices
involving certain automobile collateral protection insurance
policies and certain mortgage interest rate lock extensions.
As required by the consent orders, the Company submitted
to the CFPB and OCC an enterprise-wide compliance risk
management plan and a plan to enhance the Company’s
internal audit program with respect to federal consumer
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.
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.
financial law and the terms of the consent orders. In
addition, as required by the consent orders, the Company
submitted for non-objection plans to remediate customers
affected by the automobile collateral protection insurance
and mortgage interest rate lock matters, as well as a plan for
the management of remediation activities conducted by the
Company.
Probability of default and severity at the time of default are
statistically derived through historical observations of
defaults and losses after default within each credit risk
rating. Commercial loan risk ratings are evaluated based on
each situation by experienced senior credit officers and are
subject to periodic review by an internal team of credit
specialists.
• Economic assumptions applied to pools of consumer loans
•
(statistically modeled). Losses are estimated using
economic variables to represent our best estimate of
inherent loss. Our forecasted losses are modeled using a
range of economic scenarios.
Selection of a credit loss estimation model that fits the
credit risk characteristics of its portfolio. We use both
internally developed and vendor supplied models in this
process. We often use expected loss, transition rate, flow
rate, competing hazard, vintage maturation, 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.
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Critical Accounting Policies (continued)
SENSITIVITY TO CHANGES Table 49 demonstrates the impact
of the sensitivity of our estimates on our allowance for credit
losses.
operations (e.g., possible changes in future servicing costs,
ancillary income and earnings on escrow accounts).
• The expected cost to service loans used to estimate future
Table 49: Allowance Sensitivity Summary
(in billions)
Assumption:
Favorable (1)
Adverse (2)
December 31, 2018
Estimated
increase/(decrease)
in allowance
$
(3.2)
6.9
(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 generally
are not observable in the market and require judgment to
determine. If observable market indications do become
available, these are factored into the estimates as appropriate:
• 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
net servicing income. The cost to service loans includes
estimates for unreimbursed expenses, such as delinquency
and foreclosure costs, which considers the number of
defaulted loans as well as changes in servicing processes
associated with default and foreclosure management.
Both prepayment speed and discount rate assumptions can,
and generally will, change quarterly as market conditions and
mortgage interest rates change. For example, an increase in
either the prepayment speed or discount rate assumption results
in a decrease in the fair value of the MSRs, while a decrease in
either assumption would result in an increase in the fair value of
the MSRs. In recent years, there have been significant market-
driven fluctuations in loan prepayment speeds and the discount
rate. These fluctuations can be rapid and may be significant in
the future. Additionally, while our current valuation reflects our
best estimate of servicing costs, future regulatory or investor
changes in servicing standards, as well as changes in individual
state foreclosure legislation or additional market participant
information regarding servicing cost assumptions, 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 9
(Securitizations and Variable Interest Entities), Note 10
(Mortgage Banking Activities) and Note 18 (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, assets and liabilities held for
trading purposes, marketable equity securities not held for
trading purposes, debt securities available for sale, derivatives
and substantially all of our residential MLHFS are carried at fair
value each period. Other financial instruments, such as certain
MLHFS, nonmarketable equity securities 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, measurement alternative 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 18
(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
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active markets to measure fair value. If quoted prices in active
markets are not available, fair value measurement is based upon
models that use primarily market-based or independently
sourced market parameters, including interest rate yield curves,
prepayment speeds, option volatilities and currency rates.
However, when observable market data is limited or not
available, fair value estimates are typically determined using
internally-developed models based on unobservable inputs. In
these instances, management judgment is necessary as we are
required to make judgments about significant assumptions
market participants would use to estimate fair value.
Determination of these assumptions includes consideration of
market conditions and liquidity levels. 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. In such cases, it may be appropriate
to adjust available quoted prices or observable market data.
When significant adjustments are required to price quotes or
other observable market data, it may be appropriate to utilize an
estimate of fair value based primarily on unobservable inputs.
Internal models used to determine fair value are validated in
accordance with company policies by an internal model
validation group. 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. Third-party price validation procedures are performed
over the reasonableness of the fair value measurements. For
additional information on our use of pricing services, see Note 1
(Summary of Significant Accounting Policies) and Note 18 (Fair
Value of Assets and Liabilities) to Financial Statements in this
Report.
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 18 (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. 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 50 presents the summary of the fair value of financial
instruments recorded at fair value on a recurring basis, and the
amounts of Level 3 assets and liabilities (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 50: 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, 2018
December 31, 2017
Total Level 3
(1)
balance
Total
balance
Level 3
(1)
$ 408.4
25.3
416.6
24.9
22%
1
21
1
$ 28.2
1.6
27.3
2.0
2%
*
2
*
Less than 1%.
*
(1) Before derivative netting adjustments.
See Note 18 (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. In 2018, we finalized the recognition of
the U.S. tax expense associated with a deemed repatriation of
undistributed earnings of certain non-U.S. subsidiaries as
required under the 2017 Tax Act. We do not intend to distribute
these earnings in a taxable manner, and therefore intend to limit
distributions of 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.
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
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Critical Accounting Policies (continued)
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 23 (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.
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 16 (Legal Actions) to Financial Statements in this
Report for further information.
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Current Accounting Developments
Table 51 provides the significant accounting updates applicable
to us that have been issued by the FASB but are not yet effective.
Table 51: Current Accounting Developments – Issued Standards
Standard
Description
Effective date and financial statement impact
Accounting Standard Update
(ASU or Update) 2018-16 -
Derivatives and Hedging
(Topic 815): Inclusion of the
Secured Overnight Financing
Rate (SOFR) Overnight
Index Swap (OIS) Rate as a
Benchmark Interest Rate for
Hedge Accounting Purposes
ASU 2018-12 – Financial
Services – Insurance (Topic
944): Targeted
Improvements to the
Accounting for Long-
Duration Contracts
ASU 2017-08 – Receivables
– Nonrefundable Fees and
Other Costs (Subtopic
310-20): Premium
Amortization on Purchased
Callable Debt Securities
The Update expands the list of U.S.
benchmark interest rates permitted in
the application of hedge accounting. The
Update adds the OIS rate based on
SOFR as a U.S. benchmark interest rate
to facilitate the LIBOR to SOFR transition
and provide sufficient lead time for
entities to prepare for changes to
interest rate risk hedging strategies for
both risk management and hedge
accounting purposes.
The Update requires all features in long-
duration insurance contracts that meet
the definition of a market risk benefit to
be measured at fair value through
earnings with changes in fair value
attributable to our own credit risk
recognized in other comprehensive
income. Currently, two measurement
models exist for these features, fair
value and insurance accrual. The Update
requires the use of a standardized
discount rate and routine updates for
insurance assumptions used in valuing
the liability for future policy benefits for
traditional long-duration contracts. The
Update also simplifies the amortization
of deferred acquisition costs.
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.
We adopted the guidance in first quarter 2019. The adoption did not
impact existing hedges, but may impact new hedge relationships if we
designate the SOFR OIS rate as the designated hedged benchmark
interest rate for the Company’s fixed-rate financial instruments and
forecasted issuances or purchases of fixed-rate financial instruments.
The guidance becomes effective on January 1, 2021. Certain of our
variable annuity reinsurance products meet the definition of market risk
benefits and will be measured at fair value as of the earliest period
presented. The cumulative effect of changes attributable to the market
risk benefit of the liability’s instrument-specific credit risk (i.e., the
Company’s own credit risk) will be recognized in the beginning balance
of accumulated other comprehensive income. The cumulative effect of
the difference between fair value and carrying value, excluding the
effect of our own credit, will be recognized in the opening balance of
retained earnings. Changes to the liability for future policy benefits for
traditional long-duration contracts and deferred acquisition costs will be
applied to all outstanding contracts on the basis of their existing carrying
amounts at the beginning of the earliest period presented. The impact of
the Update on our consolidated financial statements is still being
evaluated.
We adopted the guidance in first quarter 2019 and recorded a
cumulative-effect adjustment as of January 1, 2019, that reduced
retained earnings by $592 million and increased other comprehensive
income by $481 million. The guidance impacted our investments in
purchased callable debt securities held at a premium classified as
available-for-sale (AFS) and held-to-maturity (HTM), which primarily
consist of obligations of U.S. states and political subdivisions. In future
periods, interest income recognized prior to the call date will be reduced
because the premium will be amortized over a shorter time period.
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Current Accounting Developments (continued)
Standard
Description
Effective date and financial statement impact
ASU 2016-13 – Financial
Instruments – Credit Losses
(Topic 326): Measurement of
Credit Losses on Financial
Instruments
The Update changes the accounting for
credit losses measurement on loans and
debt securities. For loans and held-to
maturity debt securities, the Update
requires a current expected credit loss
(CECL) measurement to estimate the
allowance for credit losses (ACL) for the
remaining estimated life of the financial
asset (including off-balance sheet credit
exposures) using historical experience,
current conditions, and reasonable and
supportable forecasts. 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.
We expect to adopt the guidance in first quarter 2020. Our
implementation process includes loss forecasting model development,
evaluation of technical accounting topics, updates to our allowance
documentation, reporting processes and related internal controls, and
overall operational readiness for our adoption of the Update, which will
continue throughout 2019, including parallel runs for CECL alongside our
current allowance process.
We are in the process of developing, validating, and implementing
models used to estimate credit losses under CECL. We have substantially
completed a significant majority of our loss forecasting models, and we
expect to complete the validation process for our loan models during
2019.
Our current planned approach for estimating expected life-time
credit losses for loans and debt securities includes the following key
components:
• An initial forecast period of one year for all portfolio segments and
classes of financing receivables and off-balance-sheet credit
exposures. This period reflects management’s expectation of losses
based on forward-looking economic scenarios over that time.
• A historical loss forecast period covering the remaining contractual
life, adjusted for prepayments, by portfolio segment and class of
financing receivables based on the change in key historic economic
variables during representative historical expansionary and
recessionary periods.
• A reversion period of up to 2 years connecting the initial loss
forecast to the historical loss forecast based on economic
conditions at the measurement date.
• We will utilize discounted cash flow (DCF) methods to measure
credit impairment for loans modified in a TDR, unless they are
collateral dependent and measured at the fair value of collateral.
The DCF methods would obtain estimated life-time credit losses
using the conceptual components described above.
For available-for-sale debt securities and certain beneficial interests
classified as held-to-maturity, we plan to utilize the DCF methods
to measure the ACL, which will incorporate expected credit losses
using the conceptual components described above.
•
We expect an overall increase in the ACL for loans, with an
expected increase for longer duration consumer portfolios and an
expected decrease for commercial loans given short contractual
maturities with conditional renewal options. The expected impact on our
ACL does not include the impact of the FASB’s recently proposed change
to consider recoveries of previously charged off loans or subsequent
increases in fair value of collateral for collateral dependent loans in the
ACL measurement. If finalized, the proposed changes would reduce the
expected change in our ACL. We continue to evaluate the results of our
modeled loss estimates and will continue to make refinements to our
approach, including evaluating an amount for imprecision or uncertainty,
based on management’s judgment of the risk inherent in the processes
and assumptions used in estimating the ACL.
We will recognize an ACL for held-to-maturity and available-for-sale
debt securities. The ACL on available-for-sale debt securities will be
subject to a limitation based on the fair value of the security. Based on
the credit quality of our existing debt securities portfolio, we do not
expect the ACL for held-to-maturity and available-for-sale debt
securities to be significant.
The amount of the change in our ACL will be impacted by our
portfolio composition and credit quality at the adoption date as well as
economic conditions and forecasts at that time. At adoption, we expect
to have a cumulative-effect adjustment to retained earnings for our
change in the ACL, which will impact our capital. Federal banking
regulatory agencies have agreed to limit the initial capital impact of the
Update by allowing a phased adoption over three years, on a straight-
line basis. An increase in our ACL will result in a reduction to our
regulatory capital amounts and ratios; however, at this point in
implementation, we are not able to provide a more precise estimate of
the impact.
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Standard
Description
Effective date and financial statement impact
ASU 2016-02 – Leases
(Topic 842) and subsequent
related Updates
The Update requires lessees to recognize
operating leases on the balance sheet
with lease liabilities and related right-of
use assets based on the present value of
future 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.
We adopted the guidance in first quarter 2019 and have elected not to
provide a comparative presentation for 2018 and 2017 financial
statements. At adoption, we recognized a cumulative effect adjustment
of approximately $100 million that increased retained earnings related
to deferred gains on our prior sale-leaseback transactions. Our operating
lease right-of-use assets and liabilities, for approximately 7,000 leases,
were $5 billion and $5.6 billion, respectively. There were no material
changes to the timing of expense recognition on these operating leases
or in the recognition and measurement of our lessor accounting. While
the increase to our consolidated total assets related to operating lease
right-of-use assets increases our risk-weighted assets and decreases our
capital ratios, we do not expect these changes to be material.
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 2018-17 – Consolidation (Topic 810): Targeted
Improvements to Related Party Guidance for Variable
Interest Entities
• ASU 2018-15 – Intangibles – Goodwill and Other –
Internal-Use Software (Subtopic 350-40): Customer’s
Accounting for Implementation Costs Incurred in a Cloud
Computing Arrangement That Is a Service Contract (a
consensus of the FASB Emerging Issues Task Force)
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, return on equity, and return on tangible
common 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
• ASU 2018-13 – Fair Value Measurement (Topic 820):
Disclosure Framework – Changes to the Disclosure
Requirements for Fair Value Measurement
• ASU 2018-09 – Codification Improvements
• ASU 2018-03 – Technical Corrections and Improvements to
Financial Instruments – Overall (Subtopic 825-10):
Financial Instruments – Overall
• ASU 2017-04 – Intangibles – Goodwill and Other (Topic
350): Simplifying the Test for Goodwill Impairment
changes in circumstances that are difficult to predict. Our actual
results may differ materially from those contemplated by the
forward-looking statements. We caution you, therefore, against
relying on any of these forward-looking statements. They are
neither statements of historical fact nor guarantees or
assurances of future performance. While there is no assurance
that any list of risks and uncertainties or risk factors is complete,
important factors that could cause actual results to differ
materially from those in the forward-looking statements include
the following, without limitation:
•
current and future economic and market conditions,
including the effects of declines in housing prices, high
unemployment rates, U.S. fiscal debt, budget and tax
matters, geopolitical matters, and any 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;
•
•
• developments in our mortgage banking business, including
the extent of the success of our mortgage loan modification
efforts, the amount of mortgage loan repurchase demands
that we receive, any negative effects relating to our
mortgage servicing, loan modification or foreclosure
practices, and the effects of regulatory or judicial
requirements or guidance impacting our mortgage banking
business and any changes in industry standards;
our ability to realize any efficiency ratio or expense 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
•
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Forward-Looking Statements (continued)
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 interest rate environment or
changes in interest rates on our net interest income, net
interest margin and our mortgage originations, mortgage
servicing rights and mortgage loans 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
debt securities and equity securities portfolios;
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;
•
•
•
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.
• negative effects from the retail banking sales practices
Any forward-looking statement made by us speaks only as of
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;
resolution of regulatory matters, litigation, or other legal
actions, which may result in, among other things, additional
costs, fines, penalties, restrictions on our business activities,
reputational harm, or other adverse consequences;
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.
•
•
•
•
•
Risk Factors
An investment in the Company involves risk, including the
possibility that the value of the investment could fall
substantially and that dividends or other distributions on the
investment could be reduced or eliminated. We discuss below
risk factors that could adversely affect our financial results and
condition, and the value of, and return on, an investment in the
Company.
RISKS RELATED TO THE ECONOMY, FINANCIAL
MARKETS, INTEREST RATES AND LIQUIDITY
As one of the largest lenders in the U.S. and a provider
of financial products and services to consumers and
businesses across the U.S. and internationally, our
financial results have been, and will continue to be,
materially affected by general economic conditions,
and a deterioration in economic conditions or in the
financial markets may materially adversely affect our
lending and other businesses and our financial results
and condition. We generate revenue from the interest and
fees we charge on the loans and other products and services we
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.
Forward-looking Non-GAAP Financial Measures. From time
to time management may discuss forward-looking non-GAAP
financial measures, such as forward-looking estimates or
targets for return on average tangible common equity. We
are unable to provide a reconciliation of forward-looking
non-GAAP financial measures to their most directly
comparable GAAP financial measures because we are unable
to provide, without unreasonable effort, a meaningful or
accurate calculation or estimation of amounts that would be
necessary for the reconciliation due to the complexity and
inherent difficulty in forecasting and quantifying future
amounts or when they may occur. Such unavailable
information could be significant to future results.
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. 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 at times 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 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, restrictions on international
trade, 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, including
the terms of its exit, could increase economic barriers between
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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. For example, certain operations of our
broker-dealer in London may be impacted by the terms and
conditions of Britain’s withdrawal. Although we are transitioning
certain of these operations to other European countries, there is
no guarantee that we will be able to operate or conduct business
in the European Union in the same manner following Britain’s
withdrawal. 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
2018, 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. In addition, adverse market conditions
may negatively affect the performance of products we have
provided to customers, which may expose us to legal actions or
additional costs. The U.S. stock market experienced all-time
highs in 2018, but also experienced significant volatility and
there is no guarantee that high price levels will continue or that
price levels will stabilize. 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 activities 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 on the debt and equity
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 debt and equity 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 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.
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.
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Risk Factors (continued)
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, or ceases to be
recognized as an acceptable market benchmark rate or financial
metric (for example, if LIBOR is discontinued after 2021 as
contemplated by the U.K. Financial Conduct Authority), 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, require renegotiation of previously
booked transactions, or affect our capital and liquidity planning
and management. In addition, the transition to using any new
benchmark rate or other financial metric may impact our
existing transaction data, products, systems, models, operations
and pricing processes, and could result in significant
operational, systems, or other practical challenges, increased
compliance, legal and operational costs, losses on financial
instruments we hold, or other adverse consequences.
Furthermore, the transition from a widely-used benchmark rate
like LIBOR to any new benchmark rate could have a significant
impact on the overall interest rate environment and could result
in customers challenging the determination of their interest
payments or entering into fewer transactions or postponing their
financing needs, which could reduce our revenue and adversely
affect our business. Moreover, to the extent borrowers with loans
referenced to LIBOR, such as adjustable rate mortgage loans,
experience higher interest payments as a result of the transition
to a new benchmark rate, our customers’ ability to repay their
loans may be adversely affected, which can negatively impact our
credit performance.
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 portfolios of debt securities, equity securities and
loans, refinance our debt and take other strategic actions. We
may incur losses when we take such actions.
We hold debt and equity securities, 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. Because of changing
economic and market conditions, as well as credit ratings,
affecting issuers and the performance of any collateral
underlying the securities, we may be required to recognize OTTI
in future periods on the securities we hold. In particular,
economic difficulties in the oil and gas industry resulting from
volatile or prolonged low energy 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 debt securities we hold can fluctuate due to changes in
interest rates, issuer creditworthiness, and other factors. 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.
Trading debt securities and equity securities held for trading 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 debt and equity
securities that are subject to market fluctuations with gains and
losses recognized in net income. 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 marketable and nonmarketable equity
securities can fluctuate from quarter to quarter. Marketable
equity securities are carried at fair value with unrealized gains
and losses reflected in earnings. Nonmarketable equity securities
are carried under the cost method, equity method, or
measurement alternative, while others are carried at fair value
with unrealized gains and losses reflected in earnings. Earnings
from our equity securities portfolio 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.
Nonmarketable equity securities include our private equity
and venture capital investments that could result in significant
OTTI losses for those investments carried under the
measurement alternative or equity method. If we determine
there is OTTI for an investment, we write-down the carrying
value of the investment, resulting in a charge to earnings, which
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 Securities” and
the “Balance Sheet Analysis – Available-for-Sale and Held-to-
Maturity Debt Securities” sections in this Report and Note 4
(Trading Activities), Note 5 (Available-for-Sale and Held-to-
Maturity Debt Securities) and Note 8 (Equity Securities) to
Financial Statements in this Report.
Effective liquidity management, which ensures that we
can meet customer loan requests, customer deposit
maturities/withdrawals and other cash commitments,
including principal and interest payments on our debt,
efficiently under both normal operating conditions and
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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 sizable source of relatively stable and low-cost
funds. In addition to customer deposits, our sources of liquidity
include certain debt and equity securities, 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 improved 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
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 17 (Derivatives) to Financial
Statements in this Report.
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Risk Factors (continued)
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 2018 Form 10-K and to Note 3 (Cash,
Loan and Dividend Restrictions) and Note 28 (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. Our businesses and revenues
in non-U.S. jurisdictions are also subject to risks from political,
economic and social developments in those jurisdictions,
including sanctions or business restrictions, asset freezes or
confiscation, unfavorable political or diplomatic developments,
or financial or social instability. 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, either in the U.S. or in
foreign jurisdictions, 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. The CFPB’s activities may
increase our compliance costs and require changes in our
business practices as a result of regulations and requirements
which could limit or negatively affect the products and services
that we 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. The FRB has proposed further rules to
streamline and modify compliance with the Volcker Rule’s
requirements. 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
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initial and variation margin requirements for swaps and
security-based swaps not centrally cleared, rules placing
restrictions on a party’s right to exercise default rights under
derivatives and other qualified financial contracts against
applicable banking organizations, and record-keeping
requirements for qualified financial contracts. 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, impact our ability to offer customers
new derivatives or amendments to existing derivatives, and may
increase our costs for engaging in swaps, security-based swaps,
and other derivatives activities.
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 2018, the SEC proposed a rule that would require
broker-dealers to act in the best interest of a retail customer
when making a recommendation of any securities transaction or
investment strategy involving securities. This rule may impact
the manner in which business is conducted with customers
seeking investment advice and may affect certain investment
product offerings.
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. As required by the consent order, the Board
submitted to the FRB a plan to further enhance the Board’s
governance and oversight of the Company, and the Company
submitted to the FRB a plan to further improve the Company’s
compliance and operational risk management program. The
consent order requires the Company, following the FRB’s
acceptance and approval of the plans and the Company’s
adoption and implementation of the plans, to complete third-
party reviews of the enhancements and improvements provided
for in the plans. 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.
Additionally, after removal of the asset cap, a second third-party
review must also be conducted to assess the efficacy and
sustainability of the enhancements and improvements.
On April 20, 2018, the Company entered into consent
orders with the CFPB and OCC to pay an aggregate of $1 billion
in civil money penalties to resolve matters regarding the
Company’s compliance risk management program and past
practices involving certain automobile collateral protection
insurance policies and certain mortgage interest rate lock
extensions. As required by the consent orders, the Company
submitted to the CFPB and OCC an enterprise-wide compliance
risk management plan and a plan to enhance the Company’s
internal audit program with respect to federal consumer
financial law and the terms of the consent orders. In addition, as
required by the consent orders, the Company submitted for non-
objection plans to remediate customers affected by the
automobile collateral protection insurance and mortgage
interest rate lock matters, as well as a plan for the management
of remediation activities conducted by the Company.
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. Compliance with the FRB
consent order, the CFPB and OCC consent orders, and any other
consent orders or regulatory actions, as well as the
implementation of their requirements, may increase the
Company’s costs and require the Company to undergo
significant changes to its business, products and services.
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,
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Risk Factors (continued)
improving underwriting standards, and increasing
accountability and transparency in the securitization process.
Congress also may consider the adoption of legislation to reform
the mortgage financing market in an effort to assist borrowers
experiencing difficulty in making mortgage payments or
refinancing their mortgages. The extent and timing of any
regulatory reform or the adoption of any legislation regarding
the GSEs and/or the home mortgage market, as well as any
effect on the Company’s business and financial results, are
uncertain.
Any other future legislation and/or regulation, if adopted,
also could significantly change our regulatory environment and
increase our cost of doing business, limit the activities we may
pursue or affect the competitive balance among banks, savings
associations, credit unions, and other financial services
companies, and have a material adverse effect on our financial
results and condition.
For more information, refer to the “Regulatory Matters”
section in this Report and the “Regulation and Supervision”
section in our 2018 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
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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.
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
2017 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
•
•
•
•
127
•
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. Beginning January 1, 2018, the requirements
for calculating CET1 and tier 1 capital, along with RWAs, became
fully phased-in. However, the requirements for calculating tier 2
and total capital are still in accordance with Transition
Requirements. The entire Basel III capital rules are scheduled to
be fully phased in by the end of 2021.
On April 10, 2018, the FRB issued a proposed rule that
would add a stress capital buffer and a stress leverage buffer to
the minimum capital and tier 1 leverage ratio requirements. The
buffers would be calculated based on the decrease in a financial
institution’s risk-based capital and tier 1 leverage ratios under
the supervisory severely adverse scenario in CCAR, plus four
quarters of planned common stock dividends. The stress capital
buffer would replace the 2.5% capital conservation buffer under
the Standardized Approach, whereas the stress leverage buffer
would be added to the current 4% minimum tier 1 leverage ratio.
Because the Company has been designated as a G-SIB, we
are also 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 became fully effective on January 1, 2019.
Based on year-end 2017 data, our 2019 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 years.
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 April 2018, the FRB and OCC proposed
rules (the “Proposed SLR Rules”) that would replace the 2%
supplementary leverage buffer with a buffer equal to one-half of
the firm’s G-SIB capital surcharge. The Proposed SLR Rules
would similarly tailor the current 6% SLR requirement for our
insured depository institutions.
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 became effective on January 1, 2019, U.S. G-SIBs
are 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 are required to maintain (i) a TLAC
Wells Fargo & Company
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Risk Factors (continued)
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 to be added
to the 18% minimum and (ii) an external TLAC leverage buffer
equal to 2.0% of total leverage exposure to be added to the 7.5%
minimum, in order to avoid restrictions on capital distributions
and discretionary bonus payments. The rules 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 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. Under the
Proposed SLR Rules, the 2% external TLAC leverage buffer
would be replaced with a buffer equal to one-half of the firm’s G
SIB capital surcharge. Additionally, the Proposed SLR Rules
would modify the leverage component for calculating the
minimum amount of eligible unsecured long-term debt from
4.5% of total leverage exposure to 2.5% of total leverage
exposure plus one-half of the firm’s G-SIB capital surcharge.
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 finalized
enhanced prudential standards that implement single
counterparty credit limits, and has proposed a rule to 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 2018 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 has stated that in
determining the timing and size of any 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 debt 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 or changes in market 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
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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, changes in consumer
behavior or other market conditions that adversely affect
borrowers, 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 $1.0 billion less than net
charge-offs in 2018, which had a positive effect on our earnings.
Future allowance levels may increase or decrease based on a
variety of factors, including loan growth, portfolio performance
and general economic conditions. While we believe that our
allowance for credit losses was appropriate at December 31,
2018, there is no assurance that it will be sufficient to cover
future credit losses, especially if housing and employment
conditions worsen. In the event of significant deterioration in
economic conditions or if we experience significant loan growth,
we may be required to build reserves in future periods, which
would reduce our earnings.
For more information, refer to the “Risk Management –
Credit Risk Management” and “Critical Accounting Policies –
Allowance for Credit Losses” sections in this Report.
We may have more credit risk and higher credit losses
to the extent our loans are concentrated by loan type,
industry segment, borrower type, or location of the
borrower or collateral. Our credit risk and credit losses can
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, or trade policies, 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 or our
consumer Pick-a-Pay loans reach their recast trigger.
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, declines in commercial property
values, and/or changes in consumer behavior or other market
conditions, 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 8% of our total consolidated
outstanding loans and 4% of our total assets at December 31,
2018. 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.
In order to reduce credit risk and obtain additional funding,
from time to time we may securitize or sell similar types or
categories of loans that we originate, such as mortgage loans and
automobile loans. The agreements under which we do this
generally contain various representations and warranties
regarding the origination and characteristics of the loans. We
may be required to repurchase the loans, reimburse investors
and others, or incur other losses, including regulatory fines and
penalties, as a result of any breaches in these contractual
representations and warranties. For more information about our
repurchase obligations with respect to mortgage loans, refer to
the “Risk Factors – Risks Related to Our Mortgage Business”
section in this Report.
For more information regarding credit risk, refer to the
“Risk Management – Credit Risk Management” section and Note
6 (Loans and Allowance for Credit Losses) to Financial
Statements in this Report.
We may incur losses on loans, securities and other
acquired assets of Wachovia that are materially greater
than reflected in our fair value adjustments. We
accounted for the Wachovia merger under the purchase method
of accounting, recording the acquired assets and liabilities of
Wachovia at fair value. All PCI loans acquired in the merger were
recorded at fair value based on the present value of their
expected cash flows. We estimated cash flows using internal
credit, interest rate and prepayment risk models using
assumptions about matters that are inherently uncertain. We
may not realize the estimated cash flows or fair value of these
loans. In addition, although the difference between the pre
merger carrying value of the credit-impaired loans and their
expected cash flows – the “nonaccretable difference” – is
available to absorb future charge-offs, we may be required to
increase our allowance for credit losses and related provision
expense because of subsequent additional credit deterioration in
these loans.
For more information, refer to the “Risk Management –
Credit Risk Management” section 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, could
disrupt our businesses, damage our reputation,
increase our costs and cause losses. As a large financial
institution that serves customers through numerous
physical locations, 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, as we have increasingly used the internet
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Risk Factors (continued)
and mobile banking to provide products and services to our
customers, 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, website or mobile banking
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 or other information security breaches.
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 and controls, 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.
For example, on February 7, 2019, we experienced system issues
caused by an automatic power shutdown at one of our main data
center facilities, which was triggered by a smoke alarm that
resulted from a steam condition created by routine maintenance
activities in the building. Although applications and related
workloads were systematically re-routed to back-up data centers
throughout the day, certain of our services experienced
disruptions that delayed service to our customers. For instance,
our online and mobile banking systems and certain ATM
functions experienced disruptions for several hours, and certain
critical mortgage origination systems experienced disruptions
for several days.
As a result of financial institutions and technology systems
becoming more interconnected and complex, any operational
incident at a third party may increase the risk of loss or material
impact to us or the financial industry as a whole. Furthermore,
third parties on which we rely, including those that facilitate our
business activities or to which we outsource operations, such as
exchanges, clearing houses, financial intermediaries or vendors
that provide services or security solutions for our operations,
could also be sources of operational risk to us, including from
information breaches or loss, breakdowns, disruptions or
failures of their own systems or infrastructure, or any
deficiencies in the performance of their responsibilities. We are
also exposed to the risk that a disruption or other operational
incident at a common service provider to those third parties
could impede their ability to provide services or perform their
responsibilities for us. In addition, we must meet regulatory
requirements and expectations regarding our use of third-party
service providers, and any failure by our third-party service
providers to meet their obligations to us or to comply with
applicable laws, rules, regulations, or Wells Fargo policies could
result in fines, penalties, restrictions on our business, or other
negative consequences.
Disruptions or failures in the physical infrastructure,
controls or operating systems that support our businesses and
customers, failures of the third parties on which we rely to
adequately or appropriately provide their services or perform
their responsibilities, or our failure to effectively manage or
oversee our third-party relationships, could result in business
disruptions, loss of revenue or customers, legal or regulatory
proceedings, compliance and other costs, violations of applicable
privacy and other laws, reputational damage, or other adverse
consequences, any of which could materially adversely affect our
results of operations or financial condition.
A cyber attack or other information security breach of
our technologies, computer systems or networks, or
those of our third-party vendors and other service
providers, could disrupt our businesses, result in the
disclosure or misuse of confidential or proprietary
information, damage our reputation, increase our costs
and cause losses. 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, mobile devices, and
cloud technologies to conduct financial transactions, and the
increased sophistication and activities of organized crime,
hackers, terrorists, activists, and other external parties,
including foreign state-sponsored parties. Those parties also
may attempt to 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,
tablets, 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 other 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. We are
also exposed to the risk that a team member or other person
acting on behalf of the Company fails to comply with applicable
policies and procedures and inappropriately circumvents
controls for personal gain or other improper purposes.
Due to the increasing interconnectedness and complexity of
financial institutions and technology systems, an 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. In
addition, third parties on which we rely, including those that
facilitate our business activities or to which we outsource
operations, such as internet, mobile technology and cloud
service providers, could be sources of information security risk
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to us. If those third parties fail to adequately or appropriately
safeguard their technologies, systems, and networks, we may
suffer material harm, including business disruptions, losses or
remediation costs, 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 digital 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, commit fraud, or obtain confidential,
proprietary or other information. Cyber attacks have also
focused on targeting online applications and services, such as
online banking, as well as cloud-based services provided by third
parties, and have targeted the infrastructure of the internet,
causing the widespread unavailability of websites and degrading
website performance. As a result, information security 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 and other
information security threats. As these 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. Because the investigation of any
information security breach is inherently unpredictable and
would require time to complete, we may not be able to
immediately address the consequences of a breach, which may
further increase any associated costs and consequences.
Moreover, to the extent our insurance covers aspects of
information security risk, such insurance may not be sufficient to
cover all losses associated with an information security breach.
Cyber attacks or other information security breaches
affecting us or third parties on which we rely, including those
that facilitate our business activities or to which we outsource
operations, or security breaches of the networks, systems or
devices that our customers use to access our products and
services, could result in business disruptions, loss of revenue or
customers, legal or regulatory proceedings, compliance and
other costs, violations of applicable privacy and other laws,
reputational damage, or other adverse consequences, 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, including the
inability to align performance management and compensation to
achieve the desired culture, 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 or sufficiently
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, including our
aggregation, management, and validation procedures, could
result in ineffective risk management practices, business
decisions or customer service, inefficient use of resources, or
inaccurate regulatory or other risk reporting. We also use
artificial intelligence to help further inform our business
decisions and risk management practices, but there is no
assurance that artificial intelligence will appropriately or
sufficiently replicate certain outcomes or accurately predict
future events or exposures. The recent financial and credit crisis
and resulting regulatory reform highlighted both the importance
and some of the limitations of managing unanticipated risks, and
our regulators remain focused on ensuring that financial
institutions build and maintain robust risk management policies
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 CFPB, 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
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Risk Factors (continued)
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,
we have identified certain issues related to historical practices
concerning the origination, servicing, and/or collection of
consumer automobile loans, including matters related to certain
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 – Retail Sales
Practices Matters” and “– Additional Efforts to Rebuild Trust”
sections and Note 16 (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. We are also subject to
consent orders with regulators that subject us to various
conditions and restrictions. 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, including any failure to satisfy the
conditions of any consent orders, 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. Negative public opinion about the financial services
industry generally or Wells Fargo specifically could adversely
affect our ability to keep and attract customers. Negative public
opinion could result from our actual or alleged conduct in any
number of activities, including sales practices; mortgage,
automobile or other consumer lending practices; loan
origination or servicing activities; mortgage foreclosure actions;
management of client accounts or investments; lending,
investing or other business relationships; identification and
management of potential conflicts of interest from transactions,
obligations and interests with and among our customers;
corporate governance; regulatory compliance; risk management;
incentive compensation practices; and disclosure, sharing or
inadequate protection or improper use 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. Moreover,
actions by the financial services industry generally or by certain
members or individuals in the industry also can adversely affect
our reputation. 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,
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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. Wells Fargo and other
financial institutions have also been subject to negative publicity
as a result of providing financial services to or making
investments in industries or organizations subject to stakeholder
concerns. 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 16 (Legal Actions) to
Financial Statements 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, MLHFS 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 are
one of the largest mortgage originators and residential mortgage
servicers in the U.S., 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 sizable
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 MLHFS 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 MLHFS 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 MLHFS and other interests, their fair value
may fall.
When rates rise, the demand for mortgage loans usually
tends to fall, reducing the revenue we receive from loan
originations. Under the same conditions, revenue from our
MSRs can increase through increases in fair value. When rates
fall, mortgage originations usually tend to increase and the value
of our MSRs usually tends to decline, also with some offsetting
revenue effect. Even though they can act as a “natural hedge,”
the hedge is not perfect, either in amount or timing. For
example, the negative effect on revenue from a decrease in the
fair value of residential MSRs is generally immediate, but any
offsetting revenue benefit from more originations and the MSRs
relating to the new loans would generally accrue over time. It is
also possible that, because of economic conditions and/or a weak
or deteriorating housing market, even if interest rates were to
fall or remain low, mortgage originations may also fall or any
increase in mortgage originations may not be enough to offset
the decrease in the MSRs value caused by the lower rates.
We typically use derivatives and other instruments to hedge
our mortgage banking interest rate risk. We may not hedge all of
our risk, and we may not be successful in hedging any of the risk.
Hedging is a complex process, requiring sophisticated models
and constant monitoring, and is not a perfect science. We may
use hedging instruments tied to U.S. Treasury rates, LIBOR or
Eurodollars that may not perfectly correlate with the value or
income being hedged. We could incur significant losses from our
hedging activities. There may be periods where we elect not to
use derivatives and other instruments to hedge mortgage
banking interest rate risk.
We rely on GSEs to purchase mortgage loans that meet their
conforming loan requirements and on 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
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133
Risk Factors (continued)
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. 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, requires considerable management
judgment, and is 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
loan, or incur costs, liabilities, fines and other
sanctions if we fail to satisfy our servicing obligations,
including our obligations with respect to mortgage loan
foreclosure actions. We act as servicer and/or master
servicer for mortgage loans included in securitizations and for
unsecuritized mortgage loans owned by investors. As a servicer
or master servicer for those loans we have certain contractual
obligations to the securitization trusts, investors or other third
parties, including, in our capacity as a servicer, foreclosing on
defaulted mortgage loans or, to the extent consistent with the
applicable securitization or other investor agreement,
considering alternatives to foreclosure such as loan
modifications or short sales and, in our capacity as a master
servicer, overseeing the servicing of mortgage loans by the
servicer. 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. In some cases, if we do not
satisfy our servicing obligations, we may be contractually
obligated to repurchase a mortgage loan or reimburse the
investor for credit losses, which could significantly reduce our
net servicing income.
We may incur costs, liabilities to borrowers, title insurers
and/or securitization investors, legal proceedings, or other
adverse consequences if we fail to meet our obligations with
respect to mortgage foreclosure actions or we experience delays
in the foreclosure process. 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
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Wells Fargo & Company
134
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 15
(Guarantees, Pledged Assets and Collateral, and Other
Commitments) and Note 16 (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 current
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. In addition, technological advances,
including digital currencies, may diminish the importance of
depository institutions and other financial intermediaries in the
transfer of funds between parties. 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
highly qualified team members, we must provide competitive
compensation and effectively manage team member
performance and development. 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.
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Wells Fargo & Company
135
Risk Factors (continued)
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.
and face intense competition for customers, sources of revenue,
capital, services, qualified team members, and other essential
business resources. In order to meet these challenges, we may
undertake business plans or strategies related to, among other
things, our organizational structure and risk management
framework, our expenses and efficiency, the types of products
and services we offer, the geographies in which we operate, the
manner in which we serve our clients and customers, the third
parties with which we do business, and the methods and
distribution channels by which we offer our products and
services. Accomplishing these business plans or strategies may
be complex, time intensive, and require significant financial,
technological, management and other resources, and there is no
guarantee that any business plans or strategies will ultimately be
successful. To the extent we are unable to develop or execute
effective business plans or strategies, our competitive position,
reputation, prospects for growth, and results of operations may
be adversely affected.
Certain of our financial instruments, including derivative
In addition, we regularly explore opportunities to expand
assets and liabilities, debt 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. In addition, our
customers may rely on the effectiveness of our internal controls
as a service provider, and any deficiency in those controls could
affect our customers and damage our reputation or business.
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 STRATEGIC DECISIONS
If we are unable to develop and execute effective
business plans or strategies, our competitive standing
and results of operations could suffer. We are subject to
rapid changes in technology, regulation, and product innovation,
our products, services, and assets through strategic acquisitions
of 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. 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 earnings per share if we issue
common stock in connection with the acquisition. Furthermore,
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. 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 2019 for material
changes to the above discussion of risk factors. There are factors
not discussed above or elsewhere in this Report that could
adversely affect our financial results and condition.
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Wells Fargo & Company
136
Controls and Procedures
Disclosure Controls and Procedures
The Company’s management evaluated the effectiveness, as of December 31, 2018, 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, 2018.
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
2018 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, 2018,
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, 2018, 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.
137
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,
2018, 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, 2018, 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, 2018 and 2017, 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, 2018, and
the related notes (collectively, the consolidated financial statements), and our report dated February 27, 2019 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
February 27, 2019
138
Wells Fargo & Company
138
Financial Statements
Wells Fargo & Company and Subsidiaries
Consolidated Statement of Income
(in millions, except per share amounts)
Interest income
Debt securities (1)
Mortgage loans held for sale
Loans held for sale (1)
Loans
Equity securities (1)
Other interest income (1)
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 (1)
Net gains on debt securities (2)
Net gains from equity securities (1)(3)
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
Average common shares outstanding
Diluted average common shares outstanding
Year ended December 31,
2018
2017
2016
$
14,406
12,946
11,244
777
140
786
50
784
38
43,974
41,388
39,505
992
4,358
799
2,940
635
1,457
64,647
58,909
53,663
5,622
1,717
6,703
610
14,652
49,995
1,744
48,251
4,716
14,509
3,907
3,384
3,017
429
602
108
1,515
1,753
2,473
3,013
758
5,157
424
9,352
49,557
2,528
47,029
1,395
330
3,830
354
5,909
47,754
3,770
43,984
5,111
14,495
5,372
14,243
3,960
3,557
4,350
1,049
542
479
1,779
1,907
1,603
3,936
3,727
6,096
1,268
610
942
1,103
1,927
1,289
36,413
38,832
40,513
17,834
10,264
4,926
2,444
2,888
1,058
1,110
15,602
56,126
28,538
5,662
22,876
483
$
22,393
1,704
$
20,689
$
4.31
4.28
4,799.7
4,838.4
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
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
4.14
4.10
4,964.6
5,017.3
4.03
3.99
5,052.8
5,108.3
(1) Financial information for the prior periods has been revised to reflect presentation changes made in connection with our adoption in first quarter 2018 of Accounting
Standards Update (ASU) 2016-01 – Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. See
Note 1 (Summary of Significant Accounting Policies) for more information.
(2) Total other-than-temporary impairment (OTTI) losses were $17 million, $205 million and $207 million for the years ended December 31, 2018, 2017 and 2016,
respectively. Of total OTTI, losses of $28 million, $262 million and $189 million were recognized in earnings, and losses (reversal of losses) of $(11) million, $(57) million
and $18 million were recognized as non-credit-related OTTI in other comprehensive income for the years ended December 31, 2018, 2017 and 2016, respectively.
(3) Includes OTTI losses of $352 million, $344 million and $453 million for the years ended December 31, 2018, 2017 and 2016, respectively.
The accompanying notes are an integral part of these statements.
139
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:
Debt securities (1):
Net unrealized gains (losses) arising during the period
Reclassification of net (gains) losses to net income
Derivatives and hedging activities:
Net unrealized gains (losses) arising during the period
Reclassification of net (gains) losses 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
Other comprehensive income (loss), before tax
Income tax benefit (expense) related to other comprehensive income
Other comprehensive income (loss), net of tax
Less: Other comprehensive 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
Year ended December 31,
2018
2017
2016
$
22,393
22,183
21,938
(4,493)
248
2,719
(737)
(532)
294
(434)
253
(156)
(4,820)
1,144
(3,676)
(2)
(3,674)
(540)
(543)
49
153
96
1,197
(434)
763
(62)
825
(3,458)
(1,240)
177
(1,029)
(52)
158
(3)
(5,447)
1,996
(3,451)
(17)
(3,434)
18,719
23,008
18,504
481
215
90
$
19,200
23,223
18,594
(1) The year ended December 31, 2017, and December 31, 2016, includes net unrealized gains (losses) arising during the period from equity securities of $81 million and
$259 million and reclassification of net (gains) losses to net income related to equity securities of $(456) million and $(300) million, respectively. In connection with our
adoption in first quarter 2018 of ASU 2016-01, the year ended December 31, 2018, reflects net unrealized gains (losses) arising during the period and reclassification of
net (gains) losses to net income from only debt securities.
The accompanying notes are an integral part of these statements.
140
Wells Fargo & Company
140
Wells Fargo & Company and Subsidiaries
Consolidated Balance Sheet
(in millions, except shares)
Assets
Cash and due from banks
Interest-earning deposits with banks (1)
Total cash, cash equivalents, and restricted cash (1)
Federal funds sold and securities purchased under resale agreements (1)
Debt securities:
Trading, at fair value (2)
Available-for-sale, at fair value (2)
Held-to-maturity, at cost (fair value $142,115 and $138,985)
Mortgage loans held for sale (includes $11,771 and $16,116 carried at fair value) (3)
Loans held for sale (includes $1,469 and $1,023 carried at fair value) (2)(3)
Loans (includes $244 and $376 carried at fair value) (3)
Allowance for loan losses
Net loans
Mortgage servicing rights:
Measured at fair value
Amortized
Premises and equipment, net
Goodwill
Derivative assets
Equity securities (includes $29,556 and $39,227 carried at fair value) (2)(3)
Other assets (2)
Total assets (4)
Liabilities
Noninterest-bearing deposits
Interest-bearing deposits
Total deposits
Short-term borrowings
Derivative liabilities
Accrued expenses and other liabilities
Long-term debt
Total liabilities (5)
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 – 900,557,866 shares and 590,194,846 shares
Unearned ESOP shares
Total Wells Fargo stockholders’ equity
Noncontrolling interests
Total equity
Total liabilities and equity
Dec 31,
2018
$
23,551
149,736
173,287
80,207
69,989
269,912
144,788
15,126
2,041
953,110
(9,775)
943,335
14,649
1,443
8,920
26,418
10,770
55,148
79,850
Dec 31,
2017
23,367
192,580
215,947
80,025
57,624
276,407
139,335
20,070
1,131
956,770
(11,004)
945,766
13,625
1,424
8,847
26,587
12,228
62,497
90,244
$
1,895,883
1,951,757
$
349,534
936,636
373,722
962,269
1,286,170
1,335,991
105,787
8,499
69,317
229,044
103,256
8,796
70,615
225,020
1,698,817
1,743,678
23,214
9,136
60,685
158,163
(6,336)
(47,194)
(1,502)
196,166
900
197,066
25,358
9,136
60,893
145,263
(2,144)
(29,892)
(1,678)
206,936
1,143
208,079
$
1,895,883
1,951,757
(1) Financial information has been revised to reflect the impact of our adoption in first quarter 2018 of ASU 2016-18 – Statement of Cash Flows (Topic 230): Restricted Cash in
which we changed the presentation of our cash and cash equivalents to include both cash and due from banks as well as interest-earning deposits with banks, which are
inclusive of any restricted cash. See Note 1 (Summary of Significant Accounting Policies) for more information.
(2) Financial information for the prior period has been revised to reflect presentation changes in connection with our adoption in first quarter 2018 of ASU 2016-01 – Financial
Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. See Note 1 (Summary of Significant Accounting
Policies) for more information.
(3) Parenthetical amounts represent assets and liabilities that we are required to carry at fair value or have elected the fair value option.
(4) Our consolidated assets at December 31, 2018 and 2017, 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, $139 million and $116 million; Interest-bearing deposits with banks, $8 million and $371 million; Debt securities, $45 million and
$0 million; Net loans, $13.6 billion and $12.5 billion; Derivative assets, $0 million and $0 million; Equity securities, $85 million and $306 million; Other assets, $221 million
and $342 million; and Total assets, $14.1 billion and $13.6 billion, respectively.
(5) Our consolidated liabilities at December 31, 2018 and 2017, include the following VIE liabilities for which the VIE creditors do not have recourse to Wells Fargo: Derivative
liabilities, $0 million and $5 million; Accrued expenses and other liabilities, $191 million and $132 million; Long-term debt, $816 million and $1.5 billion; and Total
liabilities, $1.0 billion and $1.6 billion, respectively.
The accompanying notes are an integral part of these statements.
141
Wells Fargo & Company
141
Wells Fargo & Company and Subsidiaries
Consolidated Statement of Changes in Equity
(in millions, except shares)
Balance December 31, 2015
Cumulative effect from change in consolidation accounting (1)
Balance January 1, 2016
Net income
Other comprehensive income (loss), net of tax
Noncontrolling interests
Common stock issued
Common stock repurchased (2)
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
Cumulative effect from change in hedge accounting (3)
Balance January 1, 2017
Net income
Other comprehensive income (loss), net of tax
Noncontrolling interests
Common stock issued
Common stock repurchased (2)
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 (4)
Stock incentive compensation expense
Net change in deferred compensation and related plans
Net change
Balance December 31, 2017
Preferred stock
Common stock
Shares
Amount
Shares
Amount
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
11,532,712
24,551
5,016,109,326
9,136
57,257,564
(196,519,707)
950,000
950
(833,077)
(833)
14,769,445
27,600
690
144,523
807
(124,492,698)
—
11,677,235 $
25,358
4,891,616,628 $
9,136
(1) 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.
(2) 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.
(3) Effective January 1, 2017, we adopted changes in hedge accounting pursuant to ASU 2017-12 – Derivatives and Hedging (Topic 815): Targeted Improvements to
Accounting for Hedging Activities.
(4) 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.
(continued on following pages)
142
Wells Fargo & Company
142
Retained
earnings
120,866
120,866
21,938
(451)
(7,712)
(1,566)
12,209
133,075
(381)
132,694
22,183
(277)
(7,708)
(1,629)
Additional
paid-in
capital
60,714
60,714
2
(203)
(250)
99
(83)
(11)
(17)
(49)
51
277
779
(1,075)
(480)
60,234
60,234
—
(133)
750
31
(35)
97
(133)
(13)
50
—
875
(830)
659
60,893
Wells Fargo stockholders’ equity
Cumulative
other
comprehensive
income (loss)
Treasury
stock
Unearned
ESOP
shares
Total
Wells Fargo
stockholders’
equity
297
(18,867)
(1,362)
192,998
Noncontrolling
interests
893
121
Total
equity
193,891
121
297
(18,867)
(1,362)
192,998
1,014
194,012
(3,434)
3,040
(7,866)
974
(1,249)
1,046
6
(3,846)
(22,713)
(203)
(1,565)
(3,434)
(3,137)
168
(2,969)
(22,713)
(1,565)
825
2,758
(10,658)
736
(981)
868
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
(213)
199,368
22,183
825
—
2,348
(9,908)
—
833
—
(133)
677
(7,658)
(1,629)
—
875
(845)
7,568
206,936
107
(17)
(188)
(98)
916
916
277
(62)
12
227
1,143
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
(213)
200,284
22,460
763
12
2,348
(9,908)
—
833
—
(133)
677
(7,658)
(1,629)
—
875
(845)
7,795
208,079
12,569
145,263
825
(2,144)
(15)
(7,179)
(29,892)
(113)
(1,678)
143
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, 2017
Cumulative effect from change in accounting policies (1)
Preferred stock
Common stock
Shares
Amount
Shares
Amount
11,677,235 $
25,358
4,891,616,628 $
9,136
Balance January 1, 2018
11,677,235
25,358
4,891,616,628
9,136
Adoption of accounting standard related to certain tax effects
stranded in accumulated other comprehensive income (loss)(2)
Net income
Other comprehensive income (loss), net of tax
Noncontrolling interests
Common stock issued
Common stock repurchased
Preferred stock redeemed (3)
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
Stock incentive compensation expense
Net change in deferred compensation and related plans
Net change
Balance December 31, 2018
41,082,047
(375,477,998)
(2,150,375)
1,100,000
(1,995)
1,100
(1,249,644)
(1,249)
24,032,931
—
—
(2,300,019)
(2,144)
(310,363,020)
—
9,377,216 $
23,214
4,581,253,608 $
9,136
(1) Effective January 1, 2018, we adopted ASU 2016-04 – Liabilities – Extinguishments of Liabilities (Subtopic 405-20): Recognition of Breakage for Certain Prepaid Stored-
Value Products, ASU 2016-01 – Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, and ASU
2014-09 – Revenue from Contracts With Customers (Topic 606) and subsequent related Updates. See Note 1 (Summary of Significant Accounting Policies) in this Report for
more information.
(2) Represents the reclassification from other comprehensive income to retained earnings as a result of our adoption of ASU 2018-02 – Reclassification of Certain Tax Effects
from Accumulated Other Comprehensive Income, in the third quarter of 2018. For additional information, see Note 1.
(3) Represents the impact of the redemption of preferred stock, series J, in third quarter 2018.
The accompanying notes are an integral part of these statements.
144
Wells Fargo & Company
144
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
60,893
145,263
(2,144)
(29,892)
(1,678)
206,936
1,143
208,079
60,893
145,357
(2,262)
(29,892)
(1,678)
206,912
1,143
208,055
94
(118)
(24)
(24)
(400)
(3,674)
400
22,393
(321)
(155)
(7,955)
(1,556)
12,806
158,163
(4,074)
(6,336)
7
(76)
—
43
(70)
6
(325)
—
66
1,041
(900)
(208)
60,685
2,073
(20,633)
1,243
15
(17,302)
(47,194)
(1,143)
1,319
—
22,393
(3,674)
7
1,676
(20,633)
(2,150)
—
1,249
—
(325)
—
(7,889)
(1,556)
1,041
(885)
483
(2)
(724)
—
22,876
(3,676)
(717)
1,676
(20,633)
(2,150)
—
1,249
—
(325)
—
(7,889)
(1,556)
1,041
(885)
176
(10,746)
(243)
(10,989)
(1,502)
196,166
900
197,066
145
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, MLHFS and LHFS carried at fair value
Depreciation, amortization and accretion
Other net gains (1)
Stock-based compensation
Originations and purchases of mortgage loans held for sale (1)
Proceeds from sales of and paydowns on mortgages loans held for sale (1)
Net change in:
Debt and equity securities, held for trading (1)
Loans held for sale (1)
Deferred income taxes
Derivative assets and liabilities
Other assets (1)
Other accrued expenses and liabilities
Net cash provided by operating activities
Cash flows from investing activities:
Net change in:
Year ended December 31,
2018
2017
2016
$
22,876
22,460
22,045
1,744
453
5,593
(7,630)
2,255
(152,832)
119,097
35,054
(960)
1,970
1,513
7,805
(865)
36,073
2,528
886
5,406
(1,518)
2,046
(181,269)
134,984
33,505
327
666
(5,025)
(1,214)
4,837
18,619
3,770
139
4,970
(6,337)
1,945
(205,300)
127,479
63,309
(451)
1,793
2,089
(14,232)
(211)
1,008
Federal funds sold and securities purchased under resale agreements (2)
(1,184)
(21,497)
(15,747)
Available-for-sale debt securities:
Proceeds from sales (1)
Prepayments and maturities (1)
Purchases (1)
Held-to-maturity securities:
Paydowns and maturities
Purchases
Equity securities, not held for trading:
Proceeds from sales and capital returns (1)
Purchases (1)
Loans:
Loans originated by banking subsidiaries, net of principal collected
Proceeds from sales (including participations) of loans held for investment
Purchases (including participations) of loans
Principal collected on nonbank entities’ loans
Loans originated by nonbank entities
Net cash paid for acquisitions
Proceeds from sales of foreclosed assets and short sales
Other, net (2)
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
Redeemed
Cash dividends paid
Common stock:
Proceeds from issuance
Stock tendered for payment of withholding taxes
Repurchased
Cash dividends paid
Net change in noncontrolling interests
Other, net
Net cash provided (used) by financing activities
Net change in cash, cash equivalents, and restricted cash (2)
Cash, cash equivalents, and restricted cash at beginning of year (2)
Cash, cash equivalents, and restricted cash at end of year (2)
Supplemental cash flow disclosures:
Cash paid for interest
Cash paid for income taxes
7,320
36,725
(60,067)
10,934
—
6,242
(6,433)
(18,619)
16,294
(2,088)
6,791
(6,482)
(10)
3,592
(769)
(7,754)
(48,034)
2,531
47,595
(40,565)
—
(2,150)
(1,622)
632
(331)
(20,633)
(7,692)
(462)
(248)
(70,979)
(42,660)
215,947
173,287
42,067
45,688
(103,656)
30,958
40,998
(120,978)
10,673
—
5,451
(3,735)
317
10,439
(3,702)
7,448
(6,814)
(320)
5,198
(709)
7,957
(23,593)
3,711
(5,383)
(39,002)
10,061
(6,221)
6,844
(7,743)
(30,584)
7,311
(508)
(13,152)
(141,919)
29,912
14,020
43,575
(80,802)
677
—
(1,629)
1,211
(393)
(9,908)
(7,480)
30
(133)
(10,920)
(5,453)
221,400
215,947
82,767
(1,198)
90,111
(34,462)
2,101
—
(1,566)
1,415
(494)
(8,116)
(7,472)
(188)
(107)
122,791
(18,120)
239,520
221,400
14,366
1,977
9,103
6,592
5,573
8,446
$
$
(1) Financial information for the prior periods has been revised to reflect presentation changes made in connection with our adoption in first quarter 2018 of ASU 2016-01 –
Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. See Note 1 (Summary of Significant
Accounting Policies) for more information.
(2) Financial information has been revised to reflect the impact of our adoption in first quarter 2018 of ASU 2016-18 – Statement of Cash Flows (Topic 230): Restricted Cash in
which we changed the presentation of our cash and cash equivalents to include both cash and due from banks as well as interest-earning deposits with banks, which are
inclusive of any restricted cash. See Note 1 (Summary of Significant Accounting Policies) for more information.
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
146
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 9 (Securitizations and Variable Interest Entities) and
Note 10 (Mortgage Banking Activities)) and financial
instruments (Note 18 (Fair Values of Assets and
Liabilities));
liabilities for contingent litigation losses (Note 16 (Legal
Actions)); and
income taxes (Note 23 (Income Taxes)).
•
•
•
Actual results could differ from those estimates.
Accounting Standards Adopted in 2018
In 2018, we adopted the following new accounting guidance:
• Accounting Standards Update (ASU or Update) 2018-14 –
Compensation – Retirement Benefits – Defined Benefit
Plans—General (Subtopic 715-20): Disclosure Framework –
Changes to the Disclosure Requirements for Defined
Benefit Plans
• ASU 2018-02 – Income Statement-Reporting
Comprehensive Income (Topic 220): Reclassification of
Certain Tax Effects from Accumulated Other
Comprehensive Income
• ASU 2017-09 – Compensation – Stock Compensation
(Topic 718): Scope of Modification Accounting;
• ASU 2017-07 – Improving the Presentation of Net Periodic
Pension Cost and Net Periodic Postretirement Benefit Cost;
• ASU 2017-05 – Other Income – Gains and Losses from the
Derecognition of Nonfinancial Assets (Subtopic 610-20):
Clarifying the Scope of Asset Derecognition Guidance and
Accounting for Partial Sales of Nonfinancial Assets;
• ASU 2017-01 – Business Combinations (Topic 805):
Clarifying the Definition of a Business;
• ASU 2016-18 – Statement of Cash Flows (Topic 230):
Restricted Cash;
• 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;
• ASU 2016-04 – Liabilities – Extinguishments of Liabilities
(Subtopic 405-20): Recognition of Breakage for Certain
Prepaid Stored-Value Products;
• ASU 2016-01 – Financial Instruments – Overall (Subtopic
825-10): Recognition and Measurement of Financial Assets
and Financial Liabilities; and
• ASU 2014-09 – Revenue from Contracts With Customers
(Topic 606) and subsequent related Updates.
ASU 2018-14 changes the disclosure requirements for our
defined benefit pension and postretirement plans. We are
eliminating two disclosures that are no longer considered
beneficial: (1) information related to amounts in accumulated
other comprehensive income to be recognized in the next year as
benefit cost and (2) the effect of one-percentage point change on
assumed health care cost trend rates. We have added two
disclosures: (1) the weighted-average interest crediting rates for
plans with promised interest crediting rates, and (2)
explanations for significant gain and losses related to changes in
the benefit obligation. We early adopted this change in fourth
quarter 2018.
ASU 2018-02 allows a reclassification to update amounts in
accumulated other comprehensive income to an appropriate tax
rate under the Tax Cuts & Jobs Act. In 2018, we reclassified
$400 million resulting in a reduction of accumulated other
comprehensive income and an increase to retained earnings. For
additional information, see Note 25 (Other Comprehensive
Income). We have finalized our provisional tax estimates based
on the completion of our U.S. tax filings in fourth quarter 2018.
ASU 2017-09 clarifies when to account for a change to the
terms or conditions of a share-based payment award as a
modification. Under the ASU, modification accounting is
required only if the fair value, the vesting conditions, or the
classification of the award (as equity or liability) changes as a
result of the change in terms or conditions. The Update is
applied to awards modified on or after the adoption date and
accordingly, did not have a material impact on our consolidated
financial statements.
ASU 2017-07 requires that the service cost component of net
benefit cost be reported in the same line item as other
compensation costs arising from services rendered by employees
during the period, and the other pension cost components
(interest cost, expected return on plan assets and amortization of
actuarial gains and losses) be presented in the income statement
separate from the service cost component. The income statement
line item used to present the other pension cost components
must be disclosed. We adopted this change in first quarter 2018.
The Update did not have a material impact on our consolidated
financial statements.
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Note 1: Summary of Significant Accounting Policies (continued)
ASU 2017-05 provides guidance for recognizing gains and
losses from the transfer of nonfinancial assets in contracts with
non-customers. The ASU applies to nonfinancial assets,
including real estate (e.g., buildings, land, windmills, solar
farms), ships and intellectual property. We adopted this change
in first quarter 2018. The Update did not have a material impact
on our consolidated financial statements.
ASU 2017-01 requires that when substantially all of the fair
value of gross assets acquired is concentrated in a single asset (or
a group of similar assets), the assets acquired would not
represent a business. We adopted this change in first quarter
2018. The Update is applied prospectively and did not have a
material impact on our consolidated financial statements.
ASU 2016-18 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. We adopted this change in first quarter 2018. Our
retrospective adoption includes changes to our presentation of
cash and cash equivalents in our consolidated statement of cash
flows to include both cash and due from banks as well as
interest-earning deposits with banks. In addition, we had
corresponding changes on our consolidated balance sheets.
ASU 2016-16 requires us to recognize the income tax effects of
intercompany sales and transfers of assets other than inventory
in the period in which the transfer occurs. We adopted this
change in first quarter 2018. 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. We adopted this change
in first quarter 2018. The Update did not have a material impact
on our consolidated financial statements.
ASU 2016-04 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 this change in
first quarter 2018. Upon adoption, we recorded a cumulative-
effect adjustment that increased retained earnings, given
estimated breakage, by $20 million.
ASU 2016-01 changes the accounting for certain equity
securities to record at fair value with unrealized gains or losses
reflected in earnings, as well as improve the disclosures of equity
securities and the fair value of financial instruments. The Update
also requires that for purposes of disclosing the fair value of
financial instruments recorded at amortized cost, including
loans and long-term debt, the valuation methodology is based on
an exit price notion.
We adopted the Update in first quarter 2018 and recorded a
cumulative-effect adjustment as of January 1, 2018, that
increased retained earnings by $106 million as a result of a
transition adjustment to reclassify $118 million in net unrealized
gains from other comprehensive income to retained earnings,
partially offset by a transition adjustment to decrease retained
earnings by $12 million primarily to adjust the carrying value of
our auction rate securities from cost to fair value. No transition
adjustment was recorded for investments changed to the
measurement alternative (described below), which was applied
prospectively.
As a result of adopting this ASU, our investments in
marketable equity securities, including those previously
classified as available-for-sale, are accounted for at fair value
with unrealized gains or losses reflected in earnings.
Additionally, our share of unrealized gains or losses related to
marketable equity securities held by our equity method investees
are reflected in earnings. Prior to adoption, such unrealized
gains and losses were reflected in other comprehensive income.
Our investments in nonmarketable equity securities previously
accounted for under the cost method of accounting, except for
Federal Reserve Bank stock, are now accounted for either at fair
value with unrealized gains and losses reflected in earnings or
using the measurement alternative. The measurement
alternative is similar to the cost method of accounting, except
the carrying value is adjusted through earnings for impairment,
if any, and changes in observable and orderly transactions in the
same or similar investment. We account for substantially all of
our private equity investments, previously using the cost method
of accounting, now under the measurement alternative. Our
auction rate securities portfolio is now accounted for at fair value
with unrealized gains or losses reflected in earnings.
In connection with our adoption of this Update, we have
modified our balance sheet and income statement presentation
to report marketable and nonmarketable equity securities and
their results separately from debt securities by now reporting all
equity securities in a new line labeled “Equity securities” in both
the balance sheet and income statement. Additionally we now
report loans held for trading purposes in loans held for sale and
have reclassified net gains and losses on marketable equity
securities used as economic hedges of deferred compensation
obligations from “Net gains for trading activities” to “Net gains
from equity securities”. All prior periods have been revised to
conform to these changes in reporting.
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Table 1.1 provides a summary of our reporting changes
implemented in connection with our adoption of ASU 2016-01 in
first quarter 2018.
Table 1.1: Summary of Reporting Changes
Financial instrument or
transaction type
Balance Sheet
As previously reported
Revised reporting
Marketable equity securities
Trading assets and available for sale investment securities Equity securities (new caption)
Nonmarketable equity securities
Other assets
Loans held for trading
Trading assets
Debt securities held for trading
Trading assets
Equity securities (new caption)
Loans held for sale
Debt securities (formerly “Investment securities”)
Income Statement
Interest income:
Marketable equity securities
Trading assets and investment securities
Nonmarketable equity securities
Other
Loans held for trading
Trading assets
Debt securities held for trading
Trading assets
Noninterest income:
Equity securities (new caption)
Equity securities (new caption)
Loans held for sale
Debt securities (formerly “Investment securities”)
Deferred compensation gains (1) Net gains from trading activities
Net gains from equity securities
(1) Reclassification of net gains and losses on marketable equity securities economically hedging our deferred compensation obligations.
Table 1.2 summarizes financial assets and liabilities by form
and measurement accounting model.
Table 1.2: Accounting Model for Financial Assets and Liabilities
Balance sheet caption
Measurement model(s)
Financial statement Note reference
Cash and due from banks
Interest-earning deposits with banks
Cost
Cost
Federal funds sold and securities purchased
Amortized cost
under resale agreements
N/A
N/A
N/A
Debt securities:
Trading
Available-for-sale
Held-to-maturity
Mortgage loans held for sale
Loans held for sale
Loans
Derivative assets and liabilities
Equity securities:
Marketable
Nonmarketable
Other assets
Deposits
Short-term borrowings
Long-term debt
FV-NI (1)
FV-OCI (2)
Note 4: Trading Activities
Note 18: Fair Values of Assets and Liabilities
Note 5: Available-for-Sale and Held-to-Maturity Debt Securities
Note 18: Fair Values of Assets and Liabilities
Amortized cost
Note 5: Available-for-Sale and Held-to-Maturity Debt Securities
FV-NI (1)
LOCOM (3)
FV-NI (1)
LOCOM (3)
Amortized cost
FV-NI (1)
FV-NI (1)
FV-OCI (2)
FV-NI (1)
FV-NI (1)
Cost method
Equity method
MA (4)
Amortized cost (5)
Amortized cost
Amortized cost
Amortized cost
Note 18: Fair Values of Assets and Liabilities
Note 18: Fair Values of Assets and Liabilities
Note 6: Loans and Allowance for Credit Losses
Note 18: Fair Values of Assets and Liabilities
Note 4: Trading Activities
Note 17: Derivatives
Note 18: Fair Values of Assets and Liabilities
Note 4: Trading Activities
Note 8: Equity Securities
Note 18: Fair Values of Assets and Liabilities
Note 4: Trading Activities
Note 8: Equity Securities
Note 18: Fair Values of Assets and Liabilities
Note 7: Premises, Equipment, Lease Commitments and Other
Assets
N/A
N/A
N/A
(1) FV-NI represents the fair value through net income accounting model.
(2) FV-OCI represents the fair value through other comprehensive income accounting model.
(3) LOCOM represents the lower of cost or fair value accounting model.
(4) MA represents the measurement alternative accounting model.
(5) Other assets are generally carried at amortized cost, except for bank-owned life insurance which is carried at cash surrender value.
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Note 1: Summary of Significant Accounting Policies (continued)
ASU 2014-09 modifies the guidance used to recognize revenue
from contracts with customers for transfers of goods or services
and transfers of non-financial assets, unless those contracts are
within the scope of other guidance. We adopted the Update in
first quarter 2018, and upon a modified retrospective adoption,
we recorded a cumulative-effect adjustment as of January 1,
2018, that decreased retained earnings by $32 million, due to
changes in the timing of revenue for corporate trust services that
are provided over the life of the associated trust. In addition, we
changed the presentation of some costs such that underwriting
expenses of our broker-dealer business that were previously
netted against revenue are now included in noninterest expense,
and card payment network charges that were previously
included in noninterest expense are now netted against card fee
revenue.
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
account for the equity security under the fair value method, cost
method or measurement alternative.
Cash, Cash Equivalents and Restricted Cash
Cash, cash equivalents and restricted cash include cash on hand,
cash items in transit, and amounts due from or held with other
depository institutions. See Note 3 (Cash, Loan and Dividend
Restrictions) for the nature of our restrictions on cash and cash
equivalents.
Trading Activities
We engage in trading activities to accommodate the investment
and risk management activities of our customers. These
activities predominantly occur in our Wholesale Banking
businesses and to a lesser extent other divisions of the Company.
The assets and liabilities classified as trading include debt
securities, loans, equity securities, derivatives and short sales,
which are reported within the balance sheet line item based on
the form of the instrument. In addition, debt securities that are
held for investment purposes that we have elected to account for
under the fair value method, are classified as trading.
Our trading assets and liabilities are carried on the balance
sheet at fair value with changes in fair value recognized in net
gains from trading activities and interest income and interest
expense recognized in net interest income.
Customer accommodation trading activities include our
actions as an intermediary to buy and sell financial instruments
and market-making activities. We also take positions to manage
our exposure to customer accommodation activities. We hold
financial instruments for trading in long positions (assets), as
well as short positions where we sold financial instruments we
have not yet purchased (liabilities), to facilitate our trading
activities. As an intermediary we interact with market buyers
and sellers to facilitate the purchase and sale of financial
instruments to meet the anticipated or current needs of our
customers. For example, we may purchase or sell a derivative to
a customer who wants to manage interest rate risk exposure. We
typically enter into an offsetting derivative or security position to
manage our exposure to the customer transaction. We earn
income based on the transaction price difference between the
customer transaction and the offsetting position, which is
reflected in the fair value changes of the positions recorded in
the net gains from trading activities.
Our market-making activities include taking long and short
trading positions to facilitate customer order flow. These
activities are typically executed on a short-term basis. As a
market-maker we earn income due to: (1) difference between the
price paid or received for the purchase and sale of the security
(bid-ask spread), (2) the net interest income of the positions,
and (3) the changes in fair value of the trading positions held on
our balance sheet. Additionally, we may enter into separate
derivative or security positions to manage our exposure related
to our long and short trading positions taken in our market-
making activities. Income earned on these market-making
activities are reflected in the fair value changes of these positions
recorded in net gains from trading activities.
Debt Securities
Our investments in debt securities that are not held for trading
purposes are classified as either debt securities available-for-sale
(AFS) or held-to-maturity (HTM).
AVAILABLE-FOR-SALE DEBT SECURITIES
Debt securities for which the Company does not have the
postitive intent and ability to hold to maturity are classified as
AFS. These AFS debt securities are reported at fair value with
unrealized gains and losses, net of applicable income taxes,
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 is a decline
in fair value below the amortized cost of the debt security.
An AFS debt security that has a decline in the fair value
below the security’s amortized cost records 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 an AFS
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
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expected to be collected, we consider all relevant information
including:
•
the length of time and the extent to which the fair value has
been less than the amortized cost basis;
the historical and implied volatility of the fair value of the
security;
the cause of the price decline, such as the general level of
interest rates or adverse conditions specifically related to
the security, an industry or a geographic area;
the issuer’s financial condition, near-term prospects and
ability to service the debt;
the payment structure of the debt security and the
likelihood of the issuer being able to make payments that
increase in the future;
for asset-backed securities, the credit performance of the
underlying collateral, including delinquency rates, level of
non-performing assets, cumulative losses to date, collateral
value and the remaining credit enhancement compared with
expected credit losses;
any change in rating agencies’ credit ratings at evaluation
date from acquisition date and any likely imminent action;
independent analyst reports and forecasts, sector credit
ratings and other independent market data; and
recoveries or additional declines in fair value subsequent to
the balance sheet date.
•
•
•
•
•
•
•
•
If we intend to sell the security, or if it is more likely than
not we will be required to sell the security before recovery 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 security that is
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 all
other factors. We believe that we will fully collect the carrying
value of securities on which we have recorded a non-credit
related impairment in OCI.
Following the recognition of OTTI, the security’s new
amortized cost basis is the previous basis minus the OTTI
amount recognized in earnings.
We recognize realized gains and losses on the sale of AFS
debt securities in net gains (losses) on debt securities 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 DEBT SECURITIES Debt securities for
which the Company has the positive intent and ability to hold to
maturity are classified as held-to-maturity (HTM). These HTM
debt securities 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 intent to sell, required to sell, whether we expect
recovery of the amortized cost basis and determination of any
credit loss component recognized in earnings for HTM debt
securities is the same as described for AFS debt securities. AFS
debt securities transferred to the HTM classification are
recorded at fair value and the unrealized gains or losses resulting
from the transfer of these securities continue to be reported in
cumulative OCI. The unamortized OCI balance is amortized into
earnings over the remaining life of the security using the
effective interest method. The HTM amortized cost basis used in
the OTTI analysis includes the unamortized OCI balances related
to previous security transfers.
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.
Mortgage Loans and Loans Held for Sale
Mortgage loans held for sale (MLHFS) 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 MLHFS (see Note 18 (Fair Values of
Assets and Liabilities)). The remaining residential MLHFS are
held at the lower of cost or fair value (LOCOM) and are valued
on an aggregate portfolio basis. Commercial MLHFS are held at
LOCOM and are valued on an individual loan basis.
Loans held for sale (LHFS) includes commercial loans
originated for sale in the secondary market and loans used in
market-making activities in our trading business. The loans held
for trading purposes are carried at fair value, with the remainder
of LHFS recorded at LOCOM.
Gains and losses on MLHFS are recorded in mortgage
banking noninterest income. Gains and losses on LHFS used in
trading activities are recognized in net gains from trading
activities, with gains and losses on LHFS not used in trading
activities recognized in other noninterest income. Direct loan
origination costs and fees for MLHFS and LHFS under the fair
value option are recognized in income at origination. For
MLHFS and LHFS recorded at LOCOM, loan costs and fees are
deferred at origination and are recognized in income at time of
sale. Interest income on MLHFS 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
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Note 1: Summary of Significant Accounting Policies (continued)
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 MLHFS or LHFS portfolio at LOCOM.
Loans
Loans are reported at their outstanding principal balances net of
any unearned income, cumulative charge-offs, unamortized
deferred fees and costs on originated loans and unamortized
premiums or discounts on purchased loans. PCI loans are
reported net of any remaining purchase accounting adjustments.
See the “Purchased Credit-Impaired Loans” section in this Note
for our accounting policy for PCI loans.
Unearned income, deferred fees and costs, and discounts
and premiums are amortized to interest income over the
contractual life of the loan using the interest method. Loan
commitment fees are generally deferred and amortized into
noninterest income on a straight-line basis over the commitment
period.
We have certain private label and co-brand credit card loans
through a program agreement that involves our active
participation in the operating activity of the program with a third
party. We share in the economic results of the loans subject to
this agreement. We consider the program to be a collaborative
arrangement and therefore report our share of revenue and
losses on a net basis in interest income for loans, other
noninterest income and provision for credit losses as applicable.
Our net share of revenue from this activity represented less than
1% of our total revenues for 2018.
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.
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), such as in bankruptcy or other
circumstances;
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;
•
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.
We typically re-underwrite modified loans at the time of a
restructuring to determine if there is sufficient evidence of
sustained repayment capacity based on the borrower’s financial
strength, including documented income, debt to income ratios
and other factors. If the borrower has demonstrated
performance under the previous terms and the underwriting
process shows the capacity to continue to perform under the
restructured terms, the loan will generally remain in accruing
status. When a loan classified as a troubled debt restructuring
(TDR) performs in accordance with its modified terms, the loan
either continues to accrue interest (for performing loans) or will
return to accrual status after the borrower demonstrates a
sustained period of performance (generally six consecutive
months of payments, or equivalent, inclusive of consecutive
payments made prior to the modification). Loans will be placed
on nonaccrual status and a corresponding charge-off is recorded
if we believe it is probable that principal and interest
contractually due under the modified terms of the agreement
will not be collectible.
Our loans are considered past due when contractually
required principal or interest payments have not been made on
the due dates.
LOAN CHARGE-OFF POLICIES For commercial loans, we
generally fully charge off or charge down to net realizable value
(fair value of collateral, less estimated costs to sell) for loans
secured by collateral when:
• management judges the loan to be uncollectible;
•
repayment is deemed to be protracted beyond reasonable
time frames;
the loan has been classified as a loss by either our internal
loan review process or our banking regulatory agencies;
the customer has filed bankruptcy and the loss becomes
evident owing to a lack of assets; or
the loan is 180 days past due unless both well-secured and
in the process of collection.
•
•
•
• 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; or
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.
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
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.
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• 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. We may also sell groups of loans from a pool and include
any gains or losses on sales to third parties in other noninterest
income. Any difference between the amount received from the
buyer and the contractual amount due from the customer is
absorbed by the nonaccretable difference for the entire pool. We
maintain the effective yield for the remaining loans in the pool
consistent with the yield immediately prior to the sale.
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
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
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Note 1: Summary of Significant Accounting Policies (continued)
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 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. Interests retained from
and liabilities incurred in securitizations with off-balance sheet
entities include debt and equity securities, loans, MSRs,
derivative assets and liabilities, other assets, other liabilities,
such as liabilities for mortgage repurchase losses or long-term
debt and are accounted for as described within this Note.
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 9 (Securitizations and
Variable Interest Entities), Note 10 (Mortgage Banking
Activities) and Note 18 (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
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
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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.
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. For additional
information on derivative assets and liabilities used in our
trading business, see Note 4 (Trading Activities).
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
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 initial 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 in current period
income, except for certain derivatives in which a portion is
recorded to OCI. We record basis adjustments to the amortized
cost of the hedged asset or liability due to the changes in fair
value related to the hedged risk with the offset recorded in
current period net income. 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;
• 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
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Note 1: Summary of Significant Accounting Policies (continued)
denominated available-for-sale debt 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 and accumulated amounts reported in OCI are
accounted for in the same manner as other components of the
carrying amount of the asset or liability. If the hedged item is
derecognized, the accumulated amounts reported in OCI are
immediately reclassified to net income. 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 17 (Derivatives).
Equity Securities
Marketable equity securities have readily determinable fair
values and include, but are not limited to securities used in our
trading activities. Marketable equity securities are recorded at
fair value with unrealized gains and losses, due to changes in fair
value, reflected in earnings. Unrealized gains and losses are
recognized in net gains from trading activities for equity
securities related to our trading activities and net gains from
equity securities for the remaining securities. Realized gains and
losses are recognized in net gains from trading activities for
equity securities related to our trading activities and net gains
from equity securities for the remaining securities. Interest and
dividend income from marketable equity securities is recognized
in interest income.
Nonmarketable equity securities do not have readily
determinable fair values, and do not include investments for
which we hold a controlling interest in the investee. These
securities are accounted for under one of the following
accounting methods:
• Fair Value: This method is an election. The securities are
recorded at fair value with unrealized gains or losses
reflected in earnings;
• Equity Method: We use this method when we have the
ability to exert significant influence over the investee. These
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securities are carried at cost and adjusted for our share of
the investee’s earnings or losses, less any impairments;
• Cost Method: This method is required for specific securities,
such as Federal Reserve Bank stock and Federal Home Loan
Bank stock. These investments are held at their cost minus
impairment. If impaired, the carrying value is written down
to the fair value of the security;
• Measurement Alternative: This method is followed by all
remaining nonmarketable equity securities. These securities
are carried at cost less impairment, and adjusted up or
down to fair value upon the occurrence of orderly
observable transactions of the same or similar security of
the same issuer.
Our review for impairment for equity method, cost method
and measurement alternative securities typically includes an
analysis of the facts and circumstances of each security, the
intent or requirement to sell the security, the expectations of
cash flows, capital needs and the viability of its business model.
For equity method and cost method investments, we reduce the
asset’s carrying value when we consider declines in value to be
other than temporary. For securities accounted for under the
measurement alternative, we reduce the asset value when the
fair value is less than carrying value, without the consideration
of recovery. We recognize all estimated impairment losses as an
unrealized loss recorded in net gains on equity securities.
Realized gains and losses on the sale of nonmarketable
equity securities are recognized in net gains on equity securities.
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.
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.
Our determination of the reasonableness of our expected
long-term rate of return on plan assets is highly quantitative by
nature. We evaluate the current asset allocations and expected
returns under two sets of conditions: (1) projected returns using
several forward-looking capital market assumptions, and (2)
historical returns for the main asset classes dating back to 1970
or the earliest period for which historical data was readily
available for the asset classes included. Using long-term
historical data allows us to capture multiple economic
environments, which we believe is relevant when using historical
returns. We place greater emphasis on the forward-looking
return and risk assumptions than on historical results. We use
the resulting projections to derive a base line expected rate of
return and risk level for the Cash Balance Plan’s prescribed asset
mix. We evaluate the portfolio based on: (1) the established
target asset allocations over short term (one-year) and longer
term (ten-year) investment horizons, and (2) the range of
potential outcomes over these horizons within specific standard
deviations. We perform the above analyses to assess the
reasonableness of our expected long-term rate of return on plan
assets. We consider the expected rate of return to be a long-term
average view of expected returns.
At year end, we re-measure our defined benefit plan
liabilities and related plan assets and recognize any resulting
actuarial gain or loss in other comprehensive income. 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, 2018, is 19 years. See Note 22 (Employee
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. In 2018, we finalized the
recognition of the U.S. tax expense associated with a deemed
repatriation of undistributed earnings of certain non-U.S.
subsidiaries as required under the 2017 Tax Act. We do not
intend to distribute these 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.
See Note 23 (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.
Stock-Based Compensation
We have stock-based employee compensation plans as more
fully discussed in Note 20 (Common Stock and Stock Plans). Our
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Note 1: Summary of Significant Accounting Policies (continued)
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.
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 instruments used in our trading activities, or on a
nonrecurring basis, such as measuring impairment on assets
carried at amortized cost. 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 the exit price notion and are 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 the measurement of fair value.
In instances where there is limited or no observable market
data for the asset or liability, fair value measurements are based
on internal models, third-party vendor pricing, broker pricing or
a combination of these sources. The valuation models utilize
external market information and vendor or broker pricing where
available, and consider the economic and competitive
environment, the characteristics of the asset or liability, recent
prices for products we offer or issue, and other relevant internal
and external 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.
Our fair value measurements are adjusted, where necessary,
to incorporate the lack of market liquidity. Fair value
measurements based on vendor or broker prices may reflect exit
prices that inherently consider the lack of market liquidity.
When the impact of illiquid markets has not already been
incorporated in the fair value measurement, we adjust the
vendor or broker price using internal models based on
discounted cash flows. For certain residential MLHFS and
certain securities where the significant inputs have become
unobservable due to illiquid markets and vendor or broker
pricing is not used, our discounted cash flow model uses a
discount rate that reflects what we believe a market participant
would require in light of the illiquid market.
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 debt and equity 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 18 (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 2018 and 2017, we repurchased approximately
94 million shares and approximately 89 million shares of our
common stock, respectively, under private forward repurchase
contracts and a written repurchase plan pursuant to Rule 10b5-1
of the Securities Exchange Act of 1934 that we executed in fourth
quarter 2018. We enter into these stock repurchase transactions
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 the private forward
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. Our total number
of outstanding shares of common stock is not reduced until
settlement of the private forward repurchase contract. We had
no unsettled private forward repurchase contracts at
December 31, 2018, or December 31, 2017.
Under the Rule 10b5-1 repurchase plan, payments and
receipt of repurchased shares settle on the same day and the
shares repurchased reduce the total number of outstanding
shares of common stock upon the settlement of each trade under
the plan.
158
Wells Fargo & Company
158
SUPPLEMENTAL CASH FLOW INFORMATION Noncash
activities are presented in Table 1.3, including information on
transfers affecting MLHFS and debt securities.
Table 1.3: Supplemental Cash Flow Information
(in millions)
Trading debt securities retained from securitizations of MLHFS
Transfers from loans to MLHFS
Transfers from available-for-sale debt securities to held-to-maturity debt securities
Deconsolidation of reverse mortgages previously sold:
Loans
Long-term debt
2018
$
37,265
5,366
16,479
—
—
Year ended December 31,
2017
52,435
5,500
50,405
—
—
2016
72,399
6,894
4,161
3,807
3,769
SUBSEQUENT EVENTS We have evaluated the effects of events
that have occurred subsequent to December 31, 2018, and there
have been no material events that would require recognition in
our 2018 consolidated financial statements or disclosure in the
Notes to the consolidated financial statements. On
February 7, 2019, we experienced system issues caused by an
automatic power shutdown at one of our main data center
facilities. This power shutdown was triggered by a smoke alarm
that resulted from a steam condition created by routine
maintenance activities in the building. Although applications
and related workloads were systematically re-routed to back-up
data centers throughout the day, certain of our services
experienced disruptions that delayed service to our
customers. As an example, our online and mobile banking
systems and certain ATM functions experienced disruptions for
several hours, and certain critical mortgage origination systems
experienced disruptions for several days. We are currently
assessing these system issues and expect that the Company will
incur costs associated with system enhancements that may be
necessary to improve the speed of re-routing applications and
related workloads to back-up data centers, help ensure that
applications are fully operational to the extent an incident
occurs, and reduce the likelihood of similar issues occurring in
the future.
Note 2: Business Combinations
We regularly explore opportunities to acquire financial services
companies and businesses. Generally, we do not make a public
announcement about an acquisition opportunity until a
definitive agreement has been signed. For information on
additional contingent consideration related to acquisitions,
which is considered to be a guarantee, see Note 15 (Guarantees,
Pledged Assets and Collateral, and Other Commitments).
Business combinations completed in 2017 and 2016 are
presented in Table 2.1. There were no new acquisitions during
2018. As of December 31, 2018, we had no pending acquisitions.
Table 2.1: Business Combinations Activity
Name of acquisition
2017:
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
Analytic Investors, LLC
North America, Asia,
Australia / New Zealand and
EMEA
Los Angeles, CA
Specialty Lending
Asset Management
March 1, July
1, August 1 &
October 1
October 1
32,531
106
$
36,976
During 2018, we completed the sale of Wells Fargo
Shareowner Services in February, the sale of the automobile
lending business of Reliable Financial Services, Inc. and Reliable
Finance Holding Company in August, and the sale of
52 branches in Indiana, Ohio, Michigan and part of Wisconsin in
November. Included with the branches sale were approximately
$2.0 billion of deposits.
159
Wells Fargo & Company
159
Note 3: Cash, Loan and Dividend Restrictions
Cash and cash equivalents may be restricted as to usage or
withdrawal. Federal Reserve Board (FRB) regulations require
that each of our subsidiary banks maintain reserve balances on
deposit with the Federal Reserve Banks. Table 3.1 provides a
summary of restrictions on cash equivalents in addition to the
FRB reserve cash balance requirements.
Table 3.1: Nature of Restrictions on Cash Equivalents
(in millions)
Dec 31,
2018
Dec 31,
2017
Average required reserve balance for FRB (1) $ 12,428
12,306
Reserve balance for non-U.S. central banks
517
617
Segregated for benefit of brokerage
customers under federal and other
brokerage regulations
Related to consolidated variable interest
entities (VIEs) that can only be used to
settle liabilities of VIEs
1,135
666
147
487
(1) FRB required reserve balance represents average for the years ended
December 31, 2018, and December 31, 2017.
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 28
(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 $15.2 billion at December 31, 2018, without
obtaining prior regulatory approval. 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, 2018, our nonbank subsidiaries could
have declared additional dividends of $24.4 billion at
December 31, 2018, without obtaining prior approval.
The FRB’s Capital Plan Rule (codified at 12 CFR 225.8 of
Regulation Y) establishes capital planning and prior notice and
approval requirements for capital distributions including
dividends by certain 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 $0.45 per share as declared by
the Company’s Board of Directors on January 22, 2019, payable
on March 1, 2019.
160
Wells Fargo & Company
160
Note 4: Trading Activities
Table 4.1 presents a summary of our trading assets and liabilities
measured at fair value through earnings.
Table 4.1: Trading Activities and Liabilities
(in millions)
Trading assets:
Debt securities
Equity securities
Loans held for sale
Gross trading derivative assets
Netting (1)
Total trading derivative assets
Total trading assets
Trading liabilities:
Short sale
Gross trading derivative liabilities
Netting (1)
Total trading derivative liabilities
Total trading liabilities
Dec 31,
2018
Dec 31,
2017
$
69,989
19,449
1,469
29,216
57,624
30,004
1,023
31,340
(19,807)
(19,629)
9,409
100,316
19,720
28,717
11,711
100,362
18,472
31,386
(21,178)
(23,062)
7,539
$
27,259
8,324
26,796
(1) Represents balance sheet netting for trading derivative asset and liability balances, and trading portfolio level counterparty valuation adjustments.
Table 4.2 provides a summary of the net interest income
earned from trading securities, and net gains and losses due to
the realized and unrealized gains and losses from trading
activities.
Table 4.2: Net Interest Income and Net Gains (Losses) on Trading Activities
(in millions)
Interest income (1):
Debt securities
Equity securities
Loans held for sale
Total interest income
Less: Interest expense (2)
Net interest income
Net gains (losses) from trading activities:
Debt securities
Equity securities
Loans held for sale
Derivatives (3)
Year ended December 31,
2018
2017
2016
$
2,831
587
62
3,480
587
2,893
(824)
(4,240)
(1)
5,667
602
3,495
2,313
515
38
2,866
416
2,450
125
3,394
45
(3,022)
542
2,992
2,047
383
29
2,459
353
2,106
(444)
1,213
55
(214)
610
2,716
Total net gains from trading activities (4)
Total trading-related net interest and noninterest income
$
(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) 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.
(4) Represents realized gains (losses) from our trading activities and unrealized gains (losses) due to changes in fair value of our trading positions, attributable to the type of
asset or liability.
161
Wells Fargo & Company
161
Note 5: Available-for-Sale and Held-to-Maturity Debt Securities
Table 5.1 provides the amortized cost and fair value by major
categories of available-for-sale debt 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 debt securities are reported on an after-tax
basis as a component of cumulative OCI. Information on debt
securities held for trading is included in Note 4 (Trading
Activities) to Financial Statements in this Report.
Table 5.1: Amortized Cost and Fair Value
(in millions)
December 31, 2018
Available-for-sale debt securities:
Securities of U.S. Treasury and federal agencies
Securities of U.S. states and political subdivisions (1)
Mortgage-backed securities:
Federal agencies
Residential
Commercial
Total mortgage-backed securities
Corporate debt securities
Collateralized loan and other debt obligations (2)
Other (3)
Amortized
Cost
Gross
unrealized
gains
Gross
unrealized
losses
Fair value
$
13,451
48,994
155,974
2,638
4,207
162,819
6,230
35,581
5,396
3
716
369
142
40
551
131
158
100
(106)
(446)
(3,140)
(5)
(22)
(3,167)
(90)
(396)
(13)
13,348
49,264
153,203
2,775
4,225
160,203
6,271
35,343
5,483
Total available-for-sale debt securities
272,471
1,659
(4,218)
269,912
Held-to-maturity debt securities:
Securities of U.S. Treasury and federal agencies
Securities of U.S. states and political subdivisions
Federal agency and other mortgage-backed securities (4)
Collateralized loan obligations
Other (3)
Total held-to-maturity debt securities
Total (5)
December 31, 2017
Available-for-sale debt securities:
44,751
6,286
93,685
66
—
144,788
4
30
112
—
—
146
$
417,259
1,805
Securities of U.S. Treasury and federal agencies
Securities of U.S. states and political subdivisions (1)
Mortgage-backed securities:
$
Federal agencies
Residential
Commercial
Total mortgage-backed securities
Corporate debt securities
Collateralized loan and other debt obligations (2)
Other (3)
Total available-for-sale debt securities
Held-to-maturity debt securities:
Securities of U.S. Treasury and federal agencies
Securities of U.S. states and political subdivisions
Federal agency and other mortgage-backed securities (4)
Collateralized loan obligations
Other (3)
Total held-to-maturity debt securities
6,425
50,733
160,561
4,356
4,487
169,404
7,343
35,675
5,516
275,096
44,720
6,313
87,527
661
114
139,335
2
1,032
930
254
80
1,264
363
384
137
189
84
201
4
—
478
(415)
(116)
(2,288)
—
—
(2,819)
(7,037)
(108)
(439)
(1,272)
(2)
(2)
(1,276)
(40)
(3)
(5)
44,340
6,200
91,509
66
—
142,115
412,027
6,319
51,326
160,219
4,608
4,565
169,392
7,666
36,056
5,648
(103)
(43)
(682)
—
—
(828)
(2,699)
44,806
6,354
87,046
665
114
138,985
415,392
3,182
(1,871)
276,407
Total (5)
$
414,431
3,660
(1) Available-for-sale debt securities include investments in tax-exempt preferred debt securities issued by investment funds or trusts that predominantly invest in tax-exempt
municipal securities. The cost basis and fair value of these types of securities was $6.3 billion each at December 31, 2018, and $5.2 billion each at December 31, 2017.
(2) Available-for-sale debt securities include collateralized debt obligations (CDOs) with a cost basis and fair value of $662 million and $800 million, respectively, at
December 31, 2018, and $887 million and $1.0 billion, respectively, at December 31, 2017.
(3) The “Other” category of available-for-sale debt securities largely includes asset-backed securities collateralized by student loans. Included in the “Other” category of held-
to-maturity debt securities are asset-backed securities collateralized by automobile leases or loans and cash with a cost basis and fair value of $0 million each at
December 31, 2018, and $114 million each at December 31, 2017.
(4) Predominantly consists of federal agency mortgage-backed securities at both December 31, 2018, and December 31, 2017.
(5) At December 31, 2018 and 2017, 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.
162
Wells Fargo & Company
162
Gross Unrealized Losses and Fair Value
Table 5.2 shows the gross unrealized losses and fair value of
available-for-sale and held-to-maturity debt securities by length
of time those 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, 2018
Less than 12 months
12 months or more
Total
Gross
unrealized
losses
Fair value
Gross
unrealized
losses
Fair value
Gross
unrealized
losses
Fair value
Available-for-sale debt 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 available-for-sale debt securities
Held-to-maturity debt 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
Total held-to-maturity debt securities
(1)
(73)
(42)
(3)
(20)
(65)
(64)
(388)
(7)
(598)
(3)
(4)
(5)
—
(12)
498
9,746
10,979
398
1,972
13,349
1,965
28,306
819
54,683
895
598
4,635
—
6,128
(105)
(373)
6,204
9,017
(106)
(446)
6,702
18,763
(3,098)
(2)
(2)
(3,102)
112,252
69
79
112,400
(3,140)
(5)
(22)
(3,167)
123,231
467
2,051
125,749
(26)
298
(90)
2,263
(8)
(6)
(3,620)
553
159
128,631
(396)
(13)
(4,218)
28,859
978
183,314
(412)
(112)
41,083
3,992
(415)
(116)
41,978
4,590
(2,283)
77,741
(2,288)
82,376
—
(2,807)
—
122,816
—
(2,819)
—
128,944
Total
$
(610)
60,811
(6,427)
251,447
(7,037)
312,258
December 31, 2017
Available-for-sale debt 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 available-for-sale debt securities
Held-to-maturity debt 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
Total held-to-maturity debt securities
Total
$
(27)
(17)
(243)
(1)
(1)
(245)
(4)
(1)
(1)
(295)
(69)
(5)
(198)
—
(272)
(567)
4,065
6,179
52,559
47
101
52,707
239
373
37
63,600
11,255
500
29,713
—
41,468
(81)
(422)
(1,029)
(1)
(1)
(1,031)
(36)
(2)
(4)
(1,576)
(34)
(38)
(484)
—
(556)
105,068
(2,132)
2,209
11,766
44,691
58
133
44,882
503
146
483
59,989
1,490
1,683
28,244
—
31,417
91,406
(108)
(439)
(1,272)
(2)
(2)
(1,276)
(40)
(3)
(5)
(1,871)
(103)
(43)
(682)
—
(828)
6,274
17,945
97,250
105
234
97,589
742
519
520
123,589
12,745
2,183
57,957
—
72,885
(2,699)
196,474
163
Wells Fargo & Company
163
Note 5: Available-for-Sale and Held-to Maturity Debt Securities (continued)
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.
OTHER DEBT SECURITIES MATTERS The fair values of our
debt 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.
We have assessed each debt 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 debt 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. We evaluate, where
necessary, whether credit impairment exists by comparing the
present value of the expected cash flows to the debt securities’
amortized cost basis.
For descriptions of the factors we consider when analyzing
debt 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.
164
Wells Fargo & Company
164
Table 5.3 shows the gross unrealized losses and fair value of
the available-for-sale and held-to-maturity debt 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 debt security. Debt 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, debt securities rated below investment grade,
labeled as “speculative grade” by the rating agencies, are
considered to be distinctively higher credit risk than investment
grade debt securities. We have also included debt securities not
rated by S&P or Moody’s in the table below based on our internal
credit grade of the debt 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 debt securities categorized as investment grade based on
internal credit grades were $20 million and $5.2 billion,
respectively, at December 31, 2018, and $32 million and $6.9
billion, respectively, at December 31, 2017. If an internal credit
grade was not assigned, we categorized the debt security as non-
investment grade.
Table 5.3: Gross Unrealized Losses and Fair Value by Investment Grade
Investment grade
Non-investment grade
Gross
unrealized
losses
Fair value
Gross
unrealized
losses
Fair value
(in millions)
December 31, 2018
Available-for-sale debt 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
$
(106)
(425)
6,702
18,447
(3,140)
123,231
(2)
(20)
295
1,999
(3,162)
125,525
(17)
(396)
(7)
791
28,859
726
Total available-for-sale debt securities
(4,113)
181,050
Held-to-maturity debt 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
Total held-to-maturity debt securities
Total
December 31, 2017
Available-for-sale debt 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
$
$
(415)
(116)
(2,278)
—
(2,809)
(6,922)
41,978
4,590
81,977
—
128,545
309,595
(108)
(412)
6,274
17,763
(1,272)
97,250
(1)
(1)
42
183
(1,274)
97,475
(13)
(3)
(2)
304
519
469
Total available-for-sale debt securities
(1,812)
122,804
Held-to-maturity debt 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
Total held-to-maturity debt securities
Total
$
(103)
(43)
(680)
—
(826)
(2,638)
12,745
2,183
57,789
—
72,717
195,521
—
(21)
—
(3)
(2)
(5)
(73)
—
(6)
(105)
—
—
(10)
—
(10)
(115)
—
(27)
—
(1)
(1)
(2)
(27)
—
(3)
(59)
—
—
(2)
—
(2)
(61)
—
316
—
172
52
224
1,472
—
252
2,264
—
—
399
—
399
2,663
—
182
—
63
51
114
438
—
51
785
—
—
168
—
168
953
165
Wells Fargo & Company
165
Note 5: Available-for-Sale and Held-to Maturity Debt 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, 2018
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
$
13,348
1.87% $ 1,087
1.52% $ 12,213
1.90% $
48
1.89% $
—
—%
49,264
4.78
3,568
2.92
6,644
3.42
4,635
3.44
34,417
5.42
Federal agencies
Residential
Commercial
153,203
2,775
4,225
Total mortgage-backed securities
160,203
3.42
4.01
3.64
3.44
5.11
3.89
3.17
—
—
—
—
—
—
—
—
169
14
—
3.52
5.85
—
1,909
6
342
2.56
3.04
3.60
151,125
2,755
3,883
3.43
4.00
3.65
183
3.70
2,257
2.72
157,763
3.45
390
6.27
2,525
5.25
2,743
4.68
613
5.67
—
—
28
4.18
8,866
3.91
26,449
3.89
15
6.02
818
3.84
1,446
2.17
3,204
3.44
6,271
35,343
5,483
Corporate debt securities
Collateralized loan and other debt
obligations
Other
Total available-for-sale debt
securities at fair value
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:
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
$ 269,912
3.70% $ 5,060
2.89% $ 22,411
2.82% $ 19,995
3.64% $222,446
3.81%
$
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
160,219
4,608
4,565
169,392
7,666
36,056
5,648
3.27
3.52
3.45
3.28
5.12
2.98
2.46
15
—
—
15
2.03
—
—
2.03
210
24
—
3.08
5.67
—
234
3.35
5,534
11
166
5,711
2.82
2.46
2.69
2.82
154,460
4,573
4,399
163,432
3.28
3.51
3.48
3.30
443
5.54
2,738
5.56
3,549
4.70
936
5.26
—
71
—
3.56
50
463
1.68
2.72
15,008
1,466
2.96
2.13
20,998
3,648
3.00
2.53
$
276,407
3.72 % $
2,990
3.70 % $ 19,158
3.11 % $ 28,059
3.24 % $ 226,200
3.83 %
(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.
166
Wells Fargo & Company
166
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, 2018
Held-to-maturity debt 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
$
44,751
2.12%
$
6,286
4.93
93,685
66
—
3.10
3.62
—
Total held-to-maturity debt
securities at amortized cost
$
144,788
2.87% $
December 31, 2017
Held-to-maturity debt securities (1):
Amortized cost:
Securities of U.S. Treasury and federal
agencies
$
44,720
2.12 %
$
Securities of U.S. states and political
subdivisions
Federal agency and other mortgage-
backed securities
Collateralized loan obligations
Other
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 % $
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
—
—
—
—
—
—
—
—
—
—
—
—
—%
$ 32,356
2.04%
$ 12,395
2.32% $
—
—%
—
—
—
—
72
6.04
1,188
4.91
5,026
4.92
26
3.52
—
—
—
—
—
66
—
—
93,659
3.10
3.62
—
—
—
—
—
—% $ 32,454
2.05% $ 13,649
2.55% $ 98,685
3.19%
— %
$ 32,330
2.04 %
$ 12,390
2.32 %
$
—
— %
—
—
—
—
50
7.18
695
6.31
5,568
5.98
15
—
114
2.81
—
1.83
11
661
—
2.49
2.86
—
87,501
3.11
—
—
—
—
— % $ 32,509
2.05 % $ 13,757
2.55 % $ 93,069
3.28 %
(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, 2018
Held-to-maturity debt 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
$
44,340
Securities of U.S. states and political subdivisions
Federal agency and other mortgage-backed securities
Collateralized loan obligations
Other
6,200
91,509
66
—
Total held-to-maturity debt securities at fair value
$
142,115
December 31, 2017
Held-to-maturity debt 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
44,806
6,354
87,046
665
114
Total held-to-maturity debt securities at fair value
$
138,985
—
—
—
—
—
—
—
—
—
—
—
—
32,073
70
26
—
—
12,267
1,191
—
66
—
—
4,939
91,483
—
—
32,169
13,524
96,422
32,388
12,418
49
15
—
114
701
11
665
—
32,566
13,795
—
5,604
87,020
—
—
92,624
167
Wells Fargo & Company
167
Note 5: Available-for-Sale and Held-to Maturity Debt Securities (continued)
Realized Gains and Losses
Table 5.7 shows the gross realized gains and losses on sales and
OTTI write-downs related to available-for-sale debt securities.
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 debt securities
Year ended December 31,
2018
$
155
(19)
(28)
$
108
2017
948
(207)
(262)
479
2016
1,234
(103)
(189)
942
Other-Than-Temporary Impaired Debt Securities
Table 5.8 shows the detail of total OTTI write-downs included in
earnings for available-for-sale debt securities. There were no
OTTI write-downs on held-to-maturity debt securities during the
years ended December 31, 2018, 2017 or 2016.
Table 5.8: Detail of OTTI Write-downs
(in millions)
Debt securities OTTI write-downs included in earnings:
Securities of U.S. states and political subdivisions
Mortgage-backed securities:
Residential
Commercial
Corporate debt securities
Other debt securities
Total debt securities OTTI write-downs included in earnings
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 and the Related Changes in OCI
(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
Year ended December 31,
2018
2017
2016
$
2
150
63
34
14
72
6
4
18
—
4
28
11
80
21
—
262
189
$
$
Year ended December 31,
2018
2017
2016
27
1
28
(2)
2
(11)
—
—
(11)
119
143
262
(5)
(1)
(51)
1
(1)
(57)
205
143
46
189
8
(3)
24
(13)
2
18
207
Total OTTI losses (reversal of losses) recorded on debt securities
$
17
(1) Represents amounts recorded to OCI for impairment of debt securities, due to factors other than credit, 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 debt securities due to non-credit factors.
168
Wells Fargo & Company
168
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
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
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.
Year ended December 31,
2018
$
742
2017
1,043
2016
1,092
1
26
27
9
110
119
85
58
143
(204)
(414)
(184)
(3)
(6)
(8)
(207)
(420)
(192)
$
562
742
1,043
(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.
169
Wells Fargo & Company
169
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 $1.3 billion and $3.9 billion at
December 31, 2018 and 2017, respectively, for unearned income,
net deferred loan fees, and unamortized discounts and
premiums, which among other things, reflect the
impact of various loan sales.
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
2018
2017
2016
2015
2014
December 31,
$ 350,199
333,125
330,840
299,892
271,795
121,014
126,599
132,491
122,160
111,996
22,496
19,696
24,279
19,385
23,916
19,289
22,164
12,367
18,728
12,307
513,405
503,388
506,536
456,583
414,826
285,065
284,054
275,579
273,869
265,386
34,398
39,025
45,069
36,148
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
439,705
453,382
461,068
459,976
447,725
$
953,110
956,770
967,604
916,559
862,551
address is outside of the United States. Table 6.2 presents total
commercial foreign loans outstanding by class of financing
receivable.
2018
2017
2016
2015
2014
December 31,
$
62,564
60,106
6,731
1,011
1,159
8,033
655
1,126
55,396
8,541
375
972
49,049
8,350
444
274
44,707
4,776
218
336
Total commercial foreign loans
$
71,465
69,920
65,284
58,117
50,037
170
Wells Fargo & Company
170
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, 2018 and 2017, 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 both December 31, 2018 and
2017, 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 5% of total loans. We continuously monitor
changes in real estate values and underlying economic or market
conditions for all geographic areas of our real estate 1-4 family
mortgage portfolio as part of our credit risk management
process.
Some of our real estate 1-4 family first and junior lien
mortgage loans include an interest-only feature as part of the
loan terms. These interest-only loans were approximately 4% of
total loans at both December 31, 2018 and 2017. 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, 2018,
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, 2018, our lines of credit portfolio had an
outstanding balance of $43.6 billion, of which $11.1 billion, or
25%, is in its amortization period, another $1.3 billion, or 3%, of
our total outstanding balance, will reach their end of draw period
during 2019 through 2020, $11.3 billion, or 26%, during 2021
through 2023, and $19.9 billion, or 46%, will convert in
subsequent years. This portfolio had unfunded credit
commitments of $60.1 billion at December 31, 2018. 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, 2018, $488 million, or 4%, of
outstanding lines of credit that are in their amortization period
were 30 or more days past due, compared with $553 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 MLHFS/LHFS
$
Commercial
Consumer (1)
2,065
(1,905)
(617)
16
(261)
(1,995)
2018
Total
2,081
(2,166)
(2,612)
Year ended December 31,
Commercial
Consumer (1)
3,675
(2,066)
(736)
2
(425)
(2)
2017
Total
3,677
(2,491)
(738)
(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.
171
Wells Fargo & Company
171
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 $91 billion at December 31, 2018, and $85 billion
at December 31, 2017.
We issue commercial letters of credit to assist customers in
purchasing goods or services, typically for international trade. At
December 31, 2018 and 2017, we had $919 million and
$982 million, 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 15 (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,
2018
Dec 31,
2017
Commercial and industrial
$ 330,492
326,626
Real estate mortgage
Real estate construction
Total commercial
Consumer:
6,984
7,485
16,400
16,621
353,876
350,732
Real estate 1-4 family first mortgage
29,736
29,876
Real estate 1-4 family
junior lien mortgage
Credit card
37,719
38,897
109,840
108,465
Other revolving credit and installment
27,530
27,541
Total consumer
204,825
204,779
Total unfunded
credit commitments
$ 558,701
555,511
172
Wells Fargo & Company
172
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:
Year ended December 31,
2018
2017
2016
2015
2014
$ 11,960
12,540
12,512
13,169
14,971
1,744
(166)
2,528
(186)
3,770
(205)
2,442
(198)
1,395
(211)
(727)
(42)
—
(70)
(839)
(179)
(179)
(1,599)
(947)
(685)
(3,589)
(4,428)
304
70
13
23
410
267
219
307
363
118
(789)
(38)
—
(45)
(1,419)
(734)
(627)
(27)
(1)
(41)
(59)
(4)
(14)
(66)
(9)
(15)
(872)
(1,488)
(811)
(717)
(240)
(279)
(1,481)
(1,002)
(713)
(3,715)
(452)
(495)
(507)
(635)
(721)
(864)
(1,259)
(1,116)
(1,025)
(845)
(708)
(742)
(643)
(729)
(668)
(3,759)
(3,643)
(4,007)
(4,587)
(5,247)
(4,454)
(4,724)
297
82
30
17
426
288
266
239
319
121
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
1,274
1,684
1,233
1,659
1,299
1,727
1,138
1,562
1,106
1,779
(2,744)
(2,928)
(3,520)
(2,892)
(2,945)
(87)
6
(17)
(9)
(41)
$ 10,707
11,960
12,540
12,512
13,169
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
$ 9,775
11,004
932
956
$ 10,707
11,960
0.29%
1.03
1.12
0.31
1.15
1.25
11,419
1,121
12,540
0.37
1.18
1.30
11,545
12,319
967
850
12,512
13,169
0.33
1.26
1.37
0.35
1.43
1.53
(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.
173
Wells Fargo & Company
173
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)
Commercial Consumer
Total
Commercial Consumer
2018
Balance, beginning of year
$
6,632
Provision (reversal of provision) for credit losses
Interest income on certain impaired loans
281
(47)
5,328
1,463
11,960
1,744
(119)
(166)
7,394
(261)
(59)
5,146
2,789
(127)
(186)
2017
Total
12,540
2,528
Loan charge-offs
Loan recoveries
Net loan charge-offs
Other
Balance, end of year
(839)
(3,589)
(4,428)
(872)
(3,715)
(4,587)
410
1,274
1,684
426
1,233
1,659
(429)
(2,315)
(2,744)
(446)
(2,482)
(2,928)
(20)
(67)
(87)
4
2
6
$
6,417
4,290
10,707
6,632
5,328
11,960
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, 2018
Collectively evaluated (1)
Individually evaluated (2)
PCI (3)
Total
December 31, 2017
Collectively evaluated (1)
Individually evaluated (2)
PCI (3)
Total
Allowance for credit losses
Recorded investment in loans
Commercial
Consumer
Total
Commercial
Consumer
Total
$
5,903
3,361
514
—
929
—
9,264
1,443
—
510,180
421,574
931,754
3,221
13,126
16,347
4
5,005
5,009
$
6,417
4,290
10,707
513,405
439,705
953,110
$
5,927
705
—
4,143
1,185
—
10,070
1,890
—
499,342
425,919
925,261
3,960
86
14,714
12,749
18,674
12,835
$
6,632
5,328
11,960
503,388
453,382
956,770
(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, 2018. 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 $14.8 billion in criticized
commercial and industrial loans and $4.8 billion in criticized
commercial real estate (CRE) loans at December 31, 2018,
$1.5 billion and $612 million, respectively, have been placed on
nonaccrual status and written down to net realizable collateral
value.
174
Wells Fargo & Company
174
Commercial
and industrial
Real estate
mortgage
Real estate
construction
Lease
financing
Total
Table 6.8: Commercial Loans by Risk Category
(in millions)
December 31, 2018
By risk category:
Pass
Criticized
$
335,412
116,514
22,207
14,783
4,500
289
18,671
1,025
19,696
—
492,804
20,597
513,401
4
Total commercial loans (excluding PCI)
350,195
121,014
22,496
Total commercial PCI loans (carrying value)
4
—
—
Total commercial loans
$
350,199
121,014
22,496
19,696
513,405
December 31, 2017
By risk category:
Pass
Criticized
Total commercial loans (excluding PCI)
Total commercial PCI loans (carrying value)
$
316,431
122,312
16,608
4,287
333,039
126,599
86
—
23,981
298
24,279
—
18,162
1,223
19,385
—
480,886
22,416
503,302
86
Total commercial loans
$
333,125
126,599
24,279
19,385
503,388
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, 2018
By delinquency status:
Commercial
and industrial
Real estate
mortgage
Real estate
construction
Lease
financing
Total
Current-29 days past due (DPD) and still accruing
$
348,158
120,176
22,411
19,443
510,188
30-89 DPD and still accruing
90+ DPD and still accruing
Nonaccrual loans
508
43
1,486
207
51
580
53
—
32
163
—
90
931
94
2,188
Total commercial loans (excluding PCI)
350,195
121,014
22,496
19,696
513,401
Total commercial PCI loans (carrying value)
4
—
—
—
4
Total commercial loans
$
350,199
121,014
22,496
19,696
513,405
December 31, 2017
By delinquency status:
Current-29 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
175
Wells Fargo & Company
175
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, 2018
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)
Loans held at fair value
Real estate
1-4 family
first
mortgage
Real estate
1-4 family
junior lien
mortgage
Credit card
Automobile
Other
revolving
credit and
installment
Total
$ 263,881
33,644
38,008
43,604
35,794
414,931
1,411
549
257
225
822
12,688
244
247
126
74
77
213
—
—
292
212
192
320
1
—
—
1,040
140
314
109
2
—
—
—
87
80
27
20
—
—
3,130
1,288
712
651
1,056
12,688
244
Total consumer loans (excluding PCI)
280,077
34,381
39,025
45,069
36,148
434,700
Total consumer PCI loans (carrying value)
4,988
17
—
—
—
5,005
Total consumer loans
$ 285,065
34,398
39,025
45,069
36,148
439,705
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)
Loans held at fair value
Total consumer loans (excluding PCI)
Total consumer PCI loans (carrying value)
$ 251,786
38,746
36,996
1,893
742
369
308
1,091
14,767
376
271,332
12,722
336
163
103
95
243
—
—
287
201
192
298
2
—
—
51,445
1,385
392
146
3
—
—
—
37,885
416,858
155
93
80
30
25
—
—
4,056
1,591
890
734
1,361
14,767
376
39,686
37,976
53,371
38,268
440,633
27
—
—
—
12,749
Total consumer loans
$ 284,054
39,713
37,976
53,371
38,268
453,382
(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
$7.7 billion at December 31, 2018, compared with $10.5 billion at December 31, 2017.
Of the $2.4 billion of consumer loans not government
insured/guaranteed that are 90 days or more past due at
December 31, 2018, $885 million was accruing, compared with
$3.0 billion past due and $1.0 billion accruing at December 31,
2017.
Real estate 1-4 family first mortgage loans 180 days or more
past due totaled $822 million, or 0.3% of total first mortgages
(excluding PCI), at December 31, 2018, compared with
$1.1 billion, or 0.4%, at December 31, 2017.
Table 6.11 provides a breakdown of our consumer portfolio
by FICO. 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 $8.9 billion at
December 31, 2018, and $8.5 billion at December 31, 2017.
176
Wells Fargo & Company
176
Table 6.11: Consumer Loans by FICO
(in millions)
December 31, 2018
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
Real estate
1-4 family
junior lien
mortgage
Credit card
Automobile
Other revolving
credit and
installment
Total
$
4,273
2,974
5,810
13,568
27,258
57,193
151,465
4,604
—
1,454
994
1,898
3,908
5,323
6,315
13,190
1,299
—
—
3,292
2,777
6,464
9,445
7,949
5,227
3,794
77
—
—
7,071
4,431
6,225
7,354
6,853
5,947
7,099
89
—
—
697
725
1,822
3,384
4,395
5,322
8,411
2,507
8,885
16,787
11,901
22,219
37,659
51,778
80,004
183,959
8,576
8,885
—
12,932
34,381
39,025
45,069
36,148
434,700
17
—
—
—
5,005
Total consumer loans
$
285,065
34,398
39,025
45,069
36,148
439,705
Government insured/guaranteed loans (1)
12,932
Total consumer loans (excluding
PCI)
Total consumer PCI loans (carrying value)
280,077
4,988
December 31, 2017
By FICO:
< 600
600-639
640-679
680-719
720-759
760-799
800+
$
5,145
3,487
6,789
14,977
27,926
55,590
1,768
1,253
2,387
4,797
6,246
7,323
136,729
15,144
No FICO available
FICO not required
Government insured/guaranteed loans (1)
Total consumer loans (excluding PCI)
Total consumer PCI loans (carrying value)
5,546
—
15,143
271,332
12,722
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
39,686
37,976
53,371
38,268
440,633
27
—
—
—
12,749
Total consumer loans
$
284,054
39,713
37,976
53,371
38,268
453,382
(1) Represents loans whose repayments are predominantly insured by the FHA or guaranteed by the VA.
LTV refers to the ratio comparing the loan’s unpaid
principal balance to the property’s collateral value. CLTV refers
to the combination of first mortgage and junior lien mortgage
(including unused line amounts for credit line products) ratios.
LTVs and CLTVs are updated quarterly using a cascade approach
which first uses values provided by automated valuation models
(AVMs) for the property. If an AVM is not available, then the
value is estimated using the original appraised value adjusted by
the change in Home Price Index (HPI) for the property location.
If an HPI is not available, the original appraised value is used.
The HPI value is normally the only method considered for high
value properties, generally with an original value of $1 million or
more, as the AVM values have proven less accurate for these
properties.
Table 6.12 shows the most updated LTV and CLTV
distribution of the real estate 1-4 family first and junior lien
mortgage loan portfolios. We consider the trends in residential
real estate markets as we monitor credit risk and establish our
allowance for credit losses. In the event of a default, any loss
should be limited to the portion of the loan amount in excess of
the net realizable value of the underlying real estate collateral
value. Certain loans do not have an LTV or CLTV due to industry
data availability and portfolios acquired from or serviced by
other institutions.
177
Wells Fargo & Company
177
Note 6: Loans and Allowance for Credit Losses (continued)
Table 6.12: Consumer Loans by LTV/CLTV
December 31, 2018
December 31, 2017
(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
$ 147,666
15,753
163,419
104,477
11,183
115,660
12,372
1,211
484
935
12,932
4,874
1,596
578
397
—
17,246
2,807
1,062
1,332
133,902
104,639
13,924
1,868
783
1,073
12,932
15,143
16,301
12,918
6,580
2,427
1,008
452
—
Total
150,203
117,557
20,504
4,295
1,791
1,525
15,143
Total consumer loans (excluding PCI)
280,077
34,381
314,458
271,332
39,686
311,018
Total consumer PCI loans (carrying value)
4,988
17
5,005
12,722
27
12,749
Total consumer loans
$ 285,065
34,398
319,463
284,054
39,713
323,767
(1) Reflects total loan balances with LTV/CLTV amounts in excess of 100%. In the event of default, the loss content would generally be limited to only the amount in excess of
100% LTV/CLTV.
(2) Represents loans whose repayments are predominantly insured by the FHA or guaranteed by the VA.
NONACCRUAL LOANS 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,
2018
2017
Commercial and industrial
$
1,486
Real estate mortgage
Real estate construction
Lease financing
Total commercial
Consumer:
580
32
90
1,899
628
37
76
2,188
2,640
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 $4.6 billion and $6.3 billion at December 31, 2018 and 2017,
respectively, which included $3.2 billion and $4.0 billion,
respectively, of loans that are government insured/guaranteed.
Under the Consumer Financial Protection Bureau guidelines, we
do not commence the foreclosure process on consumer real
estate loans until after the loan is 120 days delinquent.
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.
Real estate 1-4 family first mortgage (1)
3,183
3,732
Real estate 1-4 family junior lien
mortgage
Automobile
Other revolving credit and installment
Total consumer
Total nonaccrual loans
(excluding PCI)
945
130
50
1,086
130
58
4,308
5,006
$
6,496
7,646
(1) Prior period has been revised to exclude $390 million of MLHFS, LHFS and
loans held at fair value.
178
Wells Fargo & Company
178
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 $370 million at December 31, 2018, and
$1.4 billion at December 31, 2017, are not included in these 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.
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 (1)
(in millions)
Dec 31,
Dec 31,
2018
2017
Total (excluding PCI):
$
8,704
Less: FHA insured/VA guaranteed (2)
7,725
11,532
10,475
Total, not government
insured/guaranteed
$
979
1,057
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
Real estate 1-4 family junior lien
mortgage
Credit card
Automobile
Other revolving credit and installment
Total consumer
Total, not government
insured/guaranteed
43
51
94
124
32
513
114
102
885
26
23
49
213
60
492
143
100
1,008
$
979
1,057
(1) Financial information for the prior period December 31, 2017 has been revised
to exclude MLHFS, LHFS and loans held at fair value, which reduced “Total, not
government insured/guaranteed” by $6 million.
(2) Represents loans whose repayments are predominantly insured by the FHA or
guaranteed by the VA.
179
Wells Fargo & Company
179
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 $149 million at December 31, 2018, and $194 million at
December 31, 2017.
For additional information on our impaired loans and
allowance for credit losses, see Note 1 (Summary of Significant
Accounting Policies).
(in millions)
December 31, 2018
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, 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)
Recorded investment
Unpaid
principal
balance (1)
Impaired
loans
Impaired
loans with
related
allowance for
credit losses
Related
allowance for
credit losses
$
3,057
1,228
74
146
2,030
1,032
47
112
1,730
1,009
46
112
4,505
3,221
2,897
12,309
1,886
449
153
162
14,959
$
19,464
$
3,577
1,502
95
132
5,306
14,020
2,135
356
157
136
16,804
$
22,110
10,738
1,694
449
89
156
13,126
16,347
2,568
1,239
54
99
4,420
1,133
449
43
136
6,181
9,078
2,310
1,207
45
89
3,960
3,651
12,225
1,918
356
87
128
14,714
18,674
6,060
1,421
356
34
117
7,988
11,639
319
154
9
32
514
525
183
172
8
41
929
1,443
462
211
9
23
705
770
245
136
5
29
1,185
1,890
(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 $1.3 billion and $1.4 billion at December 31, 2018 and 2017, 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.
180
Wells Fargo & Company
180
Commitments to lend additional funds on loans whose
terms have been modified in a TDR amounted to $513 million
and $579 million at December 31, 2018 and 2017, 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:
2018
2017
2016
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
2,287
1,193
60
125
3,665
11,522
1,804
407
86
142
13,961
Total impaired loans (excluding PCI)
$
17,626
173
89
7
1
270
664
116
50
11
10
851
1,121
3,241
1,328
66
105
4,740
13,326
2,041
323
86
117
15,893
20,633
Interest income:
Cash basis of accounting
Other (1)
Total interest income
$
$
338
783
1,121
118
91
14
1
224
730
121
36
11
8
906
1,130
299
831
1,130
3,408
1,636
115
88
5,247
15,857
2,294
295
93
89
18,628
23,875
101
128
11
—
240
828
132
34
11
6
1,011
1,251
353
898
1,251
(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 $15.5 billion and $17.8 billion at December 31,
2018 and 2017, 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.
181
Wells Fargo & Company
181
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)
Note 6: Loans and Allowance for Credit Losses (continued)
Table 6.17: TDR Modifications
(in millions)
Year ended December 31, 2018
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, 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
$
$
$
$
$
$
13
—
—
—
13
209
7
—
13
—
—
229
242
24
5
—
—
29
231
25
—
2
—
—
258
287
42
2
—
—
44
338
23
—
2
1
—
364
408
29
44
—
—
73
26
41
336
16
49
—
468
541
45
59
1
—
105
140
82
257
15
47
—
541
646
130
105
27
—
262
288
109
180
16
33
—
626
888
2,310
2,352
375
25
63
419
25
63
2,773
2,859
1,042
113
—
55
12
8
1,230
4,003
2,912
507
26
37
1,277
161
336
84
61
8
1,927
4,786
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
2,037
238
180
75
44
44
2,618
6,718
58
—
—
—
58
4
5
—
30
—
—
39
97
173
20
—
—
193
15
14
—
39
1
—
69
1.18% $
0.88
—
—
1.00
2.25
2.14
12.54
6.21
7.95
—
8.96
8.06% $
0.64 % $
1.28
0.69
—
1.00
2.57
3.26
11.98
5.89
7.47
—
6.70
262
5.92 % $
360
1
—
—
361
49
37
—
36
2
—
124
485
1.91 % $
1.15
1.02
—
1.51
2.69
3.07
12.09
6.07
6.83
—
4.92
29
44
—
—
73
119
45
336
16
49
—
565
638
45
59
1
—
105
257
93
257
15
47
—
669
774
130
105
27
—
262
507
130
180
16
33
—
866
4.13 % $
1,128
(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 $1.9 billion, $2.1 billion and
$1.6 billion, for the years ended December 31, 2018, 2017, and 2016, 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 $28 million, $32 million and $67 million for the years ended
December 31, 2018, 2017, and 2016, 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.
182
Wells Fargo & Company
182
Recorded investment of defaults
Year ended December 31,
2018
2017
2016
$
198
76
36
—
310
60
14
79
14
6
173
483
$
173
61
4
1
239
114
19
74
15
5
227
466
124
66
3
—
193
138
20
56
13
4
231
424
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)
Total commercial
Consumer:
Dec 31, Dec 31,
2018
2017
$
4
86
Real estate 1-4 family first mortgage
4,988
12,722
Real estate 1-4 family junior lien
mortgage
Total consumer
Total PCI loans (carrying value)
Total PCI loans (unpaid principal balance)
17
27
5,005
12,749
5,009
12,835
7,348
18,975
$
$
183
Wells Fargo & Company
183
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 weighted-average 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 2018 also reflect $2.4 billion in gains on the sale of $6.2
billion Pick-a-Pay PCI loans.
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)
2018
2017
2016
2009-2015
$
8,887
11,216
16,301
10,447
—
(1,094)
(2,374)
2
27
132
(1,406)
(1,365)
(14,212)
(334)
(9)
(458)
Reclassification from nonaccretable difference for loans with improving credit-related
cash flows
403
642
1,221
Changes in expected cash flows that do not affect nonaccretable difference (3)
(2,789)
(1,233)
(4,959)
Total, end of period
$
3,033
8,887
11,216
9,734
10,658
16,301
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)
By risk category:
Pass
Criticized
Total commercial PCI loans
Dec. 31,
2018
Dec. 31,
2017
$
$
1
3
4
8
78
86
184
Wells Fargo & Company
184
Table 6.22 provides past due information for commercial
PCI loans.
Table 6.22: Commercial PCI Loans by Delinquency Status
(in millions)
By delinquency status:
Current-29 DPD and still accruing
30-89 DPD and still accruing
Total commercial PCI loans
Dec. 31,
2018
Dec. 31,
2017
$
$
3
1
4
86
—
86
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, 2018
December 31, 2017
(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
$
5,545
117
5,662
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
495
229
99
54
353
8
3
2
1
3
503
232
101
55
356
13,127
1,317
622
293
219
1,310
Total consumer PCI loans (adjusted unpaid
principal balance)
Total consumer PCI loans (carrying value)
$
$
6,775
4,988
134
17
6,909
16,888
5,005
12,722
138
8
3
2
2
4
157
27
Total
13,265
1,325
625
295
221
1,314
17,045
12,749
185
Wells Fargo & Company
185
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, 2018
December 31, 2017
Real estate Real estate
1-4 family
junior lien
mortgage
1-4 family
first
mortgage
Real estate
1-4 family
first
mortgage
Real estate
1-4 family
junior lien
mortgage
(in millions)
By FICO:
< 600
600-639
640-679
680-719
720-759
760-799
800+
No FICO available
(in millions)
By LTV/CLTV:
0-60%
60.01-80%
80.01-100%
100.01-120% (1)
> 120% (1)
No LTV/CLTV available
Total consumer PCI loans (adjusted unpaid
principal balance)
Total consumer PCI loans (carrying value)
$
$
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
134
17
6,909
16,888
5,005
12,722
157
27
17,045
12,749
December 31, 2018
December 31, 2017
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
$
1,418
713
898
970
843
523
381
1,029
6,775
4,988
$
3,970
2,161
542
82
19
1
Total
1,445
731
918
994
863
534
387
4,014
2,086
2,393
2,242
1,779
933
468
1,037
2,973
Total
4,014
2,214
570
90
20
1
8,010
6,510
1,975
319
73
1
27
18
20
24
20
11
6
8
44
53
28
8
1
—
134
17
Total
4,051
2,106
2,417
2,271
1,802
945
474
2,979
Total
8,055
6,573
2,010
329
76
2
17,045
12,749
37
20
24
29
23
12
6
6
45
63
35
10
3
1
157
27
Total consumer PCI loans (adjusted unpaid
principal balance)
Total consumer PCI loans (carrying value)
$
$
6,775
4,988
6,909
16,888
5,005
12,722
(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.
186
Wells Fargo & Company
186
Note 7: Premises, Equipment, Lease Commitments and Other Assets
Table 7.1: Premises and Equipment
Table 7.3 presents the components of other assets.
Dec 31,
2018
Dec 31,
2017
Table 7.3: Other Assets
(in millions)
Land
Buildings
Furniture and equipment
Leasehold improvements
$
1,757
8,974
6,896
2,387
1,799
8,865
7,089
2,291
Premises and equipment leased under
capital leases
75
103
Total premises and equipment
20,089
20,147
(in millions)
Dec 31,
2018
Dec 31,
2017
Corporate/bank-owned life insurance
$ 19,751
Accounts receivable (1)
Interest receivable
Core deposit intangibles
Customer relationship and other amortized
34,281
6,084
—
19,549
39,127
5,688
769
Less: Accumulated depreciation and
amortization
Net book value, premises and
equipment
11,169
11,300
intangibles
Foreclosed assets:
$
8,920
8,847
Residential real estate:
545
841
Government insured/guaranteed (1)
Non-government insured/guaranteed
Non-residential real estate
Operating lease assets
Due from customers on acceptances
88
229
134
9,036
258
120
252
270
9,666
177
Other
9,444
13,785
Total other assets
$ 79,850
90,244
(1) 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).
Depreciation and amortization expense for premises and
equipment was $1.3 billion, $1.2 billion and $1.2 billion in 2018,
2017 and 2016, respectively.
Dispositions of premises and equipment resulted in net
gains of $32 million, $128 million and $44 million in 2018, 2017
and 2016, 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, 2018.
Table 7.2: Minimum Lease Payments of Operating Leases
(in millions)
Year ended December 31,
2019
2020
2021
2022
2023
Thereafter
Total
$
1,174
1,056
880
713
577
1,654
$
6,054
Total minimum lease payments for operating leases above
are net of $427 million of noncancelable sublease income.
Operating lease rental expense (predominantly for premises)
was $1.3 billion for the years 2018, 2017 and 2016, net of
sublease income of $73 million, $76 million and $86 million for
the same years, respectively.
187
Wells Fargo & Company
187
Note 8: Equity Securities
Table 8.1 provides a summary of our equity securities by
business purpose and accounting method, including equity
securities with readily determinable fair values (marketable) and
those without readily determinable fair values (nonmarketable).
Table 8.1: Equity Securities
(in millions)
Held for trading at fair value:
Dec 31,
2018
Dec 31,
2017
Marketable equity securities
$ 19,449
30,004
Not held for trading:
Fair value:
Marketable equity securities (1)
Nonmarketable equity securities (2)
4,513
5,594
Total equity securities at fair value
10,107
4,356
4,867
9,223
Equity method:
LIHTC (3)
Private equity
Tax-advantaged renewable energy
New market tax credit and other
10,999
10,269
3,832
3,073
311
3,839
1,950
294
Total equity method
18,215
16,352
Other:
Federal Reserve Bank stock and other at
cost (4)
Private equity (5)
5,643
1,734
5,828
1,090
Total equity securities not held for
trading
35,699
32,493
Total equity securities (6)
$ 55,148
62,497
(1)
(2)
Includes $3.2 billion and $3.7 billion at December 31, 2018 and 2017,
respectively, related to securities held as economic hedges of our deferred
compensation plan obligations.
Includes $5.5 billion and $4.9 billion at December 31, 2018 and 2017,
respectively, related to investments for which we elected the fair value option.
See Note 18 (Fair Value of Assets and Liabilities) for additional information.
(3) Represents low-income housing tax credit investments.
(4)
Includes $5.6 billion and $5.4 billion at December 31, 2018 and 2017,
respectively, related to investments in Federal Reserve Bank and Federal Home
Loan Bank stock.
(5) Represents nonmarketable equity securities for which we have elected to
account for the security under the measurement alternative.
(6) At December 31, 2018 and 2017, we held no securities of any single issuer
with a book value that exceeded 10% of stockholder’s equity.
Equity Securities Held for Trading
Equity securities held for trading purposes are marketable equity
securities traded on organized exchanges. These securities are
held as part of our customer accommodation trading activities.
For more information on these activities, see Note 4 (Trading
Activities).
Equity Securities Not Held for Trading
We also hold equity securities unrelated to trading activities.
These securities include private equity and tax credit
investments, securities held as economic hedges or to meet
regulatory requirements (for example, Federal Reserve Bank and
Federal Home Loan Bank stock). Equity securities not held for
trading purposes are accounted for at either fair value, equity
method, cost or the measurement alternative.
FAIR VALUE Marketable equity securities held for purposes
other than trading primarily consist of exchange-traded equity
funds held to economically hedge obligations related to our
deferred compensation plans and to a lesser extent other
holdings of publicly traded equity securities held for investment
purposes. We have elected to account for nonmarketable equity
securities under the fair value method, and substantially all of
these securities are economically hedged with equity derivatives.
EQUITY METHOD Our equity method investments consist of
tax credit and private equity investments, the majority of which
are our low-income housing tax credit (LIHTC) investments.
We invest in affordable housing projects that qualify for the
LIHTC, which are designed to promote private development of
low-income housing. These investments generate a return
mostly through realization of federal tax credit and other tax
benefits. We recognized pre-tax losses of $1.2 billion for both
2018 and 2017, related to our LIHTC investments. These losses
were recognized in other noninterest income. We also
recognized total tax benefits of $1.5 billion for both 2018 and
2017, which included tax credits recorded to income taxes of
$1.2 billion and $1.1 billion for the same periods, respectively.
We are periodically required to provide additional financial
support during the investment period. Our liability for unfunded
commitments was $3.9 billion and $3.6 billion at December 31,
2018 and 2017, respectively. Substantially all of this liability is
expected to be paid over the next three years. This liability is
included in long-term debt.
OTHER The remaining portion of our nonmarketable equity
securities portfolio consists of securities accounted for using the
cost or measurement alternative method.
188
Wells Fargo & Company
188
Realized Gains and Losses
Table 8.2 provides a summary of the net gains and losses for
equity securities. Gains and losses for securities held for trading
are reported in net gains from trading activities.
Table 8.2: Net Gains (Losses) from Equity Securities
(in millions)
Net gains (losses) from equity securities carried at fair value:
Marketable equity securities
Nonmarketable equity securities
Total equity securities carried at fair value
Year ended December 31,
2018
2017
2016
$
(389)
709
320
967
1,557
2,524
525
(21)
504
Net gains (losses) from nonmarketable equity securities not carried at fair value:
Impairment write-downs
(352)
(339)
(448)
Net unrealized gains related to measurement alternative observable transactions
Net realized gains on sale
All other
Total nonmarketable equity securities not carried at fair value
418
1,504
33
1,603
—
980
97
738
Net gains (losses) from economic hedge derivatives (1)
(408)
(1,483)
—
849
73
474
125
Total net gains from equity securities
$
1,515
1,779
1,103
(1)
Includes net gains (losses) on derivatives not designated as hedging instruments.
Measurement Alternative
Table 8.3 provides additional information about the impairment
write-downs and observable price adjustments related to
nonmarketable equity securities accounted for under the
measurement alternative. Gains and losses related to these
adjustments are also included in Table 8.2.
Table 8.3: Measurement Alternative
(in millions)
Net gains (losses) recognized in earnings during the period:
Gross unrealized gains due to observable price changes
Gross unrealized losses due to observable price changes
Impairment write-downs
Realized net gains from sale
Total net gains recognized during the period
The cumulative gross unrealized gains and (losses) due to
observable price changes as of December 31, 2018, were
$415 million and $(25) million, respectively. Cumulative
impairment losses as of December 31, 2018, were $33 million.
These cumulative amounts represent carrying value adjustments
to equity securities accounted for under the measurement
alternative that were recognized on the balance sheet as of
December 31, 2018.
Year ended December 31,
2018
443
(25)
(33)
274
659
$
$
189
Wells Fargo & Company
189
Note 9: Securitizations and Variable Interest Entities
Involvement with Special Purpose Entities (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.
190
Wells Fargo & Company
190
Table 9.1 provides the classifications of assets and liabilities
in our balance sheet for our transactions with VIEs.
Table 9.1: Balance Sheet Transactions with VIEs
(in millions)
December 31, 2018
Cash and due from banks
Interest-earning deposits with banks
Debt securities:
Trading debt securities
Available-for-sale debt securities (1)
Held-to-maturity debt securities
Loans
Mortgage servicing rights
Derivative assets
Equity securities
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, 2017
Cash and due from banks
Interest-earning deposits with banks
Debt securities:
Trading debt securities
Available-for-sale debt securities (1)
Held-to-maturity debt securities
Loans
Mortgage servicing rights
Derivative assets
Equity securities
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
$
—
—
2,110
2,686
510
139
8
45
—
—
1,433
13,564
14,761
53
11,041
—
—
—
85
221
32,594
14,062
—
—
200
317
—
94
—
—
—
6
617
493
—
8
93
Total
139
8
2,355
3,003
510
15,091
14,761
53
11,126
227
47,273
493
26
430
4,779
5,728
34
—
26
231
3,870
4,127
—
—
— (2)
191 (2)
816 (2)
1,007
34
594
—
$ 28,467
13,021
23
41,511
$
—
—
1,305
3,288
485
4,274
13,628
44
10,740
—
116
371
—
—
—
12,482
—
—
306
342
33,764
13,617
—
106
244
3,590
3,940
—
—
5 (2)
132 (2)
1,479 (2)
1,616
283
$
29,824
11,718
—
—
201
358
—
110
—
—
—
6
675
522
—
10
111
643
—
32
116
371
1,506
3,646
485
16,866
13,628
44
11,046
348
48,056
522
111
386
5,180
6,199
283
41,574
(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 debt
and equity securities, loans, MSRs, derivative assets and
liabilities, other assets, other liabilities, and long-term debt, as
appropriate.
191
Wells Fargo & Company
191
Note 9: Securitizations and Variable Interest Entities (continued)
Table 9.2 provides a summary of unconsolidated VIEs with
which we have significant continuing involvement, but we are
not the primary beneficiary. We do not consider our continuing
involvement in an unconsolidated VIE to be significant when it
relates to third-party sponsored VIEs for which we were not the
transferor (unless we are servicer and have other significant
forms of involvement) or if we were the sponsor only or sponsor
and servicer but do not have any other forms of significant
involvement.
Significant continuing involvement includes transactions
where we were the sponsor or transferor and have other
significant forms of involvement. Sponsorship includes
transactions with unconsolidated VIEs where we solely or
materially participated in the initial design or structuring of the
entity or marketing of the transaction to investors. When we
transfer assets to a VIE and account for the transfer as a sale, we
Table 9.2: Unconsolidated VIEs
are considered the transferor. We consider investments in
securities (other than those held temporarily in trading), loans,
guarantees, liquidity agreements, written options and servicing
of collateral to be other forms of involvement that may be
significant. We have excluded certain transactions with
unconsolidated VIEs from the balances presented in the
following table where we have determined that our continuing
involvement is not significant due to the temporary nature and
size of our variable interests, because we were not the transferor
or because we were not involved in the design of the
unconsolidated VIEs. We also exclude from the table secured
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, 2018
Residential mortgage loan securitizations:
Conforming (2)
Other/nonconforming
Commercial mortgage securitizations
Collateralized debt obligations:
Debt securities
Loans (3)
Asset-based finance structures
Tax credit structures
Collateralized loan obligations
Investment funds
Other (4)
Total
Residential mortgage loan securitizations:
Conforming
Other/nonconforming
Commercial mortgage securitizations
Collateralized debt obligations:
Debt securities
Loans (3)
Asset-based finance structures
Tax credit structures
Collateralized loan obligations
Investment funds
Other (4)
Total
(continued on following page)
Total
VIE
assets
Debt and
equity
interests (1)
Servicing
Other
commitments
and
assets Derivatives
guarantees Net assets
Carrying value – asset (liability)
$ 1,172,833
2,377
13,811
10,596
153,350
453
2,409
57
893
659
—
304
—
—
205
35,185
12,087
2
185
1,688
—
42
207
—
—
—
—
—
—
—
$ 1,374,802
17,780
14,761
—
—
(22)
5
—
—
—
—
—
44
27
Debt and
equity
interests (1)
Servicing
assets Derivatives
(171)
16,017
—
(40)
(20)
—
—
510
3,240
(15)
—
205
(3,870)
8,217
—
—
—
—
42
251
(4,101)
28,467
Maximum exposure to loss
Other
commitments
and
guarantees
Total
exposure
$
2,377
13,811
453
2,409
—
—
205
12,087
—
42
207
57
893
—
—
—
—
—
—
—
$
17,780
14,761
—
—
28
1,183
17,371
—
510
11,563
14,893
5
20
—
—
—
—
—
45
78
—
71
25
—
276
1,420
13,507
—
—
158
—
42
410
14,415
47,034
192
Wells Fargo & Company
192
(continued from previous page)
(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
Total
VIE
Debt and
equity
assets interests (1)
Servicing
assets
Derivatives
Carrying value - asset (liability)
Other
commitments
and
guarantees
Net assets
$ 1,169,410
14,175
144,650
1,031
1,481
2,333
2,100
598
2,198
—
1,443
1,867
31,852
11,258
23
225
2,257
1
50
577
12,665
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)
(20)
—
—
(3,590)
—
—
—
671
3,082
(15)
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
(1)
Includes total equity interests of $11.0 billion and $10.7 billion at December 31, 2018 and 2017, 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 $1.2 billion and $2.2 billion at December 31, 2018 and 2017, 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 invested in senior tranches from a diversified pool of U.S. asset
securitizations, of which all were current and 100% were rated as investment grade by the primary rating agencies at December 31, 2017. These senior loans were
accounted for at amortized cost and were subject to the Company’s allowance and credit charge-off policies. The securitization was terminated in first quarter 2018.
Includes structured financing and credit-linked note structures. At December 31, 2017, also contains investments in auction rate securities (ARS) issued by VIEs that we
did not sponsor and, accordingly, are unable to obtain the total assets of the entity.
(4)
In Table 9.2, “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
193
Wells Fargo & Company
193
Note 9: Securitizations and Variable Interest Entities (continued)
agreements we make to our issuers and purchasers, which are
included in other commitments and guarantees. In certain
instances, we may service residential mortgage loan
securitizations structured by third parties whose loans we did
not originate or transfer. Our residential mortgage loan
securitizations consist of conforming and nonconforming
securitizations.
Conforming residential mortgage loan securitizations are
those that are guaranteed by the GSEs, including GNMA.
Because of the power of the GSEs over the VIEs that hold the
assets from these conforming residential mortgage loan
securitizations, we do not consolidate them.
The loans sold to the VIEs in nonconforming residential
mortgage loan securitizations are those that do not qualify for a
GSE guarantee. We may hold variable interests issued by the
VIEs, including senior securities. We do not consolidate the
nonconforming residential mortgage loan securitizations
included in the table because we either do not hold any variable
interests, hold variable interests that we do not consider
potentially significant or are not the primary servicer for a
majority of the VIE assets.
Other commitments and guarantees include amounts
related to loans sold that we may be required to repurchase, or
otherwise indemnify or reimburse the investor or insurer for
losses incurred, due to material breach of contractual
representations and warranties as well as other retained
recourse arrangements. The maximum exposure to loss for
material breach of contractual representations and warranties
represents a stressed case estimate we utilize for determining
stressed case regulatory capital needs and is considered to be a
remote scenario.
COMMERCIAL MORTGAGE LOAN SECURITIZATIONS
Commercial mortgage loan securitizations are financed through
the issuance of fixed or floating-rate asset-backed securities,
which are collateralized by the loans transferred to the VIE. In a
typical securitization, we may transfer loans we originate to
these VIEs, account for the transfers as sales, retain the right to
service the loans and may hold other beneficial interests issued
by the VIEs. In certain instances, we may service commercial
mortgage loan securitizations structured by third parties whose
loans we did not originate or transfer. We typically serve as
primary or master servicer of these VIEs. The primary or master
servicer in a commercial mortgage loan securitization typically
cannot make the most significant decisions impacting the
performance of the VIE and therefore does not have power over
the VIE. We do not consolidate the commercial mortgage loan
securitizations included in the disclosure because we either do
not have power or do not have a variable interest that could
potentially be significant to the VIE.
COLLATERALIZED DEBT OBLIGATIONS (CDOs) A CDO is a
securitization where a VIE purchases a pool of assets consisting
of asset-backed securities and issues multiple tranches of equity
or notes to investors. In some CDOs, a portion of the assets are
obtained synthetically through the use of derivatives such as
credit default swaps or total return swaps.
In addition to our role as arranger, we may have other forms
of involvement with these CDOs. Such involvement may include
acting as liquidity provider, derivative counterparty, secondary
market maker or investor. For certain CDOs, we may also act as
the collateral manager or servicer. We receive fees in connection
with our role as collateral manager or servicer.
We assess whether we are the primary beneficiary of CDOs
based on our role in them in combination with the variable
interests we hold. Subsequently, we monitor our ongoing
involvement to determine if the nature of our involvement has
changed. We are not the primary beneficiary of these CDOs in
most cases because we do not act as the collateral manager or
servicer, which generally denotes power. In cases where we are
the collateral manager or servicer, we are not the primary
beneficiary because we do not hold interests that could
potentially be significant to the VIE.
COLLATERALIZED LOAN OBLIGATIONS (CLOs) A CLO is a
securitization where an SPE purchases a pool of assets consisting
of loans and issues multiple tranches of equity or notes to
investors. Generally, CLOs are structured on behalf of a third-
party asset manager that typically selects and manages the assets
for the term of the CLO. Typically, the asset manager has the
power over the significant decisions of the VIE through its
discretion to manage the assets of the CLO. We assess whether
we are the primary beneficiary of CLOs based on our role in
them and the variable interests we hold. In most cases, we are
not the primary beneficiary because we do not have the power to
manage the collateral in the VIE.
In addition to our role as arranger, we may have other forms
of involvement with these CLOs. Such involvement may include
acting as underwriter, derivative counterparty, secondary market
maker or investor. For certain CLOs, we may also act as the
servicer, for which we receive fees in connection with that role.
We also earn fees for arranging these CLOs and distributing the
securities.
ASSET-BASED FINANCE STRUCTURES We engage in various
forms of structured finance arrangements with VIEs that are
collateralized by various asset classes including energy contracts,
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.
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INVESTMENT 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 2018, 2017 and 2016 was
$45 million, $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, 2018, we held no ARS issued by VIEs, compared
with $400 million at December 31, 2017. We acquired the ARS
pursuant to agreements entered into in 2008 and 2009. All ARS
were sold during 2018.
We did not consolidate the VIEs that issued the ARS
because we did not have power over the activities of the VIEs.
TRUST PREFERRED SECURITIES VIEs that we wholly own
issue debt securities or preferred equity to third-party investors.
All of the proceeds of the issuance are invested in debt securities
or preferred equity that we issue to the VIEs. The VIEs’
operations and cash flows relate only to the issuance,
administration and repayment of the securities held by third
parties. We do not consolidate these VIEs because the sole assets
of the VIEs are receivables from us, even though we own all of
the voting equity shares of the VIEs, have fully guaranteed the
obligations of the VIEs and may have the right to redeem the
Table 9.3: Cash Flows From Sales and Securitization Activity
third-party securities under certain circumstances. In our
consolidated balance sheet at December 31, 2018 and 2017, we
reported the debt securities issued to the VIEs as long-term
junior subordinated debt with a carrying value of $2.0 billion at
both dates, 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 9.3 presents the cash flows for our
transfers accounted for as sales in which we have a continuing
involvement with the transferred financial assets.
(in millions)
2018
Other
financial
assets
Mortgage
loans
Proceeds from securitizations and whole loan sales
$ 193,721
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
3,337
698
3
96
(154)
—
—
1
—
—
—
Year ended December 31,
2017
Other
financial
assets
25
—
1
—
—
—
Mortgage
loans
252,723
3,492
2,898
26
133
(218)
2016
Other
financial
assets
347
—
1
—
—
—
Mortgage
loans
228,282
3,352
2,218
12
92
(269)
(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 2018 and 2017, we paid nothing to third-party investors to settle repurchase liabilities on pools of loans, compared with $11 million in 2016.
(3) Represent loans repurchased from GNMA, FNMA, and FHLMC under representation and warranty provisions included in our loan sales contracts. Excludes $7.8 billion in
delinquent insured/guaranteed loans that we service and have exercised our option to purchase out of GNMA pools in 2018, compared with $8.6 billion and $9.9 billion in
2017 and 2016, respectively. These loans are predominantly insured by the FHA or guaranteed by the VA.
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Note 9: Securitizations and Variable Interest Entities (continued)
During 2018, 2017 and 2016, we transferred $17.9 billion,
$16.7 billion and $18.3 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 $280 million in 2018, $359 million in 2017
and $429 million in 2016, respectively, because the loans were
carried at lower of cost or fair value (LOCOM). In connection
with these transfers, in 2018 we recorded a servicing asset of
$158 million, initially measured at fair value using a Level 3
measurement technique, and securities of $81 million, classified
as Level 2. In 2017, we recorded a servicing asset of $166 million
and securities of $65 million. In 2016, we recorded a servicing
asset of $270 million and securities of $258 million.
Retained Interests from Unconsolidated VIEs
Table 9.5 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.
In 2018, 2017, and 2016, we recognized net gains of
$270 million, $701 million and $524 million, respectively, from
transfers accounted for as sales of financial assets, in which we
have a continuing involvement with the transferred assets. These
net gains largely relate to commercial mortgage securitizations,
and residential mortgage securitizations where the loans were
not already carried at fair value.
Sales with continuing involvement during 2018, 2017 and
2016 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 2018, 2017 and 2016 we
transferred $177.8 billion, $213.6 billion and $236.6 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 2018 we
recorded a $1.9 billion servicing asset, measured at fair value
using a Level 3 measurement technique, securities of
$5.0 billion, classified as Level 2, and a $17 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 2017, we recorded a $2.1 billion servicing asset,
securities of $1.4 billion and a $24 million liability. In 2016, we
recorded a $2.1 billion servicing asset, securities of $4.4 billion
and a $36 million liability.
Table 9.4 presents the key weighted-average assumptions
we used to measure residential mortgage servicing rights at the
date of securitization.
Table 9.4: Residential Mortgage Servicing Rights
Residential mortgage servicing rights
2018
2017
2016
Year ended December 31,
Prepayment speed (1)
Discount rate
Cost to service ($ per loan) (2) $
10.6%
7.4
128
11.5
7.0
132
11.7
6.5
132
(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)
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Wells Fargo & Company
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Table 9.5: Retained Interests from Unconsolidated VIEs
($ in millions, except cost to service amounts)
Fair value of interests held at December 31, 2018
Expected weighted-average life (in years)
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
Fair value of interests held at December 31, 2017
Expected weighted-average life (in years)
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
Residential
mortgage
servicing
rights (1)
$ 14,649
6.5
Other interests held
Commercial (2)
Interest-only
strips
Subordinated
bonds
16
3.6
668
7.0
Senior
bonds
309
5.7
9.9%
17.7
$
530
1,301
1
1
8.1%
14.5
$
615
1,176
106
316
787
—
1
$
$ 13,625
6.2
19
3.3
10.5 %
20.0
$
565
1,337
1
2
6.9 %
14.8
—
1
$
652
1,246
143
467
1,169
4.3
37
72
5.1%
2
5
596
6.7
4.1
32
61
$
1.8 %
—
—
3.7
14
28
—
—
—
468
5.2
3.1
20
39
—
—
—
(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
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Note 9: Securitizations and Variable Interest Entities (continued)
In addition to residential mortgage servicing rights (MSRs)
included in the previous table, we have a small portfolio of
commercial MSRs with a fair value of $2.3 billion and
$2.0 billion at December 31, 2018 and 2017, respectively. The
nature of our commercial MSRs, which are carried at LOCOM, is
different from our residential MSRs. Prepayment activity on
serviced loans does not significantly impact the value of
commercial MSRs because, unlike residential mortgages,
commercial mortgages experience significantly lower
prepayments due to certain contractual restrictions, impacting
the borrower’s ability to prepay the mortgage. Additionally, for
our commercial MSR portfolio, we are typically master/primary
servicer, but not the special servicer, who is separately
responsible for the servicing and workout of delinquent and
foreclosed loans. It is the special servicer, similar to our role as
servicer of residential mortgage loans, who is affected by higher
servicing and foreclosure costs due to an increase in delinquent
and foreclosed loans. Accordingly, prepayment speeds and costs
to service are not key assumptions for commercial MSRs as they
do not significantly impact the valuation. The primary economic
driver impacting the fair value of our commercial MSRs is
forward interest rates, which are derived from market
observable yield curves used to price capital markets
instruments. Market interest rates 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, 2018 and 2017, results in a decrease in fair value
of $320 million and $278 million, respectively. See Note 10
Table 9.6: Off-Balance Sheet Loans Sold or Securitized
(Mortgage Banking Activities) for further information on our
commercial MSRs.
The sensitivities in the preceding paragraph and table are
hypothetical and caution should be exercised when relying on
this data. Changes in value based on variations in assumptions
generally cannot be extrapolated because the relationship of the
change in the assumption to the change in value may not be
linear. Also, the effect of a variation in a particular assumption
on the value of the other interests held is calculated
independently without changing any other assumptions. In
reality, changes in one factor may result in changes in others (for
example, changes in prepayment speed estimates could result in
changes in the credit losses), which might magnify or counteract
the sensitivities.
Off-Balance Sheet Loans
Table 9.6 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,
2018
2017
2018
2017
2018
2017
$
105,173
100,875
105,173
100,875
1,008
1,008
2,839
2,839
739
739
466
466
1,027
1,027
735
735
Real estate 1-4 family first mortgage
1,097,128
1,126,208
8,947
13,393
Total consumer
1,097,128
1,126,208
8,947
13,393
Total off-balance sheet sold or securitized loans (2)
$ 1,202,301
1,227,083
9,955
16,232
1,205
1,762
(1)
Includes $675 million and $1.2 billion of commercial foreclosed assets and $582 million and $879 million of consumer foreclosed assets at December 31, 2018 and 2017,
respectively.
(2) At December 31, 2018 and 2017, the table includes total loans of $1.1 trillion at both dates, delinquent loans of $6.4 billion and $9.1 billion, and foreclosed assets of
$442 million and $619 million, 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.
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Transactions with Consolidated VIEs and Secured
Borrowings
Table 9.7 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 9.7: Transactions with Consolidated VIEs and Secured Borrowings
Total VIE
assets
Assets
Liabilities
Noncontrolling
interests
Net assets
Carrying value
(in millions)
December 31, 2018
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
627
95
722
8,215
1,947
3,957
—
155
14
523
94
617
8,204
1,732
3,957
—
155
14
(501)
(93)
(594)
(477)
(521)
—
—
(5)
(4)
Total consolidated VIEs
14,288
14,062
(1,007)
Total secured borrowings and consolidated VIEs
$ 15,010
14,679
(1,601)
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 consolidated VIEs
Total secured borrowings and consolidated VIEs
We have raised financing through the securitization of
certain financial assets in transactions with VIEs accounted for
as secured borrowings. We also consolidate VIEs where we are
the primary beneficiary. In certain transactions, we provide
contractual support in the form of limited recourse and liquidity
to facilitate the remarketing of short-term securities issued to
third-party investors. Other than this limited contractual
support, the assets of the VIEs are the sole source of repayment
of the securities held by third parties.
MUNICIPAL TENDER OPTION BOND SECURITIZATIONS As
part of our normal investment portfolio activities, we consolidate
municipal bond trusts that hold highly rated, long-term, fixed-
rate municipal bonds, the majority of which are rated AA or
better. Our residual interests in these trusts generally allow us to
capture the economics of owning the securities outright, and
constructively make decisions that significantly impact the
economic performance of the municipal bond vehicle, primarily
by directing the sale of the municipal bonds owned by the
658
113
771
9,116
2,515
2,378
10
305
100
14,424
$
15,195
565
110
675
8,626
2,212
2,378
6
305
90
13,617
14,292
(532)
(111)
(643)
(915)
(694)
—
(4)
(2)
(1)
(1,616)
(2,259)
vehicle. In addition, the residual interest owners have the right
to receive benefits and bear losses that are proportional to
owning the underlying municipal bonds in the trusts. The trusts
obtain financing by issuing floating-rate trust certificates that
reprice on a weekly or other basis to third-party investors. Under
certain conditions, if we elect to terminate the trusts and
withdraw the underlying assets, the third-party investors are
entitled to a small portion of any unrealized gain on the
underlying assets. We may serve as remarketing agent and/or
liquidity provider for the trusts. The floating-rate investors have
the right to tender the certificates at specified dates, often with
as little as seven days’ notice. Should we be unable to remarket
the tendered certificates, we are generally obligated to purchase
them at par under standby liquidity facilities unless the bond’s
credit rating has declined below investment grade or there has
been an event of default or bankruptcy of the issuer and insurer.
—
—
—
(14)
—
—
—
(15)
(5)
(34)
(34)
—
—
—
(29)
—
—
—
(230)
(24)
(283)
(283)
22
1
23
7,713
1,211
3,957
—
135
5
13,021
13,044
33
(1)
32
7,682
1,518
2,378
2
73
65
11,718
11,750
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Wells Fargo & Company
199
Note 9: Securitizations and Variable Interest Entities (continued)
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, 2018 and 2017, total assets held
by the master trust were $6.7 billion and $7.6 billion,
respectively, and the outstanding senior notes were $299 million
and $773 million, respectively. The other SPEs acquired
included securitization term trust entities, which purchased
vendor finance lease and loan assets and issued notes to
investors, and an SPE that engages in leasing activities to
specific vendors. The securitization term trusts were dissolved
during 2017. The remaining other SPE held $1.5 billion and $1.4
billion in total assets at December 31, 2018 and 2017,
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.
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.
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Wells Fargo & Company
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Note 10: 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 10.1
presents the changes in MSRs measured using the fair value
method.
Table 10.1: 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,
2018
2017
2016
$ 13,625
12,959
12,415
—
2,010
541
2,263
—
2,204
(71)
(23)
(65)
1,939
2,781
2,139
1,337
818
(830)
(365)
960
(103)
96
13
(132)
(126)
543
106
—
(84)
565
(1,875)
(1,989)
(2,160)
(915)
(2,115)
(1,595)
$ 14,649
13,625
12,959
(1)
(2)
(3)
(4)
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. The amount for the year ended December 31, 2018, reflects updated information obtained regarding market
participants’ views of servicing and foreclosure costs.
(5) Reflects discount rate assumption change, excluding portion attributable to changes in mortgage interest rates. The amount for the year ended December 31, 2018,
reflects updated information obtained regarding market participants’ views of discount 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 10.2 presents the changes in amortized MSRs.
Table 10.2: 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,
2018
$
1,424
127
158
2017
1,406
115
166
2016
1,308
97
270
(266)
(263)
(269)
$
1,443
1,424
1,406
$
2,025
2,288
1,956
2,025
1,680
1,956
(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.
201
Wells Fargo & Company
201
Note 10: Mortgage Banking Activities (continued)
We present the components of our managed servicing
portfolio in Table 10.3 at unpaid principal balance for loans
serviced and subserviced for others and at book value for owned
loans serviced.
Table 10.3: 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 10.4 presents the components of mortgage banking
noninterest income.
Table 10.4: 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,
2018
Dec 31,
2017
$ 1,164
1,209
334
4
342
3
1,502
1,554
543
121
9
673
$ 2,175
$ 1,707
0.94%
495
127
9
631
2,185
1,704
0.88
Year ended December 31,
2018
2017
2016
$
3,613
3,603
3,778
162
182
172
199
180
229
(331)
(582)
(819)
3,626
3,392
3,368
Due to changes in valuation model inputs or assumptions (2)
(A)
960
(126)
565
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 (losses) 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)
(1,875)
(1,989)
(2,160)
(915)
(2,115)
(1,595)
(266)
(1,072)
1,373
1,644
3,017
(112)
$
$
(263)
413
1,427
2,923
4,350
287
(269)
261
1,765
4,331
6,096
826
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 10.1 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 17 (Derivatives) for additional discussion and detail.
202
Wells Fargo & Company
202
Note 11: Intangible Assets
Table 11.1 presents the gross carrying value of intangible assets
and accumulated amortization.
Table 11.1: Intangible Assets
December 31, 2018
December 31, 2017
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
$
4,161
(2,718)
1,443
12,834
3,994
(12,834)
(3,449)
—
545
Total amortized intangible assets
$
20,989
(19,001)
1,988
Unamortized intangible assets:
MSRs (carried at fair value) (2)
$
14,649
Goodwill
Trademark
26,418
14
(1) Excludes fully amortized intangible assets.
(2) See Note 10 (Mortgage Banking Activities) for additional information on MSRs.
(2,452)
(12,065)
(3,153)
(17,670)
1,424
769
841
3,034
3,876
12,834
3,994
20,704
13,625
26,587
14
Table 11.2 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, 2018. Future amortization
expense may vary from these projections.
Table 11.2: Amortization Expense for Intangible Assets
(in millions)
Year ended December 31, 2018 (actual)
Estimate for year ended December 31,
2019
2020
2021
2022
2023
Amortized MSRs
Core deposit
intangibles
Customer
relationship and
other
intangibles (1)
$
$
266
769
299
260
233
200
178
150
—
—
—
—
—
116
97
83
69
59
Total
1,334
376
330
283
247
209
(1) The year ended December 31, 2018, balance includes $10 million for lease intangible amortization.
203
Wells Fargo & Company
203
Note 11: Intangible Assets (continued)
Table 11.3 shows the allocation of goodwill to our reportable
operating segments.
Table 11.3: Goodwill
(in millions)
December 31, 2016
Reclassification of goodwill held for sale to other assets (2)
Reduction in goodwill related to divested businesses and other (2)
Goodwill from business combinations
December 31, 2017 (1)
Reclassification of goodwill held for sale to other assets
Reduction in goodwill related to divested businesses and other
Community
Banking
Wholesale
Banking
$
16,849
—
—
—
$
16,849
(155)
(9)
8,585
(116)
(14)
—
8,455
—
(5)
Wealth and
Investment
Management
Consolidated
Company
1,259
26,693
—
—
24
(116)
(14)
24
1,283
26,587
—
—
(155)
(14)
December 31, 2018 (1)
$
16,685
8,450
1,283
26,418
(1) At December 31, 2017, other assets included Goodwill classified as held-for-sale of $13 million related to the sales agreement for Wells Fargo Shareowner Services. At
December 31, 2018, there was no Goodwill classified as held-for-sale in other assets.
(2) The prior period has been revised to conform with the current period presentation.
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, 2018 and 2017. The fair values
exceeded the carrying amount of our respective reporting units
by approximately 42% to 544% at December 31, 2018. See
Note 26 (Operating Segments) for further information on
management reporting.
204
Wells Fargo & Company
204
Note 12: Deposits
Table 12.1 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 12.3.
Table 12.1: Time Certificates of Deposits and Other Time
Deposits
Table 12.3: 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
2018
$
13,724
12,292
12,945
3,504
$
42,465
Demand deposit overdrafts of $624 million and
$371 million were included as loan balances at December 31,
2018 and 2017, respectively.
(in billions)
Dec 31,
Dec 31,
2018
2017
Total domestic and foreign
$
130.6
128.6
Domestic:
$100,000 or more
$250,000 or more
Foreign:
$100,000 or more
$250,000 or more
42.5
37.1
4.6
4.6
52.7
46.9
13.4
13.4
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 12.2.
Table 12.2: Contractual Maturities of CDs and Other Time
Deposits
(in millions)
December 31, 2018
2019
2020
2021
2022
2023
Thereafter
Total
$
88,435
25,986
6,324
3,320
2,868
3,712
$
130,645
205
Wells Fargo & Company
205
Note 13: Short-Term Borrowings
Table 13.1 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 15 (Guarantees, Pledged Assets and Collateral, and Other
Commitments).
Table 13.1: Short-Term Borrowings
(in millions)
As of December 31,
Federal funds purchased and securities sold under agreements to
repurchase
Commercial paper
Amount
2018
Rate
Amount
2017
Rate
Amount
2016
Rate
$
92,430
2.65%
$
88,684
1.30%
$
78,124
0.17%
—
—
—
—
120
Other short-term borrowings
13,357
1.63
14,572
0.72
18,537
Total
Year ended December 31,
Average daily balance
Federal funds purchased and securities sold under agreements to
repurchase
Commercial paper
Other short-term borrowings
Total
Maximum month-end balance
$
105,787
2.52
$ 103,256
1.22
$
96,781
$
90,348
1.78
$
82,507
0.90
$
99,955
—
—
16
13,919
0.79
16,399
0.95
0.13
256
14,976
$
104,267
1.65
$
98,922
0.77
$ 115,187
Federal funds purchased and securities sold under agreements to
repurchase (1)
Commercial paper (2)
Other short-term borrowings (3)
$
93,918
N/A
$
91,604
N/A
$ 109,645
—
16,924
N/A
N/A
78
19,439
N/A
N/A
519
18,537
N/A- Not applicable
(1) Highest month-end balance in each of the last three years was November 2018, November 2017 and October 2016.
(2) There were no month-end balances in 2018; highest month-end balance in the remaining years was January 2017 and March 2016.
(3) Highest month-end balance in each of the last three years was January 2018, February 2017 and December 2016.
0.93
0.28
0.19
0.33
0.86
0.02
0.29
N/A
N/A
N/A
206
Wells Fargo & Company
206
Note 14: 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, approximately
half of the long-term debt presented below is hedged in a fair
value or cash flow hedge relationship. See Note 17 (Derivatives)
for further information on qualifying hedge contracts.
Table 14.1: Long-Term Debt
Table 14.1 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, 2018. 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,
2018
2017
Senior
Fixed-rate notes (1)
Floating-rate notes
FixFloat notes
Structured notes (2)
Total senior debt - Parent
Subordinated
Fixed-rate notes (3)
Total subordinated debt - Parent
Junior subordinated
Fixed-rate notes - hybrid trust securities
Floating-rate notes
Total junior subordinated debt - Parent (4)
Total long-term debt - Parent (3)
Wells Fargo Bank, N.A. and other bank entities (Bank)
Senior
Fixed-rate notes
Floating-rate notes
FixFloat notes
Fixed-rate advances - Federal Home Loan Bank (FHLB) (5)
Floating-rate advances - FHLB (5)
Structured notes (2)
Capital leases
Total senior debt - Bank
Subordinated
Fixed-rate notes
Total subordinated debt - Bank
Junior subordinated
Floating-rate notes
Total junior subordinated debt - Bank (4)
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)
2019-2045
2019-2048
2028
2019-2056
0.38-6.75%
$
77,742
0.10-4.08%
19,553
3.58%
2,901
7,984
84,652
22,463
2,961
7,442
108,180
117,518
2023-2046
3.45-7.57%
2029-2036
2027
5.95-7.95%
2.94-3.44%
25,428
25,428
27,132
27,132
1,308
308
1,616
1,369
299
1,668
135,224
146,318
2019-2023
2019-2053
2021
2019-2031
2019-2021
2019-2037
2019-2029
1.75-3.63%
14,222
2.33-3.57%
3.33%
3.83-7.50%
6,617
1,998
51
7,732
4,317
—
62
2.44-3.28%
53,825
47,825
2.87-17.78%
1,646
36
743
39
78,395
60,718
2023-2038
5.25-7.74%
2027
3.09-3.19%
2020-2047
2020-2047
2019-2057
6.00%
2.46-13.02%
0.20-9.20%
6,637
5,199
5,199
352
352
160
656
5,408
5,408
342
342
268
1,211
7,291
91,399
75,238
207
Wells Fargo & Company
207
Note 14: Long-Term Debt (continued)
(continued from previous page)
(in millions)
Other consolidated subsidiaries
Senior
Fixed-rate notes
Structured notes (2)
Maturity date(s)
Stated interest rate(s)
December 31,
2018
2017
Total senior debt - Other consolidated subsidiaries
Mortgage notes and other (7)
2026
4.08%
Total long-term debt - Other consolidated subsidiaries
Total long-term debt
6
2,389
32
2,421
1
3,391
73
3,464
$ 229,044
225,020
2019-2023
2021-2028
2.94-3.46%
2,383
3,390
(1)
(2)
(3)
Includes $59 million of outstanding zero coupon callable notes at December 31, 2018.
Included in the table are certain structured notes that have coupon or repayment terms linked to the performance of debt or equity securities, an embedded equity,
commodity, or currency index, or basket of indices accounted for separately from the note as a free-standing derivative, and the maturity may be accelerated based on the
value of a referenced index or security. For information on embedded derivatives, see the “Derivatives Not Designated as Hedging Instruments” section in Note 17
(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 $131 million and $133 million in 2018 and 2017, respectively, and debt issuance costs of
$2 million in both 2018 and 2017, 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 27 (Parent-Only Financial Statements). In addition, Parent long-term debt presented in Note 27 also includes affiliate related issuance costs of
$278 million and $323 million in 2018 and 2017, respectively.
(4) Represents junior subordinated debentures held by unconsolidated wholly-owned trusts formed for the sole purpose of issuing trust preferred securities. See Note 9
(Securitizations and Variable Interest Entities) for additional information on our trust preferred security structures.
(5) At December 31, 2018 and 2017, FHLB advances were secured by residential loan collateral.
(6) For additional information on VIEs, see Note 9 (Securitizations and Variable Interest Entities).
(7) A major portion related to securitizations and secured borrowings, see Note 9 (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 $229.0 billion at
December 31, 2018, increased $4.0 billion from December 31,
2017. We issued $47.6 billion of long-term debt in 2018.
The aggregate carrying value of long-term debt that matures
(based on contractual payment dates) as of December 31, 2018,
in each of the following five years and thereafter is presented in
Table 14.2.
Table 14.2: Maturity of Long-Term Debt
(in millions)
2019
2020
2021
2022
2023
Thereafter
Total
December 31, 2018
Wells Fargo & Company (Parent Only)
Senior notes
Subordinated notes
Junior subordinated notes
Total long-term debt - Parent
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
Securitizations and other bank debt
Total long-term debt - Other consolidated subsidiaries
$
6,713
13,459
17,923
17,772
10,932
41,381
108,180
—
—
—
—
—
—
—
—
3,544
21,884
25,428
—
1,616
1,616
6,713
13,459
17,923
17,772
14,476
64,881
135,224
36,653
18,498
20,218
—
—
—
—
—
—
2,084
1,647
574
38,737
20,145
20,792
1,097
—
1,097
—
—
—
920
—
920
40
—
—
268
308
—
—
—
2,807
1,043
—
119
179
78,395
4,156
5,199
352
352
2,761
7,453
3,969
7,448
91,399
367
—
367
5
32
37
2,389
32
2,421
Total long-term debt
$ 46,547
33,604
39,635
18,080
18,812
72,366
229,044
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, 2018, we were in compliance with all the
covenants.
208
Wells Fargo & Company
208
Note 15: 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 15.1
shows carrying value, maximum exposure to loss on our
guarantees and the related non-investment grade amounts.
Table 15.1: Guarantees – Carrying Value and Maximum Exposure to Loss
(in millions)
December 31, 2018
Carrying
value of
Expires in
obligation one year or
less
(asset)
Maximum exposure to loss
Expires
after one
year
through
three years
Expires
after three
years
through
five years
Expires
after five
years
Non-
investment
grade
Total
Written put options (3)
(455)
14,758
12,706
Standby letters of credit (1)
$
Securities lending and other
indemnifications (2)
Written put options (3)
Loans and MLHFS sold with recourse (4)
Factoring guarantees
Other guarantees
Total guarantees
December 31, 2017
Standby letters of credit (1)
Securities lending and other indemnifications
(2)
$
$
Loans and MLHFS sold with recourse (4)
Factoring guarantees
Other guarantees
Total guarantees
40
—
14,636
7,897
3,398
497
26,428
8,027
—
1
—
1,044
1,045
1
(185)
17,243
10,502
54
—
1
104
889
—
653
—
—
3,066
1,207
—
3
400
31,211
21,732
10,163
12,127
9,079
—
2,959
889
2,962
751
1
(90)
32,872
19,053
7,674
15,063
74,662
39,591
15,357
7,908
3,068
645
26,978
8,773
39
—
—
—
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
$
(364)
31,034
21,147
7,896
16,052
76,129
36,692
(1) Total maximum exposure to loss includes direct pay letters of credit (DPLCs) of $7.5 billion and $8.1 billion at December 31, 2018 and 2017, 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 $70 million and $92 million
with related collateral of $974 million and $717 million at December 31, 2018 and 2017, respectively. Estimated maximum exposure to loss was $1.0 billion at
December 31, 2018, and $809 million at December 31, 2017.
(2)
(3) Written put options, which are in the form of derivatives, are also included in the derivative disclosures in Note 17 (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 $3 million
and $5 million of loans associated with these agreements during 2018 and 2017, respectively.
“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
15.1 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
time, and we indemnify our clients against default by the
borrower in returning these lent securities. This indemnity is
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Note 15: Guarantees, Pledged Assets and Collateral, and Other Commitments (continued)
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.
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 17 (Derivatives) for
additional information regarding written derivative contracts.
LOANS AND MLHFS SOLD WITH RECOURSE In certain sales
and securitizations of loans, including mortgage loans, 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 15.1 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.
FACTORING GUARANTEES Under certain factoring
arrangements, we may be required to purchase trade receivables
from third parties, 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 15.1 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.
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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 15.2 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 $14.1 billion and
$13.6 billion at December 31, 2018 and 2017, respectively, which
can only be used to settle the liabilities of those entities. The
table also excludes $617 million and $675 million in assets
pledged in transactions with VIE’s accounted for as secured
borrowings at December 31, 2018 and 2017, respectively. See
Note 9 (Securitizations and Variable Interest Entities) for
additional information on consolidated VIE assets and secured
borrowings.
Table 15.2: Pledged Assets
(in millions)
Held for trading:
Debt securities
Equity securities
Dec 31,
2018
$
96,616
9,695
Dec 31,
2017
96,993
12,161
Total pledged assets held for trading (1)
106,311
109,154
Not held for trading:
Debt securities and other (2)
Mortgage loans held for sale and loans (3)
Total pledged assets not held for trading
Total pledged assets
62,438
453,894
516,332
$
622,643
73,592
469,554
543,146
652,300
(2)
(1) Consists of pledged assets held for trading of $45.5 billion and $41.9 billion at December 31, 2018 and 2017, respectively, and off-balance sheet securities of $60.8 billion
and $67.3 billion as of the same dates, respectively, that are pledged as collateral for repurchase agreements and other securities financings. Total pledged assets held for
trading includes $106.2 billion and $109.0 billion at December 31, 2018 and 2017, respectively, that permit the secured parties to sell or repledge the collateral.
Includes carrying value of $4.2 billion and $5.0 billion (fair value of $4.1 billion and $5.0 billion) in collateral for repurchase agreements at December 31, 2018 and 2017,
respectively, which are pledged under agreements that do not permit the secured parties to sell or repledge the collateral. Also includes $68 million and $64 million in
collateral pledged under repurchase agreements at December 31, 2018 and 2017, respectively, that permit the secured parties to sell or repledge the collateral.
Substantially all other pledged securities are pursuant to agreements that do not permit the secured party to sell or repledge the collateral.
Includes mortgage loans held for sale of $7.4 billion and $2.6 billion at December 31, 2018 and 2017, respectively. Substantially all of the total mortgage loans held for
sale and loans are pledged under agreements that do not permit the secured parties to sell or repledge the collateral. Amounts exclude $1.2 billion and $2.2 billion at
December 31, 2018 and 2017, respectively, of pledged loans recorded on our balance sheet representing certain delinquent loans that are eligible for repurchase from
GNMA loan securitizations.
(3)
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 SECURITIES FINANCING ACTIVITIES Table
15.3 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 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 15.3, we also
have balance sheet netting related to derivatives that is disclosed
in Note 17 (Derivatives).
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Note 15: Guarantees, Pledged Assets and Collateral, and Other Commitments (continued)
Table 15.3: Offsetting – Securities Financing Activities
(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)
Dec 31,
2018
Dec 31,
2017
$
112,662
(15,258)
97,404
(96,734)
$
670
$
106,248
(15,258)
90,990
(90,798)
$
192
121,135
(23,188)
97,947
(96,829)
1,118
111,488
(23,188)
88,300
(87,918)
382
(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, 2018 and 2017, includes $80.1 billion and $78.9 billion, respectively, classified on our consolidated balance sheet in federal funds sold and securities
purchased under resale agreements. Balance also includes securities purchased under long-term resale agreements (generally one year or more) classified in loans, which
totaled $17.3 billion and $19.0 billion, at December 31, 2018 and 2017, respectively.
(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, 2018 and 2017, we have received total collateral with a fair value of $123.1 billion and $130.8 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 $60.8 billion at December 31, 2018,
and $66.3 billion at December 31, 2017.
(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, 2018 and 2017, we have pledged total collateral with a fair value of $108.8 billion and $113.6 billion, respectively, of
which, the counterparty does not have the right to sell or repledge $4.4 billion as of December 31, 2018, and $5.2 billion as of December 31, 2017.
(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.
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
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 15.4 provides the underlying collateral
types of our gross obligations under repurchase and securities
lending agreements.
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Table 15.4: Underlying Collateral Types of Gross Obligations
(in millions)
Repurchase agreements:
Securities of U.S. Treasury and federal agencies (1)
Securities of U.S. States and political subdivisions
Federal agency mortgage-backed securities (1)
Non-agency mortgage-backed securities
Corporate debt securities (1)
Asset-backed securities
Equity securities
Other (1)
Total repurchases
Securities lending:
Securities of U.S. Treasury and federal agencies
Federal agency mortgage-backed securities
Corporate debt securities
Equity securities (2)
Other
Total securities lending
Dec 31,
2018
$
38,408
159
47,241
1,875
6,191
2,074
992
340
Dec 31,
2017
40,507
92
45,336
1,324
8,020
2,034
838
1,602
97,280
99,753
222
2
389
8,349
6
8,968
186
—
619
10,930
—
11,735
111,488
Total repurchases and securities lending
$
106,248
(1) Amounts for December 31, 2017, have been revised to conform with the current period classification of certain collateral.
(2) 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 15.5 provides the contractual maturities of our gross
obligations under repurchase and securities lending agreements.
Table 15.5: Contractual Maturities of Gross Obligations
Overnight/
continuous
Up to 30
days
30-90 days
>90 days
Total gross
obligation
(in millions)
December 31, 2018
Repurchase agreements
Securities lending
$
86,574
8,669
Total repurchases and securities lending (1)
$
95,243
December 31, 2017
Repurchase agreements
Securities lending
Total repurchases and securities lending (1)
$
$
83,780
9,634
93,414
3,244
—
3,244
7,922
584
8,506
2,153
299
2,452
3,286
1,363
4,649
5,309
—
97,280
8,968
5,309
106,248
4,765
154
4,919
99,753
11,735
111,488
(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, 2018 and
2017, we had commitments to purchase debt securities of
$335 million and $194 million, respectively, and commitments
to purchase equity securities of $2.5 billion and $2.2 billion,
respectively.
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
$9.8 billion and $2.8 billion as of December 31, 2018 and 2017,
respectively.
The Parent fully and unconditionally guarantees the
payment of principal, interest, and any other amounts that may
be due on securities that its 100% owned finance subsidiary,
Wells Fargo Finance LLC, may issue. These guaranteed liabilities
were $5 million and $0 million at December 31, 2018 and 2017,
respectively. These guarantees rank on parity with all of the
Parent’s other unsecured and unsubordinated indebtedness.
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Note 16: 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 that 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 On April 20, 2018, the
Company entered into consent orders with the Office of the
Comptroller of the Currency (OCC) and the Consumer Financial
Protection Bureau (CFPB) to resolve, among other things,
investigations by the agencies into the Company’s compliance
risk management program and its past practices involving
certain automobile collateral protection insurance (CPI) policies
and, as discussed below, certain mortgage interest rate lock
extensions. The consent orders require remediation to customers
and the payment of a total of $1.0 billion in civil money penalties
to the agencies. In July 2017, the Company announced a plan to
remediate customers who may have been financially harmed due
to issues related to automobile CPI policies purchased through a
third-party vendor on their behalf. 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. A putative class of shareholders also filed a securities
fraud class action against the Company and its executive officers
alleging material misstatements and omissions of CPI-related
information in the Company’s public disclosures. Former team
members have also 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 customer and dealer and, by
assignment, the lender, which will result in remediation to
customers in certain states. Allegations related to the CPI and
GAP programs are among the subjects of shareholder derivative
lawsuits pending in federal and state court in California. The
court dismissed the state court action in September 2018, but
plaintiffs filed an amended complaint in November 2018.
Subject to full documentation and court approval, the parties
have reached agreements in principle to resolve the shareholder
derivative lawsuits pursuant to which the Company will pay
plaintiffs’ attorneys’ fees and undertake certain business and
governance practices. 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. In
December 2018, the Company entered into an agreement with
all 50 state Attorneys General and the District of Columbia to
resolve an investigation into the Company’s retail sales practices,
CPI and GAP, and mortgage interest rate lock matters, pursuant
to which the Company paid $575 million.
CONSUMER DEPOSIT ACCOUNT RELATED REGULATORY
INVESTIGATION 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. A former team member
has brought a state court action alleging retaliation for raising
concerns about these procedures.
FIDUCIARY AND CUSTODY ACCOUNT FEE CALCULATIONS
Federal government agencies are conducting formal or informal
inquiries, investigations, or examinations regarding fee
calculations within certain fiduciary and custody accounts in the
Company’s investment and fiduciary services business, which is
part of the wealth management business within WIM. The
Company has determined that there have been instances of
incorrect fees being applied to certain assets and accounts,
resulting in both overcharges and undercharges to customers.
FOREIGN EXCHANGE BUSINESS Federal government
agencies, including the United States Department of Justice
(Department of Justice), are investigating or examining certain
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activities in the Company’s foreign exchange business. The
Company has accrued amounts to remediate customers that may
have received pricing inconsistent with commitments made to
those customers, and to rebate customers where historic pricing,
while consistent with contracts entered into with those
customers, does not conform to the Company’s recently
implemented standards and pricing.
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 8 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. The parties have entered into
a settlement agreement to resolve the money damages class
claims pursuant to which defendants will pay a total of
approximately $6.2 billion, which includes approximately
$5.3 billion of funds remaining from the 2012 settlement and
$900 million in additional funding. The Company’s allocated
responsibility for the additional funding is approximately
$94.5 million. The court granted preliminary approval of the
settlement in January 2019, and scheduled a final approval
hearing for November 7, 2019. 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 equitable relief class case.
LOW INCOME HOUSING TAX CREDITS Federal government
agencies have undertaken formal or informal inquiries or
investigations regarding the manner in which the Company
purchased, and negotiated the purchase of, certain federal low
income housing tax credits in connection with the financing of
low income housing developments.
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. The parties
have entered into a settlement agreement pursuant to which the
Company will pay $13.5 million to resolve the claims. On
October 24, 2018, the court granted preliminary approval of the
settlement and scheduled a final fairness hearing for March 4,
2019.
MORTGAGE INTEREST RATE LOCK RELATED REGULATORY
INVESTIGATION On April 20, 2018, the Company entered into
consent orders with the OCC and CFPB to resolve, among other
things, investigations by the agencies into the Company’s
compliance risk management program and its past practices
involving certain automobile CPI policies and certain mortgage
interest rate lock extensions. The consent orders require
remediation to customers and the payment of a total of
$1.0 billion in civil money penalties to the 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 was 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. The
Company filed a motion to dismiss and the court granted the
motion. Subsequently, a putative class action was filed in the
United States District Court for the District of Oregon, raising
similar allegations. The Company filed a motion to dismiss this
action. In addition, former team members have asserted claims,
including in pending litigation, that they were terminated for
raising concerns regarding mortgage interest rate lock extension
practices. Allegations related to mortgage interest rate lock
extension fees are also among the subjects of two shareholder
derivative lawsuits filed in California state court. This matter has
also subjected the Company to formal or informal inquiries,
investigations or examinations from other federal and state
government agencies. In December 2018, the Company entered
into an agreement with all 50 state Attorneys General and the
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Note 16: Legal Actions (continued)
District of Columbia to resolve an investigation into the
Company’s retail sales practices, CPI and GAP, and mortgage
interest rate lock matters, pursuant to which the Company paid
$575 million.
MORTGAGE LOAN MODIFICATION LITIGATION Plaintiffs
representing a putative class of mortgage borrowers have filed
separate putative class actions, Hernandez v. Wells Fargo, et al.,
and Coordes v. Wells Fargo, et al., against Wells Fargo Bank,
N.A. in the United States District Court for the Northern District
of California and the United States District Court for the District
of Washington, respectively. Plaintiffs allege that Wells Fargo
improperly denied mortgage loan modifications or repayment
plans to customers in the foreclosure process due to the
overstatement of foreclosure attorneys’ fees that were included
for purposes of determining whether a customer in the
foreclosure process qualified for a mortgage loan modification or
repayment plan.
MORTGAGE RELATED REGULATORY INVESTIGATIONS
Federal and state government agencies, including the
Department of Justice, have been investigating or examining
certain mortgage related activities of Wells Fargo and
predecessor institutions. Wells Fargo, for itself and for
predecessor institutions, has responded, or 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. An agreement, pursuant to
which the Company paid $2.09 billion, was reached in August
2018 to resolve the Department of Justice investigation, which
related to certain 2005-2007 residential mortgage-backed
securities activities. In addition, the Company reached an
agreement with the Attorney General of the State of Illinois in
November 2018 pursuant to which the Company paid
$17 million in restitution to certain Illinois state pension funds
to resolve a claim relating to certain residential mortgage-backed
securities activities. 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.
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
(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 in October
2016, and Wells Fargo appealed this decision to the United
States Court of Appeals for the Eleventh Circuit. In May 2018,
the Eleventh Circuit ruled in Wells Fargo’s favor and found that
Wells Fargo had not waived its arbitration rights and remanded
the case to the district court for further proceedings. Plaintiffs
filed a petition for rehearing to the Eleventh Circuit, which was
denied in August 2018. Plaintiffs petitioned for certiorari from
the United States Supreme Court, and that petition was denied
in January 2019.
RETAIL SALES PRACTICES MATTERS Federal, state, and
local government agencies, including the Department of
Justice, the United States Securities and Exchange
Commission (SEC), and the United States Department of
Labor; state attorneys general, including the New York
Attorney General; and prosecutors’ offices, as well as
Congressional committees, have undertaken formal or
informal inquiries, investigations or examinations arising out
of certain retail sales practices of the Company that were the
subject of settlements with the CFPB, the OCC, 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. In October 2018, the
Company entered into an agreement to resolve the New York
Attorney General’s investigation pursuant to which the
Company paid $65 million to the State of New York. In
December 2018, the Company entered into an agreement with
all 50 state Attorneys General and the District of Columbia to
resolve an investigation into the Company’s retail sales
practices, CPI and GAP, and mortgage interest rate lock
matters, pursuant to which the Company paid $575 million.
The Company has also engaged in preliminary and/or
exploratory resolution discussions with the Department of
Justice and the SEC, although there can be no assurance as to
the outcome of these discussions.
In addition, a number of lawsuits have also been filed by
non-governmental parties seeking damages or other remedies
related to these retail 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. The district court issued an order
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216
granting final approval of the settlement on June 14, 2018.
Several appeals of the district court’s order granting final
approval of the settlement have been filed with the United States
Court of Appeals for the Ninth Circuit. Second, Wells Fargo
shareholders brought 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. The
Company entered into a settlement agreement to resolve this
matter pursuant to which the Company paid $480 million. The
district court issued an order granting final approval of the
settlement on December 20, 2018. Third, Wells Fargo
shareholders have brought numerous shareholder derivative
lawsuits asserting breach of fiduciary duty claims, among others,
against current and former directors and officers for their
alleged failure to detect and prevent sales practices issues. These
actions have been filed or transferred to the United States
District Court for the Northern District of California and
California state court for coordinated proceedings. An additional
lawsuit asserting similar claims in Delaware state court has been
stayed. Subject to full documentation and court approval, the
parties have reached an agreement in principle to resolve the
shareholder derivative lawsuits pursuant to which insurance
carriers will pay the Company approximately $240 million for
alleged damage to the Company, and the Company will pay
plaintiffs’ attorneys’ fees. Fourth, multiple employment litigation
matters have 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 that has been dismissed
and is now on appeal; a class action in the United States District
Court for the Northern District of California on behalf of team
members who allege that they protested sales practice
misconduct and/or were terminated for not meeting sales goals
that has now been dismissed, and we have entered into a
framework with plaintiffs’ counsel to address individual claims
that have been asserted; various wage and hour class actions
brought in federal and state court in California (which have been
settled), New Jersey, and Pennsylvania on behalf of non-exempt
branch based team members alleging that 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.
RMBS TRUSTEE LITIGATION In November 2014, a group of
institutional investors (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
(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 (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 (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 (Third-Party
Claims). The investment advisors have moved to dismiss those
complaints. On April 17, 2018, the Southern District of New York
denied class certification in the Related Federal Case brought by
Royal Park Investments SA/NV (Royal Park Action).
A complaint raising similar allegations to those in the
Federal Court Complaint was filed in May 2016 in New York
state court by a different plaintiff investor. 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 (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 (Declaratory Judgment 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 November 2018, the Institutional Investor Plaintiffs
and the Company entered into a settlement agreement
pursuant to which, among other terms, the Company will pay
$43 million to resolve the Federal Court Complaint and the
State Court Action. The settlement will also resolve the Third
Party Claims and the Declaratory Judgment Action. The New
York state court has scheduled a fairness hearing on the
settlement for May 6, 2019. In addition, Royal Park
Investments SA/NV and Wells Fargo Bank, N.A. have reached
an agreement resolving the Royal Park Action. Other than the
Royal Park Action, the Related Federal Cases are not covered
by these settlement agreements.
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. The motion was denied in June 2018. Trial is scheduled
for October 2019.
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217
Note 16: Legal Actions (continued)
WHOLESALE BANKING CONSENT ORDER INVESTIGATION
On November 19, 2015, the Company entered into a consent
order with the OCC, pursuant to which the Wholesale Banking
group was required to implement customer due diligence
standards that include collection of current beneficial ownership
information for certain business customers. The Company is
responding to inquiries from various federal government
agencies regarding potentially inappropriate conduct in
connection with the collection of beneficial ownership
information.
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, 2018. The increase in the high end of the range
from September 30, 2018, was due to a variety of matters,
including the Company’s existing retail sales practices matters.
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 the retail 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.
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218
Note 17: 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 17.1 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.
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219
Note 17: Derivatives (continued)
Table 17.1: Notional or Contractual Amounts and Fair Values of Derivatives
December 31, 2018
December 31, 2017
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
$ 177,511
34,176
2,237
573
636
209,677
1,376
34,135
2,492
1,482
1,092
1,137
2,810
2,012
3,974
2,229
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
Subtotal
Total derivatives not designated as hedging instruments
Total derivatives before netting
Netting (3)
Total
173,215
13,920
19,521
100
849
1,362
225
27
369
220,558
79
80
—
12,315
15,976
111
2,463
528
159
716
78
37
990
201
138
309
—
648
9,162,821
15,349
15,303
6,434,673
14,979
14,179
66,173
217,890
364,982
11,741
20,880
1,588
6,183
5,916
76
175
2,336
5,931
5,657
182
98
62,530
213,750
362,896
9,021
17,406
29,287
29,507
31,750
30,035
34,560
32,047
2,354
6,291
7,413
147
207
31,391
32,381
36,355
1,335
8,363
7,122
214
208
31,421
32,069
34,298
(23,790)
(23,548)
(24,127)
(25,502)
$ 10,770
8,499
12,228
8,796
(1) Notional amounts presented at December 31, 2017, exclude $500 million of interest rate contracts for certain derivatives that are combined for designation as a hedge in a
single relationship. No such hedging relationships existed at December 31, 2018. The notional amount for foreign exchange contracts at December 31, 2018 and 2017,
excludes $11.2 billion and $13.5 billion, respectively for certain derivatives that are combined for designation as a hedge on a single relationship.
Includes economic hedge derivatives used to hedge the risk of changes in the fair value of residential MSRs, MLHFS, 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.
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220
Table 17.2 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 $30.9 billion and $28.4 billion of
gross derivative assets and liabilities, respectively, at
December 31, 2018, and $30.0 billion and $29.9 billion,
respectively, at December 31, 2017, 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 $3.7 billion and $3.6 billion,
respectively, at December 31, 2018, and $6.4 billion and
$4.4 billion, respectively, at December 31, 2017, 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 17.2 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 15 (Guarantees, Pledged Assets and Collateral, and Other
Commitments).
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Note 17: Derivatives (continued)
Table 17.2: Gross Fair Values of Derivative Assets and Liabilities
Gross
amounts
offset in
consolidated
balance
sheet (1)
Gross amounts
not offset in
consolidated
balance sheet
(Disclosure-only
netting) (2)
Net amounts in
consolidated
balance sheet
Gross amounts
recognized
Percent
exchanged in
over-the-counter
market (3)
Net
amounts
(in millions)
December 31, 2018
Derivative assets
Interest rate contracts
$
18,435
(12,029)
Commodity contracts
Equity contracts
Foreign exchange contracts
Credit contracts-protection sold
Credit contracts-protection purchased
1,588
7,545
6,714
76
202
(849)
(5,318)
(5,355)
(73)
(166)
6,406
739
2,227
1,359
3
36
(80)
6,326
(4)
735
(755)
1,472
(35)
1,324
—
(1)
3
35
Total derivative assets
$
34,560
(23,790)
10,770
(875)
9,895
90%
57
78
100
12
78
Derivative liabilities
Interest rate contracts
$
16,308
(13,152)
Commodity contracts
Equity contracts
Foreign exchange contracts
Credit contracts-protection sold
Credit contracts-protection purchased
2,336
6,010
7,113
182
98
(727)
(3,877)
(5,522)
(180)
(90)
3,156
1,609
2,133
1,591
2
8
(567)
2,589
92%
(8)
1,601
(110)
2,023
(188)
1,403
(2)
—
—
8
Total derivative liabilities
$
32,047
(23,548)
8,499
(875)
7,624
December 31, 2017
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
$
17,630
(11,929)
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)
(4)
(596)
(25)
—
(3)
5,556
1,384
2,178
2,292
2
43
$
$
36,355
(24,127)
12,228
(773)
11,455
15,472
(13,226)
1,335
8,501
8,568
214
208
(648)
(4,041)
(7,189)
(204)
(194)
2,246
687
4,460
1,379
10
14
(1,078)
1,168
99 %
(1)
(400)
(204)
(9)
—
686
4,060
1,175
1
14
76
85
100
85
9
85
75
100
67
11
99 %
88
76
100
10
89
Total derivative liabilities
$
34,298
(25,502)
8,796
(1,692)
7,104
(1) Represents amounts with counterparties subject to enforceable master netting arrangements that have been offset in the consolidated balance sheet, including related cash
collateral and portfolio level counterparty valuation adjustments. Counterparty valuation adjustments were $353 million and $245 million related to derivative assets and
$152 million and $95 million related to derivative liabilities as of December 31, 2018 and 2017, respectively. Cash collateral totaled $3.7 billion and $3.6 billion, netted
against derivative assets and liabilities, respectively, at December 31, 2018, and $2.7 billion and $4.2 billion, respectively, at December 31, 2017.
(2) 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.
(3) 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.
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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 mortgage loans
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 contractually specified interest rate.
We estimate $293 million pre-tax of deferred net losses
primarily related to cash flow hedges in OCI at December 31,
2018, will be reclassified into net interest income during the next
twelve months. The deferred losses expected to be reclassified
into net interest income are primarily related to discontinued
hedges of floating rate loans. We are hedging our foreign
exposure to the variability of future cash flows for all forecasted
transactions for a maximum of 8 years.
Table 17.3 shows the net gains (losses) related to derivatives
in fair value and cash flow hedging relationships.
Table 17.3: Gains (Losses) Recognized in Consolidated Statement of Income on Fair Value and Cash Flow Hedging Relationships (1)
(in millions)
Year ended December 31, 2018
Net interest income
Noninterest
Income
Debt
securities
Mortgage
loans held
Loans
for sale Deposits
Long-term
debt
Other
Total
Total amounts presented in the consolidated statement
of income
$ 14,406 43,974
777
(5,622)
(6,703)
2,473
49,305
Gains (losses) on fair value hedging relationships
Interest rate 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
Net income (expense) recognized on fair value
hedges
Gains (losses) on cash flow hedging relationships
Interest contracts
Realized gains (losses) (pre tax) reclassified from
cumulative OCI into net income (5)
Foreign exchange 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)
(187)
845
—
1
(3)
15
(41)
292
27
(1,923)
(877)
(1)
(22)
(33)
1,843
—
—
—
61
(1,035)
910
33
7
(1)
(180)
—
—
—
—
—
—
—
—
—
—
(434)
135
(82)
—
(401)
(1,204)
(1,062)
1,114
1,031
(10)
(47)
(169)
(90)
(496)
—
(292)
—
—
1
—
(291)
—
—
—
(292)
$
—
—
—
—
(3)
(2)
—
—
(3)
(294)
223
Wells Fargo & Company
223
Note 17: Derivatives (continued)
(continued from previous page)
(in millions)
Year ended December 31, 2017
Net interest income
Noninterest
Income
Debt
securities
Mortgage
loans held
Loans
for sale Deposits
Long-
term debt
Other
Total
Total amounts presented in the consolidated statement of
income
$ 12,946
41,388
786
(3,013)
(5,157)
1,603
48,553
Gains (losses) on fair value hedging relationships
Interest rate 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
Net income (expense) recognized on fair value hedges
Gains (losses) on cash flow hedging relationships
Interest contracts
Realized gains (losses) (pre tax) reclassified from cumulative
OCI into net income (5)
Foreign exchange contracts
Realized gains (losses) (pre-tax) reclassified from cumulative
OCI into net income (5)
Net income (expense) recognized on cash flow hedges
$
(469)
(43)
(52)
14
13
(10)
(547)
(1)
1
(1)
—
—
—
(1)
(5)
(5)
(4)
—
—
—
(14)
36
(20)
36
1,286
(912)
938
(210)
(230)
255
—
—
—
52
—
—
—
—
847
(979)
917
(196)
3,118
2,901
(2,855)
(2,610)
1,127
263
880
—
551
—
—
(8)
—
543
—
—
—
551
—
—
—
—
—
(8)
—
—
—
543
Year ended December 31, 2016
Total amounts presented in the consolidated statement of
income
Gains (losses) on fair value hedging relationships
Interest rate contracts
$ 11,244
39,505
784
(1,395)
(3,830)
1,289
47,597
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
Foreign exchange contracts
Realized gains (losses) (pre-tax) reclassified from cumulative
OCI into net income (5)
Net income (expense) recognized on cash flow hedges
$
—
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
(1) Year ended December 31, 2016, gain or loss amounts and presentation location were not conformed to new hedge accounting guidance that we adopted in 2017.
(2)
(3)
Includes changes in fair value due to the passage of time associated with the non-zero fair value amount at hedge inception.
Includes $(2) million, $(3) million and $(13) million for years ended December 31, 2018, 2017, and 2016, 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.
(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 25 (Other Comprehensive Income) for the amounts recognized in other
comprehensive income.
(5) See Note 25 (Other Comprehensive Income) for details of amounts reclassified to net income.
224
Wells Fargo & Company
224
Table 17.4 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 17.4: Hedged Items in Fair Value Hedging Relationship
(in millions)
December 31, 2018
Hedged Items Currently Designated
Hedged Items No Longer Designated (1)
Carrying Amount Hedge Accounting Basis
Adjustment
Assets/(Liabilities) (3)
of Assets/
(Liabilities) (2)(4)
Carrying Amount of
Assets/(Liabilities) (4)
Hedge Accounting
Basis Adjustment
Assets/(Liabilities)
Available-for-sale debt securities (5)
$
37,857
Loans
Mortgage loans held for sale
Deposits
Long-term debt
December 31, 2017
—
448
(56,535)
(104,341)
Available-for-sale debt securities (5)
$
32,498
Loans
Mortgage loans held for sale
Deposits
Long-term debt
140
465
(23,679)
(128,950)
(157)
—
7
115
(742)
870
(1)
(1)
158
4,938
—
—
—
(25,539)
5,221
—
—
—
(2,154)
(1,953)
238
—
—
—
366
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 debt securities is
$1.6 billion and for long-term debt is $(6.3) billion as of December 31, 2018, and $1.5 billion for debt securities and for long-term debt is $(7.7) billion as of December 31,
2017.
(3) The balance includes $1.4 billion and $66 million of debt securities and long-term debt cumulative basis adjustments as of December 31, 2018, respectively, and
$2.1 billion and $297 million of debt securities and long-term debt cumulative basis adjustments as of December 31, 2017, 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 MLHFS, 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 securities 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 (losses) of
$(1.1) billion, $413 million, and $261 million in 2018, 2017, and
2016, respectively, which are included in mortgage banking
noninterest income. The aggregate fair value of these derivatives
was a net asset of $757 million at December 31, 2018, and a net
asset of $89 million at December 31, 2017. 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.
Loan 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 MLHFS, 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
MLHFS are carried at fair value with changes in fair value
included in mortgage banking noninterest income. For the fair
value measurement of derivative loan 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 positive fair value of $60 million and
$17 million at December 31, 2018 and 2017, respectively, and is
included in the caption “Interest rate contracts” under
“Customer accommodation trading and other derivatives” in
Table 17.1.
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
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Wells Fargo & Company
225
Note 17: Derivatives (continued)
currency index, or basket of such indices. These notes contain
explicit terms that affect some or all of the cash flows or the
value of the note in a manner similar to a derivative instrument
and therefore are considered to contain an “embedded”
derivative instrument. The indices on which the performance of
the hybrid instrument is calculated are not clearly and closely
related to the host debt instrument. The “embedded” derivative
is separated from the host contract and accounted for as a
derivative. Additionally, we may invest in hybrid instruments
that contain embedded derivatives, such as credit derivatives,
that are not clearly and closely related to the host contract. In
such instances, we either elect fair value option for the hybrid
instrument or separate the embedded derivative from the host
contract and account for the host contract and derivative
separately.
Table 17.5 shows the net gains (losses), recognized by
income statement lines, related to derivatives not designated as
hedging instruments.
Table 17.5: Gains (Losses) on Derivatives Not Designated as Hedging Instruments
(in millions)
Mortgage banking
Net gains (losses) Net gains (losses)
from trading
activities
from equity
securities
Noninterest income
Other
Total
Year ended December 31, 2018
Net gains (losses) recognized on
economic hedges derivatives:
Interest rate contracts (1)
$
(215)
(215)
(408)
—
—
—
—
—
—
—
—
(352)
—
(408)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
446
4,499
638
1
83
—
(15)
4
669
—
658
—
(403)
—
—
—
—
(230)
(404)
669
—
35
94
4,096
638
1
83
—
5,667
(403)
4,912
Interest rate contracts (3)
(352)
Equity contracts
Foreign exchange contracts
Credit contracts
Subtotal (2)
Net gains (losses) recognized on
customer accommodation trading
and other derivatives:
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)
$
(567)
(408)
5,667
255
4,947
226
Wells Fargo & Company
226
(continued from previous page)
(in millions)
Mortgage banking
Net gains (losses)
from equity
securities
Net gains (losses)
from trading
activities
Noninterest income
Other
Total
Year ended December 31, 2017
Net gains (losses) recognized on
economic hedges derivatives:
Interest rate contracts (1)
$
Equity contracts
Foreign exchange contracts
Credit contracts
Subtotal (2)
Net gains (losses) recognized on
customer accommodation trading and
other derivatives:
Interest rate 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, 2016
Net gains (losses) recognized on
economic hedges derivatives:
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)
Interest rate 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
$
—
—
—
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
(1)
(2)
Includes gains (losses) on the derivatives used as economic hedges of MSRs measured at fair value, derivative loan commitments and mortgages held for sale.
Includes hedging gains (losses) of $9 million, $(71) million, and $(8) million for the years ended December 31, 2018, 2017, and 2016, respectively, which partially offset
hedge accounting ineffectiveness.
(3) Amounts presented in mortgage banking noninterest income are gains (losses) on derivative loan 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 17.6 provides details of sold and purchased credit
derivatives.
227
Wells Fargo & Company
227
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
Note 17: Derivatives (continued)
Table 17.6: Sold and Purchased Credit Derivatives
(in millions)
December 31, 2018
Credit default swaps on:
Corporate bonds
Structured products
Credit protection on:
Default swap index
Commercial mortgage-backed securities index
Asset-backed securities index
Other
$
59
62
1
49
9
2
2,037
133
3,618
389
42
5,522
Total credit derivatives
$
182
11,741
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
2,007
267
2,626
423
42
3,656
9,021
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
$7.4 billion at December 31, 2018, and $8.3 billion at
December 31, 2017, respectively, for which we posted
$5.6 billion and $7.1 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
441
128
582
109
42
5,327
6,629
510
252
540
—
—
3,306
4,608
1,374
121
1,998
363
42
—
3,898
1,575
232
308
401
42
—
2,558
663
12
1,460
113
2019 - 2027
2022 - 2047
1,620
2,896
2019 - 2028
26
—
5,522
7,843
51
1
2047 - 2058
2045 - 2046
12,561
2018 - 2048
17,082
432
35
946
153
2018 - 2027
2022 - 2047
2,318
3,932
22
—
3,656
6,463
87
1
9,840
14,959
2018 - 2027
2047 - 2058
2045 - 2046
2018 - 2031
maximum amount of collateral to be posted, on December 31,
2018, or December 31, 2017, we would have been required to
post additional collateral of $1.8 billion or $1.2 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.
228
Wells Fargo & Company
228
Note 18: 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 18.2 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, write-downs of individual assets or application of
the measurement alternative for nonmarketable equity
securities. Assets recorded on a nonrecurring basis are presented
in Table 18.12 in this Note.
Following is a discussion of the fair value hierarchy and the
valuation methodologies we use for assets and liabilities
recorded at fair value on a recurring or nonrecurring basis and
for estimating fair value for financial instruments that are 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.
•
•
We do not classify equity securities 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 securities with published NAVs are 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, interest-earning deposits with
banks, federal funds sold and securities purchased under resale
agreements and due from customers on acceptances (classified
in Other Assets). 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 DEBT SECURITIES Trading debt securities are
recorded at fair value on a recurring basis. These 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.
AVAILABLE-FOR-SALE AND HELD-TO-MATURITY DEBT
SECURITIES Available-for-sale (AFS) debt securities are
recorded at fair value on a recurring basis and held-to-maturity
(HTM) debt securities are recorded at amortized cost. HTM debt
securities are subject to impairment and fair value measurement
is recorded if the fair value declines below amortized cost and we
do not expect to recover the entire amortized cost basis of the
security. Fair value measurement for AFS and HTM debt
securities 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. For
example, highly liquid government securities, such as U.S.
Treasuries, are classified as Level 1. 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.
AFS debt 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 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
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Note 18: Fair Values of Assets and Liabilities (continued)
municipal bonds, U.S. government and agency MBS, and
corporate debt securities.
Debt security fair value measurements using significant
inputs that are unobservable in the market due to limited activity
or a less liquid market are classified as Level 3 in the fair value
hierarchy. Such measurements include securities valued using
internal models or a combination of multiple valuation
techniques where the unobservable inputs are significant to the
overall fair value measurement. Securities classified as Level 3
include certain residential and commercial MBS, other asset-
backed securities, CDOs and certain CLOs, and certain residual
and retained interests in residential mortgage loan
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.
MORTGAGE LOANS HELD FOR SALE (MLHFS) MLHFS are
carried at LOCOM or at fair value. We carry substantially all of
our residential MLHFS 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 MLHFS 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. Loans used in our trading business are recorded
at fair value on a recurring basis, and the fair value is based on
current offerings in secondary markets for loans with similar
characteristics. Loans that are subject to nonrecurring fair value
adjustments are classified 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 that are based on an exit
price notion in this disclosure for loans that are not recorded at
fair value on a recurring or nonrecurring basis. The fair value
estimates of these loans are differentiated by their financial
characteristics, such as product classification, loan category,
pricing features and remaining maturity. Prepayment and credit
loss estimates are evaluated and used in the valuation process.
DERIVATIVES All derivatives are recorded at fair value on a
recurring basis. Derivative valuation includes the use of available
market prices 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, derivative loan 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.
MORTGAGE SERVICING RIGHTS (MSRs) AND CERTAIN
OTHER INTERESTS HELD IN SECURITIZATIONS MSRs and
certain other interests held in securitizations (e.g., interest-only
strips) do not trade in an active market with readily observable
prices. Accordingly, we determine the fair value of MSRs using a
valuation model that calculates the present value of estimated
future net servicing income cash flows. The model incorporates
assumptions that market participants use in estimating future
net servicing income cash flows, including estimates of
prepayment speeds (including housing price volatility), discount
rates, default rates, cost to service (including delinquency and
foreclosure costs), escrow account earnings, contractual
servicing fee income, ancillary income and late fees. Commercial
MSRs are carried at 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.
EQUITY SECURITIES Marketable equity securities and certain
nonmarketable equity securities for which we have elected to
account for under the fair value method are recorded at fair
value on a recurring basis. Our remaining nonmarketable equity
securities are accounted for using the equity method, cost
method or measurement alternative. These securities can be
subject to nonrecurring fair value adjustments to record
impairment write-downs or, for equity securities accounted for
under the measurement alternative, adjustments to the carrying
value due to the occurrence of observable transactions.
We use quoted prices to determine the fair value of
marketable equity securities as the securities are publicly traded.
Quoted prices are typically not available for nonmarketable
equity securities. We therefore use other methods, such as
market comparable pricing or discounted cash flow valuation
techniques, to determine fair value for such securities. We use all
available information in making this determination, which
230
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230
includes observable transaction prices for the same or similar
security, vendor prices, broker quotes, trading multiples of
comparable public companies and discounted cash flow models.
Where appropriate we make adjustments to observed market
data to reflect the comparative differences between the market
data and the attributes of our equity security, such as differences
with public companies and other investment-specific
considerations like liquidity, marketability or differences in
terms of the instruments. Substantially all of our nonmarketable
equity securities accounted for under the cost method include
Federal Reserve Bank stock and Federal Home Loan Bank stock,
of which their carrying value approximate their fair value.
FORECLOSED ASSETS Foreclosed assets are carried at net
realizable value, which represents fair value less costs to sell.
Fair value is generally based upon independent market prices or
appraised values of the collateral and, accordingly, we classify
foreclosed assets as Level 2.
Liabilities
DEPOSIT AND SHORT-TERM FINANCIAL LIABILITIES
Deposit and short-term financial liabilities are recorded at
historical cost. For this disclosure, we estimate the fair value of
deposit liabilities with a contractual or defined maturity and
short-term financial liabilities, which include federal funds
purchased, securities sold under repurchase agreements,
commercial paper and other short-term borrowings. The
carrying value of our short-term financial liabilities is a
reasonable estimate of their fair value because of the relatively
short time between their origination and 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 available quoted prices in active markets.
LONG-TERM DEBT Long-term debt is recorded at amortized
cost. For this disclosure, we estimate the fair value of our long-
term debt, which is largely denominated in U.S. dollars that are
issued with a fixed or floating rate at varying levels of seniority
and maturity.
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
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;
231
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231
Note 18: Fair Values of Assets and Liabilities (continued)
•
•
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 18.1 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 18.1.
Table 18.1: Fair Value Measurements by Brokers or Third-Party Pricing Services
$
$
(in millions)
December 31, 2018
Trading debt securities
Available-for-sale debt 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 available-for-sale debt securities
Equity securities:
Marketable
Nonmarketable
Total equity securities
Derivative assets
Derivative liabilities
Other liabilities (2)
December 31, 2017
Trading debt securities
Available-for-sale debt 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 available-for-sale debt securities
Equity securities:
Marketable
Nonmarketable
Total equity securities
Derivative assets
Derivative liabilities
Other liabilities (2)
Level 1
Level 2
Level 3
Level 1
Level 2
Level 3
Brokers
Third-party pricing services
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
45
45
—
—
—
—
—
—
—
—
—
33
307
340
—
—
—
—
—
—
—
—
—
—
129
129
—
—
—
—
—
—
—
—
—
—
1,158
1,158
—
—
—
—
—
—
899
256
10,399
—
—
—
2,949
48,377
160,162
44,292
10,399
255,780
—
—
—
17
(12)
—
158
1
159
—
—
—
926
215
3,389
—
—
—
2,930
50,401
168,948
44,465
—
—
43
41
758
842
—
—
—
—
—
—
—
—
49
75
22
3,389
266,744
146
—
—
—
19
(19)
—
227
—
227
—
—
—
—
—
—
—
—
—
(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.
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Wells Fargo & Company
232
Assets and Liabilities Recorded at Fair Value on a
Recurring Basis
Table 18.2 presents the balances of assets and liabilities recorded
at fair value on a recurring basis.
Table 18.2: Fair Value on a Recurring Basis
(in millions)
December 31, 2018
Trading debt securities:
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
Other trading debt securities
Total trading debt securities
Available-for-sale debt 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)
Asset-backed securities:
Automobile loans and leases
Home equity loans
Other asset-backed securities
Total asset-backed securities
Other debt securities
Total available-for-sale debt securities
Mortgage loans held for sale
Loans held for sale
Loans
Mortgage servicing rights (residential)
Derivative assets:
Interest rate contracts
Commodity contracts
Equity contracts
Foreign exchange contracts
Credit contracts
Netting
Total derivative assets
Equity securities - excluding securities at NAV:
Marketable
Nonmarketable
Total equity securities
Total assets included in the fair value hierarchy
Equity securities at NAV (4)
Total assets recorded at fair value
Derivative liabilities:
Interest rate contracts
Commodity contracts
Equity contracts
Foreign exchange contracts
Credit contracts
Netting
Total derivative liabilities
Short sale liabilities:
Securities of U.S. Treasury and federal agencies
Mortgage-backed securities
Corporate debt securities
Equity securities
Other securities
Total short sale liabilities
Other liabilities
Level 1
Level 2
Level 3
Netting
Total
$
$
$
20,525
—
—
—
—
—
—
20,525
10,399
—
—
—
—
—
34
—
—
—
—
—
—
10,433
—
—
—
—
46
—
1,648
17
—
—
1,711
23,205
—
23,205
55,874
(21)
—
(1,492)
(12)
—
—
(1,525)
(11,850)
—
—
(2,902)
—
(14,752)
—
2,892
3,272
673
10,723
30,715
893
6
49,174
2,949
48,820
153,203
2,775
4,184
160,162
5,867
34,543
925
112
4,056
5,093
1
257,435
10,774
1,409
—
—
18,294
1,535
4,582
6,689
179
—
31,279
757
24
781
350,852
(16,217)
(2,287)
(3,186)
(7,067)
(216)
—
(28,973)
(411)
(47)
(4,505)
(2)
(3)
(4,968)
—
—
3
237
34
—
—
16
290
—
444
—
—
41
41
370
800
—
—
389
389
—
2,044 (2)
997
60
244
14,649
95
53
1,315
8
99
—
1,570
—
5,468
5,468
25,322
(70)
(49)
(1,332)
(34)
(64)
—
(1,549)
—
—
—
—
—
—
(2)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(23,790) (3)
(23,790)
—
—
—
(23,790)
—
—
—
—
—
23,548 (3)
23,548
—
—
—
—
—
—
23,417
3,275
910
10,757
30,715
893
22
69,989
13,348
49,264
153,203
2,775
4,225
160,203
6,271
35,343
925
112
4,445
5,482
1
269,912
11,771
1,469
244
14,649
18,435
1,588
7,545
6,714
278
(23,790)
10,770
23,962
5,492
29,454
408,258
102
408,360
(16,308)
(2,336)
(6,010)
(7,113)
(280)
23,548
(8,499)
(12,261)
(47)
(4,505)
(2,904)
(3)
(19,720)
(2)
(28,221)
Total liabilities recorded at fair value
$
(16,277)
(33,941)
(1,551)
23,548
Includes collateralized debt obligations of $800 million.
(1)
(2) A significant portion of the balance 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.
(3) Represents balance sheet netting of derivative asset and liability balances and related cash collateral. See Note 17 (Derivatives) for additional information.
(4) Consists of certain nonmarketable equity securities 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)
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233
Note 18: Fair Values of Assets and Liabilities (continued)
Level 1
Level 2
Level 3
Netting
Total
(continued from previous page)
(in millions)
December 31, 2017
Trading debt securities:
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
Other trading debt securities
Total trading debt securities
Available-for-sale debt 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)
Asset-backed securities:
Automobile loans and leases
Home equity loans
Other asset-backed securities
Total asset-backed securities
Other debt securities
$
12,491
—
—
—
—
—
—
12,491
3,389
—
—
—
—
—
56
—
—
—
—
—
—
2,383
3,732
565
11,760
25,273
993
20
44,726
2,930
50,401
160,219
4,607
4,490
169,316
7,203
35,036
553
149
4,380
5,082
—
—
3
354
31
—
—
19
407
—
925
—
1
75
76
407
1,020
—
—
566
566
—
Total available-for-sale debt securities
3,445
269,968
2,994 (2)
Mortgage loans held for sale
Loans held for sale
Loans
Mortgage servicing rights (residential)
Derivative assets:
Interest rate contracts
Commodity contracts
Equity contracts
Foreign exchange contracts
Credit contracts
Netting
Total derivative assets
Equity securities - excluding securities at NAV:
Marketable
Nonmarketable
Total equity securities
Total assets included in the fair value hierarchy
Equity securities at NAV (4)
Total assets recorded at fair value
Derivative liabilities:
Interest rate contracts
Commodity contracts
Equity contracts
Foreign exchange contracts
Credit contracts
Netting
Total derivative liabilities
Short sale liabilities:
Securities of U.S. Treasury and federal agencies
Mortgage-backed securities
Corporate debt securities
Equity securities
Other securities
Total short sale liabilities
Other liabilities
—
—
—
—
17
—
1,698
19
—
—
1,734
33,931
—
33,931
51,601
(17)
—
(1,313)
(19)
—
—
(1,349)
(10,420)
—
—
(2,168)
—
(12,588)
—
$
$
15,118
1,009
—
—
17,479
2,318
3,970
8,944
269
—
32,980
429
46
475
364,276
(15,392)
(1,318)
(5,338)
(8,546)
(336)
—
(30,930)
(568)
—
(4,986)
(45)
(285)
(5,884)
—
Total liabilities recorded at fair value
$
(13,937)
(36,814)
998
14
376
13,625
134
36
1,339
10
122
—
1,641
—
4,821
4,821
24,876
(63)
(17)
(1,850)
(3)
(86)
—
(2,019)
—
—
—
—
—
—
(3)
(2,022)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(24,127) (3)
(24,127)
—
—
—
(24,127)
—
—
—
—
—
25,502 (3)
25,502
—
—
—
—
—
—
—
25,502
14,874
3,735
919
11,791
25,273
993
39
57,624
6,319
51,326
160,219
4,608
4,565
169,392
7,666
36,056
553
149
4,946
5,648
—
276,407
16,116
1,023
376
13,625
17,630
2,354
7,007
8,973
391
(24,127)
12,228
34,360
4,867
39,227
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)
Includes collateralized debt obligations of $1.0 billion.
(1)
(2) 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.
(3) Represents balance sheet netting of derivative asset and liability balances and related cash collateral. See Note 17 (Derivatives) for additional information.
(4) 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.
Changes in Fair Value Levels
We monitor the availability of observable market data to assess
the appropriate classification of financial instruments within the
fair value hierarchy and transfer between Level 1, Level 2, and
Level 3 accordingly. Observable market data includes but is not
limited to quoted prices and market transactions. Changes in
economic conditions or market liquidity generally will drive
changes in availability of observable market data. Changes in
availability of observable market data, which also may result in
changing the valuation technique used, are generally the cause of
transfers between Level 1, Level 2, and Level 3. The amounts
reported as transfers represent the fair value as of the beginning
of the quarter in which the transfer occurred.
234
Wells Fargo & Company
234
The changes in Level 3 assets and liabilities measured at fair value on a recurring basis for the year ended December 31, 2018,
are presented in Table 18.3.
Table 18.3: Changes in Level 3 Fair Value Assets and Liabilities on a Recurring Basis – 2018
Total net gains
(losses) included in
Purchases,
sales,
Balance,
beginning
of period
Net
income
Other
compre-
hensive
income
issuances Transfers Transfers
out of
Level 3
(3)
and
settlements,
net (1)
into
Level 3
(2)
Net unrealized
gains (losses)
included in
income related
to assets and
liabilities held
at period end (4)
Balance,
end of
period
(in millions)
Year ended December 31, 2018
Trading debt securities:
Securities of U.S. states and
political subdivisions
Collateralized loan obligations
Corporate debt securities
Other trading debt securities
Total trading debt securities
Available-for-sale debt 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:
$
3
354
31
19
407
925
1
75
76
407
—
(12)
(1)
(3)
(16)
8
—
—
—
4
1,020
72
Other asset-backed securities
Total asset-backed securities
566
566
Total available-for-sale debt securities
2,994
Mortgage loans held for sale
Loans held for sale
Loans
998
14
376
5
5
89
(27)
2
(1)
Mortgage servicing rights (residential) (8)
13,625
(915)
Net derivative assets and liabilities:
Interest rate contracts
Commodity contracts
Equity contracts
Foreign exchange contracts
Credit contracts
Other derivative contracts
Total derivative contracts
Equity securities:
Marketable
Nonmarketable (10)
Total equity securities
Short sale liabilities
Other liabilities
71
19
(511)
7
36
—
(397)
3
(108)
(42)
5
—
(378)
(539)
—
5,203
5,203
—
(3)
—
703
703
—
1
—
—
—
—
—
(8)
—
(1)
(1)
(3)
5
(11)
(11)
(18)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(101)
16
—
(85)
(137)
(1)
(33)
(34)
(38)
(297)
(171)
(171)
(677)
(36)
(36)
(131)
1,939
351
(11)
522
9
(6)
—
865
—
(450)
(450)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
72
80
—
—
—
(7)
(1)
—
—
—
(8)
—
16
16
—
—
—
(4)
(12)
—
(16)
3
237
34
16
290
(344)
444
—
—
—
—
—
—
—
—
41
41
370
800
389
389
(344)
2,044
(10)
—
—
—
—
—
81
—
—
—
81
—
(4)
(4)
—
—
997
60
244
14,649
25
4
(17)
(26)
35
—
21
—
5,468
5,468
—
(2)
—
(14)
(1)
—
(15) (5)
—
—
(1)
(1)
—
—
(3)
(3)
(4) (6)
(22) (7)
1
(11) (7)
960 (7)
(42)
(1)
(169)
(26)
(1)
—
(239) (9)
—
642
642 (11)
— (5)
— (7)
(1) See Table 18.4 for detail.
(2) All assets and liabilities transferred into level 3 were previously classified within level 2.
(3) All assets and liabilities transferred out of level 3 are classified as level 2.
(4) 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 in the income statement.
Included in net gains (losses) from debt securities in the income statement.
Included in mortgage banking and other noninterest income in the income statement.
(5)
(6)
(7)
(8) For more information on the changes in mortgage servicing rights, see Note 10 (Mortgage Banking Activities).
(9)
(10) Beginning balance includes $382 million of auction rate securities, which changed from the cost to fair value method of accounting in connection with our adoption of
Included in mortgage banking, trading activities, equity securities and other noninterest income in the income statement.
ASU 2016-01 in first quarter 2018.
(11) Included in net gains (losses) from equity securities in the income statement.
(continued on following page)
235
Wells Fargo & Company
235
Note 18: Fair Values of Assets and Liabilities (continued)
(continued from previous page)
Table 18.4 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, 2018.
Table 18.4: Gross Purchases, Sales, Issuances and Settlements – Level 3 – 2018
(in millions)
Year ended December 31, 2018
Trading debt securities:
Purchases
Sales
Issuances
Settlements
Net
Securities of U.S. states and political subdivisions
$
—
Collateralized loan obligations
Corporate debt securities
Other trading debt securities
Total trading debt securities
Available-for-sale debt 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:
Other asset-backed securities
Total asset-backed securities
Total available-for-sale debt securities
Mortgage loans held for sale
Loans 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
Equity securities:
Marketable
Nonmarketable
Total equity securities
Short sale liabilities
Other liabilities
408
20
—
428
—
—
—
—
33
61
25
25
119
87
4
8
—
—
—
3
—
12
—
15
—
—
—
—
—
—
(348)
(4)
—
(352)
—
—
—
—
—
—
(161)
—
—
(161)
—
(101)
16
—
(85)
(6)
79
(210)
(137)
—
—
—
—
(149)
(12)
(12)
(167)
(320)
(40)
—
(71)
—
—
(37)
—
(7)
—
(44)
—
(51)
(51)
—
—
—
—
—
—
—
166
166
245
353
—
17
2,010
—
—
—
—
—
—
—
—
—
—
—
—
(1)
(33)
(34)
(71)
(1)
(33)
(34)
(38)
(209)
(297)
(350)
(350)
(874)
(156)
—
(156)
—
351
(11)
556
9
(11)
—
894
—
(399)
(399)
—
—
(171)
(171)
(677)
(36)
(36)
(131)
1,939
351
(11)
522
9
(6)
—
865
—
(450)
(450)
—
—
(1) For more information on the changes in mortgage servicing rights, see Note 10 (Mortgage Banking Activities).
236
Wells Fargo & Company
236
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 18.5.
Table 18.5: Changes in Level 3 Fair Value Assets and Liabilities on a Recurring Basis – 2017
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
(2)
Transfers
out of
Level 3
(3)
Balance,
end of
period
Net unrealized
gains (losses)
included in
income related
to assets and
liabilities held
at period end (4)
(in millions)
Year ended December 31, 2017
Trading debt securities:
Securities of U.S. states and
political subdivisions
Collateralized loan obligations
Corporate debt securities
Other trading debt securities
Total trading debt securities
Available-for-sale debt 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:
Other asset-backed securities
Total asset-backed securities
$
3
309
34
28
374
—
3
2
(9)
(4)
1,140
4
1
91
92
432
879
962
962
—
(4)
(4)
(1)
1
1
22
(36)
1
(6)
22
103
—
—
—
—
—
5
—
—
—
23
3
3
134
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
42
(7)
—
35
—
—
6
—
6
—
—
(4)
—
(4)
3
354
31
19
407
1,105
5
(1,334)
925
—
(12)
(12)
(47)
16
(400)
(400)
662
(75)
(3)
(376)
2,781
(654)
13
(37)
—
(65)
20
—
—
—
—
—
—
—
5
134
34
—
—
—
2
(53)
—
—
—
(723)
(51)
—
(2)
(2)
—
—
—
1
1
—
—
—
—
—
—
—
—
—
1
75
76
407
1,020
566
566
(1,334)
2,994
998
14
376
13,625
71
19
(511)
7
36
—
(10)
(18)
—
—
—
(2)
45
—
—
—
43
—
—
—
—
—
Total available-for-sale debt securities
3,505
Mortgage loans held for sale
Loans held for sale
Loans
985
—
758
Mortgage servicing rights (residential) (8)
12,959
(2,115)
Net derivative assets and liabilities:
Interest rate contracts
Commodity contracts
Equity contracts
Foreign exchange contracts
Credit contracts
Other derivative contracts
Total derivative contracts
Equity securities:
Marketable
Nonmarketable
Total equity securities
Short sale liabilities
Other liabilities
121
23
604
(17)
(267)
(199)
12
77
(47)
(81)
—
3,259
3,259
—
(4)
(5)
24
27
434
—
1,563
1,563
—
1
—
(13)
2
(4)
(15) (5)
—
—
(11)
(11)
—
—
—
—
(11) (6)
(34) (7)
—
(12) (7)
(126) (7)
(52)
15
(259)
6
(62)
—
(378)
(352) (9)
—
4,821
4,821
—
(3)
—
1,569
1,569 (10)
— (5)
— (7)
(1) See Table 18.6 for detail.
(2) All assets and liabilities transferred into level 3 were previously classified within level 2.
(3) All assets and liabilities transferred out of level 3 are classified as level 2.
(4) 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 in the income statement.
Included in net gains (losses) from debt securities in the income statement.
Included in mortgage banking and other noninterest income in the income statement.
(5)
(6)
(7)
(8) For more information on the changes in mortgage servicing rights, see Note 10 (Mortgage Banking Activities)
(9)
(10) Included in net gains (losses) from equity securities in the income statement.
Included in mortgage banking, trading activities, equity securities and other noninterest income in the income statement.
(continued on following page)
237
Wells Fargo & Company
237
Note 18: Fair Values of Assets and Liabilities (continued)
(continued from previous page)
Table 18.6 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 18.6: Gross Purchases, Sales, Issuances and Settlements – Level 3 – 2017
(in millions)
Year ended December 31, 2017
Trading debt securities:
Securities of U.S. states and political subdivisions
$
Collateralized loan obligations
Corporate debt securities
Other trading debt securities
Total trading debt securities
Available-for-sale debt 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:
Other asset-backed securities
Total asset-backed securities
Total available-for-sale debt securities
Mortgage loans held for sale
Loans 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
Equity securities:
Marketable
Nonmarketable
Total equity securities
Short sale liabilities
Other liabilities
Purchases
Sales
Issuances
Settlements
Net
37
439
25
—
501
—
—
—
—
14
135
—
—
149
79
—
6
541
—
—
—
—
6
—
6
—
—
—
3
—
(36)
(250)
(32)
—
(318)
—
—
—
—
—
(1)
(147)
—
—
(148)
—
42
(7)
—
35
(68)
1,369
(196)
1,105
—
—
—
(4)
—
—
—
(72)
(485)
(2)
(129)
(24)
—
—
(118)
—
(3)
—
(121)
—
(2)
(2)
(3)
—
—
—
—
—
—
211
211
1,580
489
—
19
2,263
—
—
—
—
—
—
—
—
—
—
—
—
—
(12)
(12)
(57)
(119)
(611)
(611)
(995)
(158)
(1)
(272)
1
—
(12)
(12)
(47)
16
(400)
(400)
662
(75)
(3)
(376)
2,781
(654)
(654)
13
81
—
(68)
20
(608)
—
—
—
—
—
13
(37)
—
(65)
20
(723)
—
(2)
(2)
—
—
(1) For more information on the changes in mortgage servicing rights, see Note 10 (Mortgage Banking Activities).
238
Wells Fargo & Company
238
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 18.7.
Table 18.7: Changes in Level 3 Fair Value Assets and Liabilities on a Recurring Basis – 2016
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
(2)
Transfers
out of
Level 3
(3)
Balance,
end of
period
Net unrealized
gains (losses)
included in
income related
to assets and
liabilities held
at period end (4)
(in millions)
Year ended December 31, 2016
Trading debt securities:
Securities of U.S. states and
political subdivisions
Collateralized loan obligations
Corporate debt securities
Other trading debt securities
Total trading debt securities
Available-for-sale debt 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:
Other asset-backed securities
Total asset-backed securities
Total available-for-sale debt securities
Mortgage loans held for sale
Loans held for sale
Loans
$
8
343
56
34
441
—
(38)
(7)
(6)
(51)
—
—
—
—
—
1,500
6
(25)
1
73
74
405
565
1,182
1,182
3,726
1,082
—
5,316
—
—
—
21
50
2
2
79
(19)
—
(59)
Mortgage servicing rights (residential) (8)
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
Equity securities:
Marketable
Nonmarketable
Total equity securities
Short sale liabilities
Other liabilities
288
12
(111)
—
(3)
(58)
128
—
3,065
3,065
—
(30)
843
10
(80)
(3)
31
11
812
—
(30)
(30)
—
1
—
1
1
35
(1)
(8)
(8)
2
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(5)
15
(13)
(1)
(4)
60
—
17
17
(29)
265
(214)
(214)
99
(159)
—
(4,499)
2,139
(1,003)
(2)
(156)
(1)
49
—
(1,113)
(1)
224
223
—
25
—
—
—
1
1
—
(11)
(2)
—
(13)
3
309
34
28
374
80
(481)
1,140
—
—
—
—
—
—
—
80
98
—
—
—
—
4
21
16
—
—
41
1
—
1
—
—
—
—
—
—
—
—
—
1
91
92
432
879
962
962
(481)
3,505
(17)
—
—
—
985
—
758
12,959
(7)
(1)
59
—
—
—
51
—
—
—
—
—
121
23
(267)
12
77
(47)
(81)
—
3,259
3,259
—
(4)
—
(42)
—
1
(41) (5)
—
—
(1)
(1)
(2)
—
(4)
(4)
(7) (6)
(24) (7)
—
(24) (7)
565 (7)
170
11
(176)
(4)
26
11
38 (9)
—
(30)
(30) (10)
— (5)
— (7)
(1) See Table 18.8 for detail.
(2) All assets and liabilities transferred into level 3 were previously classified within level 2.
(3) All assets and liabilities transferred out of level 3 are classified as level 2.
(4) 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 in the income statement.
Included in net gains (losses) from debt securities in the income statement.
Included in mortgage banking and other noninterest income in the income statement.
(5)
(6)
(7)
(8) For more information on the changes in mortgage servicing rights, see Note 10 (Mortgage Banking Activities).
(9)
(10) Included in net gains (losses) from equity securities in the income statement.
Included in mortgage banking, trading activities, equity securities and other noninterest income in the income statement.
(continued on following page)
239
Wells Fargo & Company
239
Note 18: Fair Values of Assets and Liabilities (continued)
(continued from previous page)
Table 18.8 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 18.8: Gross Purchases, Sales, Issuances and Settlements – Level 3 – 2016
Purchases
Sales
Issuances
Settlements
Net
(in millions)
Year ended December 31, 2016
Trading debt securities:
Securities of U.S. states and political subdivisions
$
Collateralized loan obligations
Corporate debt securities
Other trading debt securities
Total trading debt securities
Available-for-sale debt 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:
Other asset-backed securities
Total asset-backed securities
Total available-for-sale debt securities
Mortgage loans held for sale
Loans 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
Equity securities:
Marketable
Nonmarketable
Total equity securities
Short sale liabilities
Other liabilities
2
372
37
—
411
28
—
22
22
36
618
50
50
754
87
—
21
—
—
—
29
—
7
—
36
—
225
225
—
—
(2)
(357)
(50)
(1)
(410)
—
—
—
—
—
(5)
—
—
—
(5)
(24)
547
(491)
(5)
15
(13)
(1)
(4)
60
—
17
17
(29)
265
(214)
(214)
99
(159)
—
(4,499)
2,139
—
(5)
(5)
(53)
(299)
(471)
(471)
(1,319)
(193)
—
(1,031)
1
(1,003)
(1,003)
(2)
(38)
(1)
46
—
(2)
(156)
(1)
49
—
(998)
(1,113)
—
(1)
(1)
—
25
(1)
224
223
—
25
—
—
—
(12)
(54)
(28)
(28)
(118)
(618)
—
(3,791)
(66)
—
—
(147)
—
(4)
—
(151)
(1)
—
(1)
—
—
—
—
—
—
—
235
235
782
565
—
302
2,204
—
—
—
—
—
—
—
—
—
—
—
—
(1) For more information on the changes in mortgage servicing rights, see Note 10 (Mortgage Banking Activities).
Table 18.9 and Table 18.10 provide quantitative information
In addition, the table excludes the valuation techniques and
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).
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.
240
Wells Fargo & Company
240
Table 18.9: Valuation Techniques – Recurring Basis – 2018
($ 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, 2018
Trading and available-for-sale debt
securities:
Securities of U.S. states and
political subdivisions:
Government, healthcare and
other revenue bonds
Collateralized loan and other debt
obligations (2)
Asset-backed securities:
$
404
Discounted cash flow
Discount rate
2.1 -
6.4 %
3.4
43
298
739
Vendor priced
Market comparable
pricing
Vendor priced
Comparability
adjustment
(13.5) -
22.1
3.2
Diversified payment rights (3)
171
Discounted cash flow
Other commercial and consumer
198 (4)
Discounted cash flow
Discount rate
Discount rate
Weighted average life
Mortgage loans held for sale (residential)
20
982
Vendor priced
Discounted cash flow
Default rate
3.4 -
4.6 -
1.1 -
0.0 -
1.1 -
0.0 -
3.2 -
6.2
5.2
1.5 yrs
15.6 %
6.6
43.3
13.4
4.4
4.7
1.1
0.8
5.5
23.4
4.6
(56.3) -
(6.3)
(36.3)
3.4 -
2.9 -
0.0 -
62 -
7.1 -
9.0 -
6.4
100.0
34.8
507
15.3 %
23.5
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
25.0
4.2
87.2
10.2
106
8.1
9.9
2.0
50.0
13.8
19.4
18.5
(7.8)
1.8
21.6
21.8
3.5
1.3
45.2
Loans
15
Market comparable
pricing
244 (5)
Discounted cash flow
Mortgage servicing rights (residential)
14,649
Discounted cash flow
Net derivative assets and (liabilities):
Interest rate contracts
(35)
Discounted cash flow
Interest rate contracts: derivative loan
commitments
60
Discounted cash flow
Fall-out factor
1.0 -
99.0
Initial-value
servicing
(36.6) -
91.7 bps
Equity contracts
104
Discounted cash flow
Conversion factor
(9.3) -
0.0 %
(121)
Option model
Correlation factor
(77.0) -
99.0 %
Weighted average life
1.0 -
3.0 yrs
Volatility factor
6.5 -
100.0
Credit contracts
3
32
Nonmarketable equity securities
5,468
Insignificant Level 3 assets, net of liabilities
497 (8)
Total level 3 assets, net of liabilities
$ 23,771 (9)
Market comparable
pricing
Option model
Market comparable
pricing
Comparability
adjustment
Credit spread
Loss severity
Comparability
adjustment
(15.5) -
0.9 -
13.0 -
40.0
21.5
60.0
(20.6) -
(4.3)
(15.8)
(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 $800 million of collateralized debt obligations.
(2)
(3) Securities backed by specified sources of current and future receivables generated from foreign originators.
(4) Predominantly 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 $62 - $204.
(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 positions, loans held for sale, other liabilities and certain net derivative assets and
liabilities, such as commodity contracts and foreign exchange contracts.
(9) Consists of total Level 3 assets of $25.3 billion and total Level 3 liabilities of $1.6 billion, before netting of derivative balances.
241
Wells Fargo & Company
241
Note 18: Fair Values of Assets and Liabilities (continued)
Table 18.10: Valuation Techniques – Recurring Basis – 2017
($ in millions, except cost to service amounts)
December 31, 2017
Trading and available-for-sale debt 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:
Fair Value
Level 3
Valuation Technique(s)
Significant
Unobservable Input
Range of Inputs
Weighted
Average (1)
$
868
11
49
354
1,020
Discounted cash flow
Discounted cash flow
Discount rate
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
Mortgage loans held for sale (residential)
26
974
24
Vendor priced
Discounted cash flow
Market comparable
pricing
Discount rate
Discount rate
Weighted average life
Default rate
Discount rate
Loss severity
Prepayment rate
Comparability
adjustment
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)
Loans
376 (5)
Discounted cash flow
Discount rate
3.1 -
7.5
Prepayment rate
8.7 -
100.0
Loss severity
0.0 -
33.9
Mortgage servicing rights (residential)
13,625
Discounted cash flow
Cost to service per
loan (6)
Discount rate
Prepayment rate (7)
6.6 -
9.7 -
$
78 -
587
Net derivative assets and (liabilities):
Interest rate contracts
54
Discounted cash flow
Default rate
0.0 -
Loss severity
50.0 -
Prepayment rate
2.8 -
12.9 %
20.5
5.0
50.0
12.5
Interest rate contracts: derivative loan
commitments
Equity contracts
Credit contracts
17
102
Discounted cash flow
Fall-out factor
1.0 -
99.0
Discounted cash flow
Conversion factor
(9.7) -
0.0 %
Initial-value servicing
(59.9) -
101.1 bps
(613)
Option model
Correlation factor
(77.0) -
98.0 %
Weighted average life
0.5 -
3.0 yrs
(3)
39
Market comparable
pricing
Comparability
adjustment
(29.9) -
Option model
Credit spread
0.0 -
Loss severity
13.0 -
17.3
63.7
60.0
Volatility factor
5.7 -
95.5
Nonmarketable equity securities
8
Discounted cash flow
Discount rate
10.0 -
10.0
Volatility Factor
0.5 -
1.9
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
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 positions, other liabilities and certain net derivative assets and liabilities, such as
commodity contracts and foreign exchange 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.
242
Wells Fargo & Company
242
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).
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.
243
Wells Fargo & Company
243
Note 18: 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, MORTGAGE LOANS HELD FOR SALE
and NONMARKETABLE EQUITY INVESTMENTS The fair
values of predominantly all Level 3 trading securities, mortgage
loans 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,
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. 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, 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 9
(Securitizations and Variable Interest Entities).
244
Wells Fargo & Company
244
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, write-downs of individual
assets or commencing in 2018 with our adoption of
Table 18.12: Fair Value on a Nonrecurring Basis
ASU 2016-01, use of the measurement alternative for
nonmarketable equity securities. Table 18.12 provides the fair
value hierarchy and fair value at the date of the nonrecurring fair
value adjustment for all assets that were still held as of
December 31, 2018 and 2017, 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, 2018
December 31, 2017
Mortgage loans held for sale (LOCOM) (1)
$
Loans held for sale
Loans:
Commercial
Consumer
Total loans (2)
Nonmarketable equity securities (3)
Other assets (4)
Total assets at fair value on a nonrecurring
basis (5)
$
—
—
—
—
—
—
—
—
1,213
1,233
2,446
313
339
346
685
774
149
—
—
1
1
157
6
313
339
347
686
931
155
3,134
1,397
4,531
—
—
—
—
—
—
—
—
1,646
1,333
2,979
108
—
108
374
502
876
—
177
—
10
10
136
161
374
512
886
136
338
2,807
1,640
4,447
(1) Consists of commercial mortgages and residential real estate 1-4 family first mortgage loans.
(2) Represents the carrying value of loans for which nonrecurring adjustments are based on the appraised value of the collateral.
(3) Consists of certain nonmarketable equity securities that are measured at fair value on a nonrecurring basis, including observable price adjustments for nonmarketable
equity securities carried under the measurement alternative.
Includes the fair value of foreclosed real estate, other collateral owned and operating lease assets.
(4)
(5) Prior period balances exclude $6 million of nonmarketable equity securities at NAV.
Table 18.13 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 18.13: Change in Value of Assets with Nonrecurring Fair
Value Adjustment
(in millions)
Mortgage loans held for sale (LOCOM)
$
Loans held for sale
Loans:
Commercial
Consumer
Total loans (1)
Nonmarketable equity securities (2)
Other assets (3)
Total
Year ended December 31,
2018
2017
21
(39)
(221)
(284)
(505)
265
(40)
10
(2)
(335)
(424)
(759)
(178)
(121)
$
(298)
(1,050)
(1) Represents write-downs of loans based on the appraised value of the
(2)
(3)
collateral.
Includes impairment losses and observable price adjustments for certain
nonmarketable equity securities.
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.
245
Wells Fargo & Company
245
Note 18: Fair Values of Assets and Liabilities (continued)
Table 18.14 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 18.14: 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.
4.0
1.7
46.5
10.5
1.7 %
3.8
2.2
50.6
10.2
($ in millions)
December 31, 2018
Residential mortgage loans held
for sale (LOCOM)
Nonmarketable equity securities
Insignificant level 3 assets
Total
December 31, 2017
Residential mortgage loans held for
sale (LOCOM)
Fair Value
Level 3
Valuation Technique(s) (1)
Significant
Unobservable
Inputs (1)
Range of inputs
Weighted
Average (2)
$ 1,233 (3)
Discounted cash flow
Default rate (4)
0.2 –
2.3%
1.4%
Discount rate
1.5 –
8.5
Loss severity
0.5 –
66.0
Prepayment rate (5)
3.5 – 100.0
Discounted cash flow
Discount rate
10.5 –
10.5
7
157
$ 1,397
$
1,333 (3)
Discounted cash flow
Default rate (4)
Discount rate
0.1 –
1.5 –
4.1 %
8.5
Nonmarketable equity securities
Insignificant level 3 assets
Total
122
185
$
1,640
Loss severity
0.7 –
52.9
Prepayment rate (5)
5.4 –
100.0
Discounted cash flow
Discount rate
5.0 –
10.5
(1) Refer to the narrative following Table 18.10 for a definition of the valuation technique(s) and significant unobservable inputs.
(2) For residential MLHFS, weighted averages are calculated using the outstanding unpaid principal balance of the loans.
(3) Consists of approximately $1.2 billion and $1.3 billion of government insured/guaranteed loans purchased from GNMA-guaranteed mortgage securitizations at
December 31, 2018 and 2017, respectively, and $27 million and $26 million of other mortgage loans that are not government insured/guaranteed at December 31, 2018
and 2017, 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.
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.
MORTGAGE LOANS HELD FOR SALE (MLHFS) We measure
MLHFS at fair value for MLHFS 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 MLHFS
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.
LOANS HELD FOR SALE (LHFS) 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.
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 MLHFS measured at fair value and, as such,
remain carried on our balance sheet under the fair value option.
EQUITY SECURITIES 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.
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Wells Fargo & Company
246
Table 18.15 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.
Table 18.15: Fair Value Option
(in millions)
Mortgage loans 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
Equity securities (1)
December 31, 2018
December 31, 2017
Fair value
carrying
amount
Aggregate
unpaid
principal
$ 11,771
11,573
127
7
158
9
1,469
1,536
21
32
244
179
5,455
274
208
N/A
Fair value
carrying
amount less
aggregate
unpaid
principal
Fair value
carrying
amount
Aggregate
unpaid
principal
Fair value
carrying
amount less
aggregate
unpaid
principal
198
(31)
(2)
(67)
(11)
(30)
(29)
N/A
16,116
15,827
127
16
165
21
1,023
1,075
34
56
376
253
4,867
404
281
N/A
289
(38)
(5)
(52)
(22)
(28)
(28)
N/A
(1) Consists of nonmarketable equity securities carried at fair value.
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 18.16 by income statement line item. Amounts
recorded as interest income are excluded from Table 18.16.
Table 18.16: Fair Value Option – Changes in Fair Value Included in Earnings
2018
2017
Year ended December 31,
2016
(in millions)
Mortgage loans
held for sale
Loans held for sale
Loans
Equity securities
Other interests
held (1)
Mortgage
banking
noninterest
income
$
462
—
—
—
—
Net
gains
(losses)
from
trading
activities
Net gains
(losses)
from
equity
securities
Other
noninterest
income
Mortgage
banking
noninterest
income
Net
gains
(losses)
from
trading
activities
Net gains
(losses)
from
equity
securities
Other
noninterest
income
Mortgage
banking
noninterest
income
Net
gains
(losses)
from
trading
activities
Net gains
(losses)
from
equity
securities
Other
noninterest
income
—
(1)
—
—
(3)
—
—
—
683
—
—
1
(1)
—
—
1,229
—
—
—
—
—
45
—
—
(9)
—
—
—
1,592
—
2
—
—
1,456
—
—
—
—
—
—
—
55
—
—
(5)
—
—
—
(12)
—
3
(60)
—
—
—
(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 18.17 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 18.17: Fair Value Option – Gains/Losses Attributable to
Instrument-Specific Credit Risk
(in millions)
2018
2017
2016
Year ended December 31,
Gains (losses) attributable to
instrument-specific credit risk:
Mortgage loans held for sale $
(16)
(12)
Loans held for sale
Total
—
$
(16)
45
33
3
55
58
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Wells Fargo & Company
247
Note 18: Fair Values of Assets and Liabilities (continued)
Disclosures about Fair Value of Financial
Instruments
Table 18.18 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 18.2
in this Note. In connection with our adoption of ASU 2016-01 in
first quarter 2018, the valuation methodologies for estimating
the fair value of financial instruments in Table 18.18 have been
changed, where necessary, to conform with an exit price notion.
Under an exit price notion, fair value estimates are based upon
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 balance sheet date. For certain loans and
deposit liabilities, the estimated fair values prior to our adoption
Table 18.18: Fair Value Estimates for Financial Instruments
(in millions)
December 31, 2018
Financial assets
of ASU 2016-01 followed an entrance price notion that based fair
values on recent prices offered to customers for loans and
deposits with similar characteristics. The carrying amounts in
the following table are recorded on the balance sheet under the
indicated captions.
We have not included assets and liabilities that are not
financial instruments in our disclosure, such as the value of the
long-term relationships with our deposit, credit card and trust
customers, amortized MSRs, premises and equipment, goodwill
and other intangibles, deferred taxes and other liabilities.
The total of the fair value calculations presented does not
represent, and should not be construed to represent, the
underlying value of the Company.
Carrying
amount
Level 1
Level 2
Level 3
Total
Estimated fair value
Cash and due from banks (1)
Interest-earning deposits with banks (1)
Federal funds sold and securities purchased under resale
agreements (1)
Held-to-maturity debt securities
Mortgage loans held for sale
Loans held for sale
Loans, net (2)(3)
Nonmarketable equity securities (cost method) (4)
$
23,551
23,551
149,736
149,542
80,207
—
144,788
44,339
3,355
572
923,703
5,643
—
—
—
—
—
194
80,207
97,275
2,129
572
—
—
—
23,551
149,736
80,207
501
142,115
1,233
—
3,362
572
45,190
872,725
917,915
—
5,675
5,675
Total financial assets
$ 1,331,555
217,432
225,567
880,134
1,323,133
Financial liabilities
Deposits (3)(5)
Short-term borrowings
Long-term debt (6)
Total financial liabilities
December 31, 2017
Financial assets
$ 130,645
105,787
229,008
$ 465,440
—
—
—
—
107,448
22,641
130,089
105,789
225,904
—
105,789
2,230
228,134
439,141
24,871
464,012
Cash and due from banks (1)
Interest-earning deposits with banks (1)
Federal funds sold and securities purchased under resale
agreements (1)
Held-to-maturity debt securities
Mortgage loans held for sale
Loans held for sale
Loans, net (2)(3)
Nonmarketable equity securities (cost method)
$
23,367
23,367
192,580
192,455
80,025
139,335
3,954
108
926,273
7,136
1,002
44,806
—
—
—
—
—
125
78,954
93,694
2,625
108
—
—
69
485
1,333
—
23,367
192,580
80,025
138,985
3,958
108
51,713
886,622
938,335
23
7,605
7,628
Total financial assets (7)
$ 1,372,778
261,630
227,242
896,114
1,384,986
Financial liabilities
Deposits (3)(5)
Short-term borrowings
Long-term debt (6)
Total financial liabilities
$
128,594
103,256
224,981
$
456,831
—
—
—
—
108,146
103,256
227,109
438,511
19,768
127,914
—
103,256
3,159
22,927
230,268
461,438
(1) Amounts consist of financial instruments for which carrying value approximates fair value.
(2) Excludes lease financing with a carrying amount of $19.7 billion and $19.4 billion at December 31, 2018 and 2017, respectively.
(3)
In connection with our adoption of ASU 2016-01, the valuation methodologies used to estimate the fair value at December 31, 2018, for a portion of loans and deposit
liabilities with a defined or contractual maturity has been changed to conform to an exit price notion. The fair value estimates at December 31, 2017 have not been revised
to reflect application of the modified methodology.
(4) Excludes $1.7 billion of nonmarketable equity securities accounted for under the measurement alternative at December 31, 2018, that were accounted for under the cost
method in prior periods.
(5) Excludes deposit liabilities with no defined or contractual maturity of $1.2 trillion at both December 31, 2018 and 2017.
(6) Excludes capital lease obligations under capital leases of $36 million and $39 million at December 31, 2018 and 2017, respectively.
(7) Excludes $27 million of carrying value and $30 million of fair value relating to nonmarketable equity securities at NAV at December 31, 2017.
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Wells Fargo & Company
248
Loan commitments, standby letters of credit and
commercial and similar letters of credit are not included in Table
18.18. 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
$1.0 billion at both December 31, 2018 and 2017.
Note 19: Preferred Stock
We are authorized to issue 20 million shares of preferred stock
and 4 million shares of preference stock, both without par value.
Preferred shares outstanding rank senior to common shares
both as to dividends and liquidation preference but have no
general voting rights. We have not issued any preference shares
under this authorization. If issued, preference shares would be
limited to one vote per share. Our total authorized, issued and
outstanding preferred stock is presented in the following two
tables along with the Employee Stock Ownership Plan (ESOP)
Cumulative Convertible Preferred Stock.
Table 19.1: Preferred Stock Shares
December 31, 2018
December 31, 2017
Liquidation
preference
per share
Shares
authorized
and
designated
Liquidation
preference
per share
Shares
authorized
and
designated
DEP Shares
Dividend Equalization Preferred Shares (DEP)
$
10
97,000
$
10
97,000
Series I
Floating Class A Preferred Stock (1)
Series J
100,000
25,010
100,000
25,010
8.00% Non-Cumulative Perpetual Class A Preferred Stock (2)
—
—
1,000
2,300,000
Series K
Floating Non-Cumulative Perpetual Class A Preferred Stock (3)
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
25,000
27,600
ESOP
Cumulative Convertible Preferred Stock (4)
Total
—
1,406,460
—
1,556,104
9,586,770
12,036,414
(1) Floating rate for Preferred Stock, Series I, is the greater of three-month LIBOR plus 0.93% and 5.56975%.
(2) Preferred Stock, Series J, was redeemed in third quarter 2018.
(3) Effective June 15, 2018, Preferred Stock, Series K, converted from a fixed to a floating coupon rate of three-month LIBOR plus 3.77%.
(4) See the ESOP Cumulative Convertible Preferred Stock section in this Note for additional information about the liquidation preference for the ESOP Cumulative Convertible
Preferred Stock.
249
Wells Fargo & Company
249
Note 19: Preferred Stock (continued)
Table 19.2: Preferred Stock – Shares Issued and Carrying Value
(in millions, except shares)
DEP Shares
December 31, 2018
December 31, 2017
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)(2)
Floating Class A Preferred Stock
25,010
2,501
2,501
Series J (1)(3)
8.00% Non-Cumulative Perpetual Class A Preferred Stock
—
—
—
Series K (1)(4)
—
—
—
96,546
$
—
—
25,010
2,501
2,501
—
—
2,150,375
2,150
1,995
155
Floating Non-Cumulative Perpetual Class A Preferred Stock
3,352,000
3,352
2,876
476
3,352,000
3,352
2,876
476
Series L (1)
7.50% Non-Cumulative Perpetual Convertible Class A
Preferred Stock
Series N (1)
3,968,000
3,968
3,200
768
3,968,000
3,968
3,200
768
5.20% Non-Cumulative Perpetual Class A Preferred Stock
30,000
750
750
Series O (1)
5.125% Non-Cumulative Perpetual Class A Preferred Stock
26,000
650
650
Series P (1)
5.25% Non-Cumulative Perpetual Class A Preferred Stock
25,000
625
625
Series Q (1)
5.85% Fixed-to-Floating Non-Cumulative Perpetual Class A
Preferred Stock
Series R (1)
6.625% Fixed-to-Floating Non-Cumulative Perpetual Class A
Preferred Stock
Series S (1)
5.90% Fixed-to-Floating Non-Cumulative Perpetual Class A
Preferred Stock
Series T (1)
69,000
1,725
1,725
33,600
840
840
80,000
2,000
2,000
6.00% 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
1,406,460
1,407
1,407
—
—
—
—
—
—
—
—
—
—
—
—
—
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
27,600
690
690
1,556,104
1,556
1,556
—
—
—
—
—
—
—
—
—
—
—
—
—
Total
9,377,216 $ 24,458
23,214
1,244
11,677,235
$ 26,757
25,358
1,399
(1) Preferred shares qualify as Tier 1 capital.
(2) Floating rate for Preferred Stock, Series I, is the greater of three-month LIBOR plus 0.93% and 5.56975%.
(3) Preferred Stock, Series J, was redeemed in third quarter 2018.
(4) Effective June 15, 2018, Preferred Stock, Series K, converted from a fixed to a floating coupon rate of three-month LIBOR plus 3.77%.
See Note 9 (Securitizations and Variable Interest Entities)
for additional information on our trust preferred securities.
250
Wells Fargo & Company
250
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 19.3: 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
2018
2017
2016
2015
2014
2013
2012
2011
2010
Shares issued and outstanding
Carrying value
Adjustable dividend rate
Dec 31,
2018
336,945
222,210
233,835
144,338
174,151
133,948
77,634
61,796
21,603
Dec 31,
Dec 31,
Dec 31,
2017
2018
2017
Minimum
Maximum
— $
273,210
322,826
187,436
237,151
201,948
128,634
129,296
75,603
337
222
234
144
174
134
78
62
22
—
273
323
187
237
202
129
129
76
7.00%
8.00%
7.00
9.30
8.90
8.70
8.50
10.00
9.00
9.50
8.00
10.30
9.90
9.70
9.50
11.00
10.00
10.50
Total ESOP Preferred Stock (1)
1,406,460
1,556,104 $
1,407
1,556
Unearned ESOP shares (2)
$
(1,502)
(1,678)
(1) At December 31, 2018 and 2017, additional paid-in capital included $95 million and $122 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.
251
Wells Fargo & Company
251
Note 20: Common Stock and Stock Plans
Common Stock
Table 20.1 presents our reserved, issued and authorized shares
of common stock at December 31, 2018.
Table 20.1: Common Stock Shares
Dividend reinvestment and common stock
purchase plans
Director plans
Stock plans (1)
Convertible securities and warrants
Total shares reserved
Shares issued
Shares not reserved or issued
Total shares authorized
Number of shares
9,114,931
447,526
369,893,237
65,835,468
445,291,162
5,481,811,474
3,072,897,364
9,000,000,000
(1)
Includes employee options, restricted shares and restricted share rights,
401(k) profit sharing and compensation deferral plans.
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. The warrants expired
on October 29, 2018, and the holders of 110,646 unexercised
warrants as of the expiration date are no longer entitled to
receive any shares of our common stock. Holders exercised
23,217,208 and 9,774,052 warrants to purchase shares of our
common stock in 2018 and 2017, respectively.
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 share 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 20.2 summarizes the
major components of stock incentive compensation expense and
the related recognized tax benefit.
Table 20.2: Stock Incentive Compensation Expense
Year ended December 31,
(in millions)
RSRs (1)
Performance shares
Stock options
2018
2017
$ 1,013
9
—
743
112
(6)
849
320
2016
692
87
—
779
294
Total stock incentive
compensation expense (2) $ 1,022
Related recognized tax benefit
$
252
(1)
In February 2018, a total of 11.9 million RSRs were granted to all eligible team
members in the U.S., and eligible team members outside the U.S., referred to
as broad-based RSRs.
(2) Amounts for the year-ended December 31, 2018, were net of $19 million
related to reversal of previously accrued RSR costs. Year-ended December 31,
2017, were 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, 2018, was 92 million.
252
Wells Fargo & Company
252
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, 2018, and changes during 2018 is presented in
Table 20.3.
Table 20.3: Restricted Share Rights
Weighted-
average
grant-date
fair value
Number
Nonvested at January 1, 2018
34,894,376 $
Granted
Vested
Canceled or forfeited
28,023,158
(14,571,562)
(2,773,474)
Nonvested at December 31, 2018
45,572,498
50.95
58.47
52.12
56.76
54.85
The weighted-average grant date fair value of RSRs granted
during 2017 and 2016 was $57.54 and $48.31, respectively.
At December 31, 2018, there was $1.1 billion of total
unrecognized compensation cost related to nonvested RSRs. The
cost is expected to be recognized over a weighted-average period
of 2.0 years . The total fair value of RSRs that vested during
2018, 2017 and 2016 was $824 million, $865 million and
$1.1 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, 2018, the determination of the number of
performance shares that will vest will occur in first quarter of
2019 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, 2018,
and changes during 2018 is in Table 20.4, based on the
performance adjustments recognized as of December 2018.
Table 20.4: Performance Share Awards
Weighted-
average
grant-date
fair value (1)
Number
Nonvested at January 1, 2018
5,492,104 $
Granted
Vested
Canceled or forfeited
2,570,300
(1,879,523)
(198,195)
Nonvested at December 31, 2018
5,984,686
47.81
58.62
55.21
54.48
49.91
(1) Reflects approval date fair value for grants subject to variable accounting.
The weighted-average grant date fair value of performance
awards granted during 2017 and 2016 was $57.14 and $44.73,
respectively.
At December 31, 2018, there was $26 million of total
unrecognized compensation cost related to nonvested
performance awards. The cost is expected to be recognized over
a weighted-average period of 1.5 years . The total fair value of
PSAs that vested during 2018, 2017 and 2016 was $107 million,
$117 million, and $220 million, respectively.
253
Wells Fargo & Company
253
Note 20: Common Stock and Stock Plans (continued)
Stock Options
Table 20.5 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 20.5: Stock Option Activity
Incentive compensation plans
Options outstanding as of December 31, 2017
Canceled or forfeited
Exercised
Options exercisable and outstanding as of December 31, 2018
Director awards
Options outstanding as of December 31, 2017
Exercised
Options exercisable and outstanding as of December 31, 2018
The total intrinsic value to option holders, which is the stock
market value in excess of the option exercise price, of options
exercised during 2018, 2017 and 2016 was $375 million,
$623 million and $546 million, respectively.
Cash received from the exercise of stock options for 2018,
2017 and 2016 was $227 million, $602 million and $893 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)
20,179,179 $
(1,886,251)
(9,949,771)
8,343,157
104,900
(104,900)
—
32.80
172.36
22.50
13.46
29.87
29.88
—
0.2 $
272
0.0
—
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 2018, 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.
254
Wells Fargo & Company
254
Table 20.6 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 20.6: 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,
2018
2017
2016
138,182,911
124,670,717
128,189,305
1,406,460
1,556,104
1,439,181
$
1,407
1,556
1,439
$
2018
213
159
Dividends paid
Year ended December 31,
2017
195
166
2016
208
169
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.
255
Wells Fargo & Company
255
Note 21: Revenue from Contracts with Customers
Our revenue includes net interest income on financial
instruments and noninterest income. Table 21.1 presents our
revenue by operating segment. The “Other” segment for each of
the tables below 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. For
additional description of our operating segments, including
additional financial information and the underlying
management accounting process, see Note 26 (Operating
Segments) to Financial Statements in this Report.
Table 21.1: Revenue by Operating Segment
We adopted ASU 2014-09 – Revenue from Contracts with
Customers (“the new revenue recognition guidance”) on a
modified retrospective basis as of January 1, 2018. Under this
method of adoption, prior period financial information for 2017
and 2016 was not adjusted. Rather, this ASU resulted in a
cumulative-effect adjustment that decreased the beginning
balance of retained earnings by $32 million on January 1, 2018,
and changed the presentation of certain revenues and expenses
prospectively. For details on the impact of the adoption of this
ASU, see Note 1 (Summary of Significant Accounting Policies).
(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:
Lending related charges and fees (1)(2)
Cash network fees
Commercial real estate brokerage commissions
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
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:
Lending related charges and fees (1)(2)
Cash network fees
Commercial real estate brokerage commissions
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
(continued on following page)
256
Community
Banking
$
29,219
Wholesale
Banking
18,690
Wealth and
Investment
Management
Year ended December 31, 2018
Other (3)
Consolidated
Company
4,441
(2,355)
49,995
2,641
2,074
16
(15)
4,716
1,887
910
(35)
2,762
3,543
278
478
—
264
339
1,359
2,659
83
28
(3)
1,505
—
3,117
17,694
46,913
317
445
1,783
2,545
362
1,247
3
468
209
92
2,019
362
312
516
102
293
1,753
(322)
10,016
28,706
9,161
2,893
9
12,063
6
7
—
—
8
2
17
(11)
82
57
9
(283)
—
(21)
11,935
16,376
(1,929)
(932)
—
(2,861)
(4)
(6)
—
—
(4)
(1)
(11)
7
(48)
1
—
—
—
(301)
(3,232)
(5,587)
9,436
3,316
1,757
14,509
3,907
1,526
481
468
477
432
3,384
3,017
429
602
108
1,515
1,753
2,473
36,413
86,408
28,658
18,810
4,641
(2,552)
49,557
Year ended December 31, 2017
$
$
$
2,909
1,830
889
(59)
2,660
3,613
311
498
1
239
448
1,497
3,895
139
(251)
709
1,455
—
1,734
18,360
47,018
2,201
304
523
1,827
2,654
345
1,257
8
461
204
124
2,054
458
872
701
(232)
116
1,907
114
11,190
30,000
Wells Fargo & Company
17
(16)
5,111
9,072
2,877
(2)
11,947
6
8
—
—
9
1
18
(10)
88
92
2
208
—
63
12,431
17,072
(1,848)
(917)
(1)
(2,766)
(4)
(8)
—
—
(4)
—
(12)
7
(50)
—
—
—
—
(308)
(3,149)
(5,701)
9,358
3,372
1,765
14,495
3,960
1,568
506
462
448
573
3,557
4,350
1,049
542
479
1,779
1,907
1,603
38,832
88,389
256
(continued from previous page)
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:
Lending related charges and fees (1)(2)
Cash network fees
Commercial real estate brokerage commissions
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
$
27,333
Wholesale
Banking
18,699
3,111
1,854
849
(141)
2,562
3,598
364
528
—
219
525
1,636
5,624
112
(148)
933
804
—
948
$
19,180
46,513
2,260
368
473
1,833
2,674
336
1,198
9
494
178
206
2,085
475
1,156
677
8
199
1,927
551
12,348
31,047
Wealth and
Investment
Management
Year ended December 31, 2016
Other (3)
Consolidated
Company
4,249
(2,527)
47,754
19
(18)
5,372
8,870
2,891
(1)
11,760
(1,876)
(877)
—
(2,753)
6
8
—
—
8
2
18
(9)
—
81
1
100
—
53
12,029
16,278
(4)
(8)
—
—
(4)
—
(12)
6
—
—
—
—
—
(263)
(3,044)
(5,571)
9,216
3,336
1,691
14,243
3,936
1,562
537
494
401
733
3,727
6,096
1,268
610
942
1,103
1,927
1,289
40,513
88,267
(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.
(2) Represents combined amount of previously reported “Charges and fees on loans” and “Letters of credit fees”.
(3)
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.
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.
charges include fees for periodic account maintenance activities
and event-driven services such as stop payment fees. 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.
Table 21.2 presents our service charges on deposit accounts
by operating segment.
SERVICE CHARGES ON DEPOSIT ACCOUNTS are earned on
depository accounts for commercial and consumer customers
and include fees for account and overdraft services. Account
Table 21.2: Service Charges on Deposit Accounts by Operating Segment
Community Banking
Wholesale Banking
Wealth and Investment
Management
Other
Consolidated
Company
(in millions)
2018
2017
2016
2018
2017
2016
2018
2017
2016
2018
2017
2016
2018
2017
2016
Overdraft fees
$ 1,776
1,941
2,024
5
6
6
Account charges
Service charges on
deposit accounts
865
968
1,087
2,069
2,195
2,254
$ 2,641
2,909
3,111
2,074
2,201
2,260
1
15
16
1
16
17
—
19
19
—
—
—
1,782
1,948
2,030
(15)
(16)
(18)
2,934
3,163
3,342
(15)
(16)
(18)
4,716
5,111
5,372
Year ended December 31,
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 and related obligations
associated with certain of these revenues, which include
investment advice, active management of client assets, or
assistance with selecting and engaging a third-party advisory
manager, are generally satisfied over a month or quarter. The
remaining revenues include trailing commissions which are
earned for selling shares to investors. Our obligation associated
with earning trailing commissions is satisfied at the time shares
are sold. However, these fees are received and recognized over
time during the period the customer owns the shares and we
remain the broker of record. The amount of trailing commissions
is variable based on the length of time the customer holds the
shares and on changes in the value of the underlying assets.
257
Wells Fargo & Company
257
Note 21: Revenue from Contracts with Customers (continued)
Transactional revenues are earned for executing
transactions at the client’s direction. Our obligation is generally
satisfied upon the execution of the transaction and the fees are
based on the size and number of transactions executed.
mutual fund companies in return for providing record keeping
and other administrative services, and annual account
maintenance fees charged to customers.
Table 21.3 presents our brokerage advisory, commissions
Other revenues earned from other brokerage advisory
and other fees by operating segment.
services include omnibus and networking fees received from
Table 21.3: Brokerage Advisory, Commissions and Other Fees by Operating Segment
Community Banking
Wholesale Banking
Wealth and Investment
Management
Year ended December 31,
Other
Consolidated
Company
(in millions)
2018
2017
2016
2018
2017
2016
2018
2017
2016
2018
2017
2016
2018
2017
2016
Asset-based
revenue (1)
Transactional
revenue
Other revenue
Brokerage advisory,
commissions and
other fees
$ 1,482
1,372
1,243
1
1
2
6,899
6,630
6,164
(1,484)
(1,371) (1,241) 6,898
6,632
6,168
340
65
382
76
454
157
70
246
40
263
55
1,618
1,802
2,032
(380)
(400)
(477) 1,648
1,824
2,064
311
644
640
674
(65)
(77)
(158)
890
902
984
$ 1,887
1,830
1,854
317
304
368
9,161
9,072
8,870
(1,929)
(1,848) (1,876) 9,436
9,358
9,216
(1) We earned trailing commissions of $1.3 billion for each of the years ended December 31, 2018, 2017, and 2016.
TRUST AND INVESTMENT MANAGEMENT FEES are earned
for providing trust, investment management and other related
services.
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.
Trust services include acting as a trustee or agent for
corporate trust, personal trust, and agency assets. Obligations
for trust services are generally satisfied over time, while
obligations for activities that are transactional in nature are
satisfied at the time of the transaction.
Other related services include the custody and safekeeping
of accounts. Our obligation for these services is generally
satisfied over time.
Table 21.4 presents our trust and investment management
fees by operating segment.
Table 21.4: Trust and Investment Management Fees by Operating Segment
Community Banking
Wholesale Banking
Wealth and Investment
Management
Year ended December 31,
Other
Consolidated
Company
2018
2017
2016
2018
2017
2016
2018
2017
2016
2018
2017
2016
2018
2017
2016
$ —
1
—
908
887
847
2
1
2
—
329
116
—
421
102
—
2,087
2,053
2,079
—
—
—
2,087
2,054
2,079
399
74
728
78
757
67
738
(932)
(916)
(875)
1,033
1,149
1,109
74
—
(1)
(2)
196
169
148
$ 910
889
849
445
523
473
2,893
2,877
2,891
(932)
(917)
(877)
3,316
3,372
3,336
(in millions)
Investment
management fees
Trust fees
Other revenue
Trust and investment
management fees
258
Wells Fargo & Company
258
INVESTMENT BANKING FEES are earned for underwriting
debt and equity securities, arranging loan syndications and
performing other advisory services. Our obligation for these
services is generally satisfied at closing of the transaction.
Substantially all of these fees are in the Wholesale Banking
operating segment.
card interchange and network revenues are earned on credit and
debit card transactions conducted through payment networks
such as Visa, MasterCard, and American Express. Our obligation
is satisfied concurrently with the delivery of services on a daily
basis.
Table 21.5 presents our card fees by operating segment.
CARD FEES include credit and debit card interchange and
network revenues and various card-related fees. Credit and debit
Table 21.5: Card Fees by Operating Segment
Community Banking
Wholesale Banking
Wealth and Investment
Management
Year ended December 31,
Other
Consolidated
Company
(in millions)
2018
2017
2016
2018
2017
2016
2018
2017
2016
2018
2017
2016
2018
2017
2016
Credit card interchange and
network revenues (1)
Debit card interchange and
network revenues
Late fees, cash advance
fees, balance transfer
fees, and annual fees
$ 792
944
959
361
345
329
2,053
1,964
1,889
—
698
705
750
1
—
—
7
—
Card fees (1)
$ 3,543
3,613
3,598
362
345
336
6
—
—
6
6
—
—
6
6
—
—
6
(4)
(4)
(4) 1,155
1,291
1,290
—
—
—
2,053
1,964
1,896
—
(4)
—
(4)
—
699
705
750
(4) 3,907
3,960
3,936
(1) The cost of credit card rewards and rebates of $1.4 billion, $1.2 billion and $1.0 billion for the years ended December 31, 2018, 2017 and 2016, respectively, are presented
net against the related revenues.
CASH NETWORK FEES are earned for processing ATM
transactions. Our obligation is completed daily upon settlement
of ATM transactions. Substantially all of these fees are in the
Community Banking operating segment.
COMMERCIAL REAL ESTATE BROKERAGE COMMISSIONS
are earned for assisting customers in the sale of real estate
property. Our obligation is satisfied upon the successful
brokering of a transaction. Fees are based on a fixed percentage
of the sales price. All of these fees are in the Wholesale Banking
operating segment.
WIRE TRANSFER AND OTHER REMITTANCE FEES consist of
fees earned for funds transfer services and issuing cashier’s
checks and money orders. Our obligation is satisfied at the time
of the funds transfer services or upon issuance of the cashier’s
check or money order. Substantially all of these fees are in the
Community Banking and Wholesale Banking operating
segments.
ALL OTHER FEES include various types of fees earned on
services to customers which have related performance
obligations that we complete to recognize revenue. A significant
portion of the revenue is earned from providing business payroll
services and merchant services, which are generally recognized
over time as we perform the services. Most of these fees are in
the Community Banking operating segment.
259
Wells Fargo & Company
259
Note 22: Employee Benefits and Other Expenses
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.
The benefit obligation for the qualified plans, nonqualified
plans and other benefits plans was $10.1 billion, $557 million
and $555 million, respectively, at December 31, 2018, a decrease
from $11.1 billion, $621 million and $611 million, respectively, at
December 31, 2017. The decreases were primarily due to benefits
paid (net of participant contributions), and actuarial gains,
reflecting an increase in the discount rates, see Table 22.5. 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.
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
2018. We do not expect that we will be required to make a
contribution to the Cash Balance Plan in 2019; however, this is
dependent on the finalization of the actuarial valuation in 2019.
Our decision of whether to make a contribution in 2019 will be
based on various factors including the actual investment
performance of plan assets during 2019. Given these
uncertainties, we cannot estimate at this time the amount, if any,
that we will contribute in 2019 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 recognize settlement losses for our Cash Balance Plan
based on assessing whether lump sum payments will, in
aggregate for the year, exceed the sum of its annual service and
interest cost (threshold). In 2018, lump sum payments (included
in the “Benefits paid” line in Table 22.1) exceeded this threshold.
Settlement losses of $134 million were recognized in 2018,
representing the pro rata portion of the net loss in cumulative
other comprehensive income based on the percentage reduction
in the Cash Balance Plan’s projected benefit obligation
attributable to 2018 lump sum payments.
260
Wells Fargo & Company
260
Table 22.1 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 22.1: Changes in Benefit Obligation and Fair Value of Plan Assets
(in millions)
Change in benefit obligation:
December 31, 2018
December 31, 2017
Pension benefits
Pension benefits
Qualified
Non-
qualified
Other
benefits
Qualified
Non-
qualified
Other
benefits
Benefit obligation at beginning of year
$ 11,110
Service cost
Interest cost
Plan participants’ contributions
Actuarial loss (gain)
Benefits paid
Medicare Part D subsidy
Amendment
Settlement
Other
Foreign exchange impact
11
392
—
(674)
(719)
—
1
—
13
(5)
Benefit obligation at end of year
10,129
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
Other
Foreign exchange impact
10,667
(478)
10
—
—
—
1
(4)
Fair value of plan assets at end of year
9,477
Funded status at end of year
$
(652)
(557)
Amounts recognized on the balance sheet at end of year:
Assets
Liabilities
$
1
—
(653)
(557)
Table 22.2 provides information for pension and post
retirement plans with benefit obligations in excess of plan assets.
Table 22.2: Plans with Benefit Obligations in Excess of Plan Assets
621
—
21
—
(27)
(57)
—
—
—
—
(1)
557
—
—
57
—
—
—
—
—
—
611
10,774
630
—
21
48
(33)
(92)
2
—
—
—
(2)
5
412
—
634
—
24
—
46
(651)
(79)
—
—
(74)
—
10
—
—
—
—
—
731
—
28
40
(102)
(88)
1
—
—
—
1
555
11,110
621
611
565
(17)
5
48
2
—
—
—
511
(44)
—
(44)
10,120
1,253
11
—
(651)
—
(74)
—
8
10,667
—
—
79
—
(79)
—
—
—
—
—
(443)
(621)
—
(443)
—
(621)
549
56
7
40
(88)
1
—
—
—
565
(46)
—
(46)
(719)
(57)
(92)
(in millions)
Projected benefit obligation
Accumulated benefit obligation
Fair value of plan assets
December 31, 2018
December 31, 2017
Pension Benefits
Other Benefits
Pension Benefits
Other Benefits
$
10,640
10,627
9,429
N/A
555
511
11,721
11,717
10,656
N/A
611
565
261
Wells Fargo & Company
261
Note 22: Employee Benefits and Other Expenses (continued)
Table 22.3 presents the components of net periodic benefit
cost and other comprehensive income (OCI).
Table 22.3: Net Periodic Benefit Cost and Other Comprehensive Income
December 31, 2018
December 31, 2017
December 31, 2016
Pension benefits
Pension benefits
Pension benefits
Qualified qualified benefits Qualified
Non-
Other
Non-
qualified
Other
benefits Qualified
Non-
qualified
Other
benefits
(in millions)
Service cost
Interest cost (1)
Expected return on plan assets (1)
Amortization of net actuarial loss (gain) (1)
Amortization of prior service credit (1)
Settlement loss (1)
Net periodic benefit cost
Other changes in plan assets and benefit
obligations recognized in other
comprehensive income:
Net actuarial loss (gain)
Amortization of net actuarial gain (loss)
Prior service cost (credit) (2)
Amortization of prior service credit
Settlement
Total recognized in other comprehensive
income
Total recognized in net periodic benefit cost
$
11
392
(641)
131
—
134
27
445
(131)
1
—
(134)
—
21
—
14
—
2
37
(27)
(14)
—
—
(2)
181
(43)
—
21
(31)
(18)
(10)
—
5
412
(652)
148
—
7
(38)
(80)
15
18
—
10
—
43
33
(148)
1
—
(8)
(122)
and other comprehensive income
$
208
(6)
5
(202)
—
24
—
11
—
6
41
46
(11)
—
—
(6)
29
70
—
28
(30)
(9)
(10)
—
(21)
(128)
9
—
10
—
3
422
(608)
146
—
5
(32)
302
(146)
—
—
(5)
—
26
—
12
—
2
40
—
39
(30)
(5)
(2)
—
2
9
(12)
—
—
(2)
(82)
5
(177)
2
—
(109)
151
(5)
(252)
(130)
119
35
(250)
(1) Effective January 1, 2018, we adopted ASU 2017-07 – Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. Accordingly,
2018 balances are reported in other noninterest expense on the consolidated statement of income. For 2017 and 2016, these balances were reported in employee benefits.
In 2016, a prior service credit of $177 million was recognized for an amendment that reduced the Wells Fargo & Company Retiree Plan obligation.
(2)
Table 22.4 provides the amounts recognized in cumulative
OCI (pre tax).
Table 22.4: Benefits Recognized in Cumulative OCI
(in millions)
Net actuarial loss (gain)
Net prior service cost (credit)
Total
December 31, 2018
December 31, 2017
Pension benefits
Pension benefits
Qualified
$
3,336
1
$
3,337
Non-
qualified
Other
benefits
Qualified
Non-
qualified
Other
benefits
149
—
149
(327)
(156)
(483)
3,156
—
3,156
192
—
192
(360)
(166)
(526)
262
Wells Fargo & Company
262
Plan Assumptions
For additional information on our pension accounting
assumptions, see Note 1 (Summary of Significant Accounting
Policies). Table 22.5 presents the weighted-average assumptions
used to estimate the projected benefit obligation for pension
benefits.
Table 22.5: Weighted-Average Assumptions Used to Estimate Projected Benefit Obligation
Discount rate
Interest crediting rate
December 31, 2018
December 31, 2017
Pension benefits
Pension benefits
Qualified
4.30%
3.22
Non-
qualified
Other
benefits
4.20
2.18
4.24
N/A
Qualified
3.65
2.74
Non-
qualified
Other
benefits
3.55
1.54
3.54
N/A
Table 22.6 presents the weighted-average assumptions used
to determine the net periodic benefit cost.
Table 22.6: Weighted-Average Assumptions Used to Determine Net Periodic Benefit Cost
December 31, 2018
December 31, 2017
December 31, 2016
Pension benefits
Pension benefits
Pension benefits
Qualified
Non-
qualified
Other
benefits Qualified
Non-
qualified
Other
benefits Qualified
Non-
qualified
Other
benefits
Discount rate (1)
Interest crediting rate (1)
Expected return on plan assets
3.65%
2.74
6.24
3.65
1.68
N/A
3.54
N/A
5.75
3.98
2.92
6.70
3.93
1.85
N/A
4.00
N/A
5.75
3.99
3.03
6.75
4.11
2.02
N/A
4.16
N/A
5.75
(1)
Includes the impact of interim re-measurements 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 8.40% for health care costs in 2019. This rate is
assumed to trend down 0.50%-0.60% per year until the trend
rate reaches an ultimate rate of 4.50% in 2026. The 2018
periodic benefit cost was determined using an initial annual
trend rate of 9.00%. This rate was assumed to decrease
0.40%-0.70% per year until the trend rate reached an ultimate
rate of 4.50% in 2026.
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 22.7.
Table 22.7: Projected Benefit Payments
(in millions)
Year ended December 31,
2019
2020
2021
2022
2023
Pension benefits
Qualified
Non-
qualified
Other
Benefits
$
784
771
767
759
711
52
50
49
46
44
46
48
48
47
46
2024-2028
3,381
199
198
263
Wells Fargo & Company
263
Note 22: Employee Benefits and Other Expenses (continued)
Fair Value of Plan Assets
Table 22.8 presents the balances of pension plan assets and
other benefit plan assets measured at fair value. See Note 18
(Fair Values of Assets and Liabilities) for fair value hierarchy
level definitions.
Table 22.8: 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, 2018
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
$
2
284
902
4,414
—
—
55
582
167
141
72
449
—
148
63
34
118
114
186
238
89
7
357
110
205
33
32
44
—
—
—
—
—
—
—
—
—
—
—
14
—
8
286
5,316
118
114
241
820
256
148
429
559
205
195
95
86
69
—
—
—
—
—
—
—
—
9
—
—
—
4
22
—
183
—
—
115
28
17
—
40
—
—
—
—
Plan investments - excluding investments
at NAV
$ 2,615
6,231
22
8,868
82
405
Investments at NAV (6)
Net receivables
Total plan assets
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
566
43
$ 9,477
235
5,299
255
267
283
1,125
360
236
480
799
305
208
90
80
—
—
—
—
—
—
—
—
—
—
—
20
—
8
85
—
—
—
—
—
—
—
—
23
—
—
—
3
23
—
185
—
—
130
34
20
—
38
—
—
—
—
1
875
—
—
60
825
227
224
89
542
—
157
62
—
234
4,424
255
267
223
300
133
12
391
257
305
31
28
72
Plan investments - excluding investments at NAV $ 3,062
6,932
28
10,022
111
430
Investments at NAV (6)
Net receivables
Total plan assets
594
51
$ 10,667
—
—
—
—
—
—
—
—
—
—
—
—
—
24
24
—
—
—
—
—
—
—
—
—
—
—
—
—
23
23
91
—
183
—
—
115
28
17
—
49
—
—
—
28
511
—
—
511
108
—
185
—
—
130
34
20
—
61
—
—
—
26
564
—
1
565
(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 2.0% of total plan assets.
(4) This category consists of five 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 four 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.
264
Wells Fargo & Company
264
Table 22.9 presents the changes in Level 3 pension plan and
other benefit plan assets measured at fair value.
Table 22.9: Fair Value Level 3 Pension and Other Benefit Plan Assets
(in millions)
Quarter ended December 31, 2018
Pension plan assets:
Real estate
Other
Total pension plan assets
Other benefits plan assets:
Other
Total other benefit plan assets
Quarter ended December 31, 2017
Pension plan assets:
Long duration 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
$
$
$
$
$
$
$
$
20
8
28
23
23
19
25
8
52
23
23
(2)
—
(2)
1
1
—
(3)
—
(3)
—
—
(1)
———
(1)
—
—
—
5
—
5
—
—
(3)
(3)
—
—
—
(4)
—
(4)
—
—
—
—
—
—
(19)
(3)
—
(22)
—
—
14
8
22
24
24
—
20
8
28
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, and limited partnerships, as
described above.
Other – insurance contracts that are stated at cash
surrender value. This group of assets also includes investments
in registered investment companies and 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.
265
Wells Fargo & Company
265
Note 22: Employee Benefits and Other Expenses (continued)
Defined Contribution Retirement Plans
We sponsor a qualified 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 each of the following years, 2018, 2017 and
2016.
Other Expenses
Table 22.10 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 22.10: Other Expenses
(in millions)
Year ended December 31,
2018
2017
2016
Outside professional services
$ 3,306
3,813
3,138
Operating losses
Contract services (1)
3,124
2,192
Credit card rewards and rebates (2)
1,401
Operating leases
Outside data processing
1,334
660
5,492
1,638
1,201
1,351
891
1,608
1,497
1,047
1,329
888
(1) The periods prior to 2018 have been revised to conform with the current
period presentation whereby temporary help is included in contract services
rather than in all other noninterest expense.
(2) Noninterest income from card fees is net of cardholder rewards and rebates
expense.
266
Wells Fargo & Company
266
Note 23: 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. In 2018, we re-
measured our provisional estimates of the tax impacts that were
recorded in 2017. As a result, during 2018 the Company
recognized a $164 million discrete tax expense for adjustments
to the provisional tax impacts of the Tax Act included in its
consolidated financial statement for the year ended
December 31, 2017. The accounting was completed in fourth
quarter 2018.
Table 23.1 presents the components of income tax expense.
Table 23.1: Income Tax Expense
(in millions)
Current:
Federal
State and local
Foreign
Total current
Deferred:
Federal
State and local
Foreign
Total deferred
Year ended December 31,
2018
2017
2016
$ 2,382
3,507
1,140
170
3,692
1,706
236
28
1,970
561
183
4,251
156
564
(54)
666
6,712
1,395
175
8,282
1,498
296
(1)
1,793
Total
$ 5,662
4,917
10,075
The tax effects of our temporary differences that gave rise to
significant portions of our deferred tax assets and liabilities are
presented in Table 23.2.
Table 23.2: Net Deferred Tax Liability
(in millions)
Deferred tax assets
Dec 31,
Dec 31,
2018
2017
Allowance for loan losses
$
2,644
2,816
Deferred compensation and employee
benefits
Accrued expenses
PCI loans
Net unrealized losses on debt
securities
Net operating loss and tax credit carry
forwards
Other
Total deferred tax assets
Deferred tax assets valuation
allowance
Deferred tax liabilities
Mortgage servicing rights
Leasing
Basis difference in investments
Mark to market, net
Intangible assets
Net unrealized gains on debt
securities
Insurance reserves
Other
2,893
815
467
1,022
366
1,272
9,479
2,377
722
1,057
—
341
986
8,299
(315)
(397)
(3,475)
(4,271)
(1,203)
(7,252)
(427)
—
(696)
(831)
(3,421)
(4,084)
(577)
(5,816)
(539)
(55)
(750)
(821)
Total deferred tax liabilities
(18,155)
(16,063)
Net deferred tax liability (1) $
(8,991)
(8,161)
(1) The net deferred tax liability is included in accrued expenses and other
liabilities.
267
Wells Fargo & Company
267
Note 23: Income Taxes (continued)
Deferred taxes related to net unrealized gains (losses) on
debt securities, net unrealized gains (losses) on derivatives,
foreign currency translation, and employee benefit plan
adjustments are recorded in cumulative OCI (see Note 25 (Other
Comprehensive Income)). These associated adjustments
increased OCI by $1.1 billion in 2018. In 2018, we adopted ASU
2018-02 – Income Statement-Reporting Comprehensive Income
(Topic 220): Reclassification of Certain Tax Effects from
Accumulated Other Comprehensive Income, and reclassified
$400 million from OCI to retained earnings. See Note 1
(Summary of Significant Accounting Policies) and Note 25
(Other Comprehensive Income) for more information.
We have determined that a valuation allowance is required
for 2018 in the amount of $315 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.
Table 23.3: Effective Income Tax Expense and Rate
At December 31, 2018, we had net operating loss carry
forwards with related deferred tax assets of $366 million. If
these carry forwards are not utilized, they will mostly expire in
varying amounts through December 31, 2038.
In 2018, we finalized the recognition of the U.S. tax expense
associated with the deemed repatriation of undistributed
earnings of certain non-U.S. subsidiaries as required under the
2017 Tax Act. We do not intend to distribute these 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 23.3 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
2018
2017
2016
Rate
Statutory federal income tax expense and rate
$ 5,892
21.0%
$
9,485
35.0%
$
11,204
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
1,076
(494)
(1,537)
236
164
325
3.9
(1.8)
(5.5)
0.8
0.6
1.2
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
—
(870)
(3.3)
(238)
(0.8)
Effective income tax expense and rate
$ 5,662
20.2%
$
4,917
18.1%
$
10,075
31.5%
The 2018 effective income tax rate was 20.2%, compared
The 2017 effective income tax rate included an estimated
with 18.1% in 2017 and 31.5% in 2016. The 2018 effective income
tax rate reflected the reduction to the U.S. federal income tax
rate from 35% to 21% resulting from the 2017 Tax Act. It also
included income tax expense related to non-deductible litigation
accruals and the reconsideration of reserves for state income
taxes following the U.S. Supreme Court opinion in South Dakota
v. Wayfair, Inc. In addition, we recognized $164 million of
income tax expense associated with the final re-measurement of
our initial estimates for the impacts of the Tax Act, in accordance
with ASC Topic 740, Income Taxes and SEC Accounting
Bulletin 118.
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 income tax expense for the estimated deemed
repatriation of the Company’s previously undistributed foreign
earnings. The 2017 effective income tax rate also included
income tax expense of $1.3 billion related to the effect of discrete
non tax-deductible items, predominantly consisting of 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.
268
Wells Fargo & Company
268
Table 23.4 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 2013 through 2016 consolidated
U.S. 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 2012. 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 $700 million to our gross unrecognized tax benefits.
Table 23.4: Change in Unrecognized Tax Benefits
Year ended
December 31,
(in millions)
2018
Balance at beginning of year
$
5,167
2017
5,029
Additions:
For tax positions related to the current
year
For tax positions related to prior years
393
503
367
158
Reductions:
For tax positions related to prior years
(262)
(319)
Lapse of statute of limitations
Settlements with tax authorities
(7)
(44)
(48)
(20)
Balance at end of year
$
5,750
5,167
Of the $5.8 billion of unrecognized tax benefits at
December 31, 2018, approximately $3.9 billion would, if
recognized, affect the effective tax rate. The remaining
$1.9 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, 2018 and 2017, we have accrued approximately
$968 million and $726 million, respectively, for the payment of
interest and penalties. In 2018, we recognized in income tax
expense a net tax expense related to interest and penalties of
$200 million. In 2017, we recognized in income tax expense a
net tax expense related to interest and penalties of $96 million.
269
Wells Fargo & Company
269
Note 24: Earnings and Dividends Per Common Share
Table 24.1 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 20 (Common Stock
and Stock Plans) for information about stock and options
activity and terms and conditions of warrants.
Table 24.1: Earnings Per Common Share Calculations
(in millions, except per share amounts)
Wells Fargo net income
Less: Preferred stock dividends and other (1)
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
2018
$
22,393
1,704
$
20,689
Year ended December 31,
2017
22,183
1,629
20,554
2016
21,938
1,565
20,373
4,799.7
$
4.31
4,964.6
4.14
5,052.8
4.03
4,799.7
4,964.6
5,052.8
8.0
26.3
4.4
17.1
24.7
10.9
18.9
25.9
10.7
4,838.4
5,017.3
5,108.3
$
4.28
4.10
3.99
(1) The year ended December 31, 2018, includes $155 million as a result of eliminating the discount on our Series J Preferred Stock, which was redeemed on
September 17, 2018.
Table 24.2 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 24.2: Outstanding Anti-Dilutive Options
(in millions)
Options
Weighted-average shares
Year ended December 31,
2018
0.3
2017
1.9
2016
3.2
Table 24.3 presents dividends declared per common share.
Table 24.3: Dividends Declared Per Common Share
Per common share
$ 1.640
2018
Year ended December 31,
2017
1.540
2016
1.515
270
Wells Fargo & Company
270
Note 25: Other Comprehensive Income
Table 25.1 provides the components of other comprehensive
income (OCI), reclassifications to net income by income
statement line item, and the related tax effects.
Table 25.1: Summary of Other Comprehensive Income
(in millions)
Debt securities (1):
Before
tax
Tax
effect
2018
Net of
tax
Before
tax
Tax
effect
Year ended December 31,
2017
Net of
tax
Before
tax
Tax
effect
2016
Net of
tax
Net unrealized gains (losses) arising during the
period
$(4,493)
1,100
(3,393)
2,719
(1,056)
1,663
(3,458)
1,302
(2,156)
Reclassification of net (gains) losses to net
income:
Interest income on debt securities (2)
Net gains on debt securities
Net gains from equity securities (3)
Other noninterest income
357
(108)
—
(1)
(88)
27
—
—
269
(81)
—
(1)
198
(479)
(456)
—
Subtotal reclassifications to net income
248
(61)
187
(737)
(75)
123
7
(3)
4
181
172
—
278
(298)
(284)
—
(942)
(300)
(5)
(459)
(1,240)
355
113
2
467
(587)
(187)
(3)
(773)
Net change
(4,245)
1,039
(3,206)
1,982
(778)
1,204
(4,698)
1,769
(2,929)
Derivatives and hedging activities:
Fair Value Hedges:
Change in fair value of excluded
components on fair value hedges (4)
Cash Flow Hedges:
Net unrealized gains (losses) arising during
the period on cash flow hedges
Reclassification of net (gains) losses to net
income:
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 noninterest
expense and employee benefits (5):
Amortization of net actuarial loss
Settlements and other
Subtotal reclassifications to noninterest
expense and employee benefits
Net change
Foreign currency translation adjustments:
Net unrealized gains (losses) arising during the
period
Net change
(254)
63
(191)
(253)
95
(158)
—
—
—
(278)
67
(211)
(287)
108
(179)
177
(67)
110
292
2
294
(238)
(72)
—
220
2
(551)
8
(72)
222
(543)
58
(180)
(1,083)
208
(3)
205
408
(343)
(1,043)
5
14
(338)
(1,029)
(675)
(852)
393
(5)
388
321
(650)
9
(641)
(531)
(434)
106
(328)
49
(12)
37
(52)
(40)
(92)
127
126
253
(181)
(31)
(29)
96
97
(60)
193
46
(135)
(156)
(156)
1
1
(155)
(155)
150
3
153
202
96
96
(57)
2
(55)
(67)
3
3
93
5
98
135
99
99
153
5
158
106
(57)
(1)
(58)
(98)
(3)
(3)
4
4
96
4
100
8
1
1
Other comprehensive income (loss)
$(4,820)
1,144
(3,676)
1,197
(434)
763
(5,447)
1,996
(3,451)
Less: Other comprehensive loss from
noncontrolling interests, net of tax
Wells Fargo other comprehensive income
(loss), net of tax
(2)
$(3,674)
(62)
825
(17)
(3,434)
(1) The years ended December 31, 2017 and 2016, include net unrealized gains (losses) arising during the period from equity securities of $81 million and $259 million and
reclassification of net (gains) losses to net income related to equity securities of $(456) million and $(300) million, respectively. In connection with our adoption in first
quarter 2018 of ASU 2016-01 – Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, the year
ended December 31, 2018, reflects net unrealized gains (losses) arising during the period and reclassification of net (gains) losses to net income from only debt securities.
(2) Represents net unrealized gains and losses amortized over the remaining lives of securities that were transferred from the available-for-sale portfolio to the held-to-
maturity portfolio.
(3) Net gains from equity securities is presented for table presentation purposes. After our adoption of ASU 2016-01 – Financial Instruments – Overall (Subtopic 825-10):
Recognition and Measurement of Financial Assets and Financial Liabilities on January 1, 2018, this line will not contain balances as realized and unrealized gains and losses
on marketable equity investments will be recorded in earnings.
(4) 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.
(5) Effective January 1, 2018, we adopted ASU 2017-07 – Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. Accordingly,
2018 balances are reclassified to other noninterest expense on the consolidated statement of income. For 2017 and 2016, these balances were reclassified to employee
benefits.
271
Wells Fargo & Company
271
Note 25: Other Comprehensive Income (continued)
Table 25.2 provides the cumulative OCI balance activity on
an after-tax basis.
Table 25.2: Cumulative OCI Balances
(in millions)
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 (2)
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
Transition adjustment (3)
Balance, January 1, 2018
Reclassification of certain tax effects to retained
earnings (4)
Net unrealized losses arising during the period
Amounts reclassified from accumulated other
comprehensive income
Net change
Debt
securities (1)
$
1,813
(2,156)
(773)
(2,929)
(17)
(1,099)
—
(1,099)
1,663
(459)
1,204
(66)
171
(118)
53
31
(3,393)
187
(3,175)
Derivatives
and
hedging
activities
Defined
benefit
plans
adjustments
Foreign
currency
translation
adjustments
Cumulative
other
comprehensive
income (loss)
620
110
(641)
(531)
—
89
168
257
(337)
(338)
(675)
—
(418)
—
(1,951)
(92)
100
8
—
(1,943)
—
(1,943)
37
98
135
—
(1,808)
—
(418)
(1,808)
(87)
(402)
222
(267)
(353)
(328)
193
(488)
(185)
1
—
1
—
(184)
—
(184)
99
—
99
4
(89)
—
(89)
9
(155)
297
(2,137)
(1,314)
(3,451)
(17)
(3,137)
168
(2,969)
1,462
(699)
763
(62)
(2,144)
(118)
(2,262)
(400)
(4,278)
—
602
(146)
(4,076)
(2)
(233)
(2)
(6,336)
Less: Other comprehensive loss from noncontrolling
interests
—
—
—
Balance, December 31, 2018
$
(3,122)
(685)
(2,296)
(1) The years ended December 31, 2017 and 2016, include net unrealized gains (losses) arising during the period from equity securities of $81 million and $259 million and
reclassification of net (gains) losses to net income related to equity securities of $(456) million and $(300) million, respectively. In connection with our adoption in first
quarter 2018 of ASU 2016-01 – Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, the year
ended December 31, 2018, reflects net unrealized gains (losses) arising during the period and reclassification of net (gains) losses to net income from only debt securities.
(2) Transition adjustment relates to our adoption of 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.
(3) The transition adjustment relates to our adoption of ASU 2016-01 – Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets
and Financial Liabilities. See Note 1 (Summary of Significant Accounting Policies) for more information.
(4) Represents the reclassification from other comprehensive income to retained earnings as a result of our adoption of ASU 2018-02 – Income Statement-Reporting
Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income in third quarter 2018. See Note 1 (Summary of
Significant Accounting Policies) for more information.
272
Wells Fargo & Company
272
Note 26: 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.
Effective first quarter 2018, we adopted a new funds transfer
pricing methodology to allow for better comparability of
performance across the Company. Under the new methodology,
assets and liabilities receive a funding charge or credit that
considers interest rate risk, liquidity risk, and other product
characteristics on a more granular level. This methodology
change affects results across all three of our reportable operating
segments and prior period operating segment results have been
revised to reflect this methodology change. Our previously
reported consolidated financial results were not impacted by the
methodology change; however, in connection with our adoption
of ASU 2016-01 in first quarter 2018, certain reclassifications
have occurred within noninterest income.
Community Banking offers a complete line of diversified
financial products and services for 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 and private equity
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 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.
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, most of which
represents products and services for Wealth and Investment
Management customers served through Community Banking
distribution channels.
273
Wells Fargo & Company
273
Note 26: Operating Segments (continued)
Table 26.1 presents our results by operating segment.
Table 26.1: Operating Segments
(income/expense in millions, average balances in billions)
2018
Community
Banking
Wholesale
Banking
Wealth and
Investment
Management
Other (1)
Consolidated
Company
Net interest income (2)
$
29,219
18,690
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 (4)
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)
2016 (4)
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)
2018
Average loans
Average assets
Average deposits
2017 (4)
Average loans
Average assets
Average deposits
1,783
17,694
30,491
14,639
3,784
10,855
461
(58)
10,016
16,157
12,607
1,555
11,052
20
$
10,394
11,032
$
28,658
18,810
2,555
18,360
32,615
11,848
634
11,214
276
10,938
27,333
2,691
19,180
27,655
16,167
5,213
10,954
136
10,818
463.7
1,034.1
757.2
475.7
1,085.5
729.6
$
$
$
$
(19)
11,190
16,624
13,395
3,496
9,899
(15)
9,914
18,699
1,073
12,348
15,901
14,073
4,159
9,914
(28)
9,942
465.7
830.5
423.7
465.6
822.8
464.2
4,441
(5)
11,935
12,938
3,443
861
2,582
2
2,580
4,641
(5)
12,431
12,623
4,454
1,668
2,786
16
2,770
4,249
(5)
12,029
12,051
4,232
1,596
2,636
(1)
2,637
74.6
83.9
165.0
71.9
82.8
189.0
(2,355)
24
(3,232)
(3,460)
(2,151)
(538)
(1,613)
—
49,995
1,744
36,413
56,126
28,538
5,662
22,876
483
(1,613)
22,393
(2,552)
(3)
(3,149)
(3,378)
(2,320)
(881)
(1,439)
—
(1,439)
(2,527)
11
(3,044)
(3,230)
(2,352)
(893)
(1,459)
—
(1,459)
(58.8)
(59.6)
(70.0)
(57.1)
(58.1)
(78.2)
49,557
2,528
38,832
58,484
27,377
4,917
22,460
277
22,183
47,754
3,770
40,513
52,377
32,120
10,075
22,045
107
21,938
945.2
1,888.9
1,275.9
956.1
1,933.0
1,304.6
(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 as well as as interest credits for any funding of a segment available to be provided to other segments. The cost of liabilities includes actual interest expense
on segment liabilities as well as funding charges for any funding provided from other segments.
(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.
(4) Prior period operating segment results have been revised to reflect a methodology change of allocating funding charges and credits.
274
Wells Fargo & Company
274
Note 27: Parent-Only Financial Statements
The following tables present Parent-only condensed financial
statements.
Table 27.1: 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,
2018
2017
2016
$
22,427
3,298
49
(424)
25,350
644
2
4,541
3
286
5,476
19,874
(544)
1,975
20,746
1,984
146
1,238
24,114
189
—
3,595
5
1,888
5,677
18,437
(319)
3,427
22,183
12,776
1,615
155
177
14,723
387
—
2,619
19
1,300
4,325
10,398
(1,152)
10,388
21,938
Net income
$
22,393
(1)
Includes dividends paid from indirect bank subsidiaries of $20.8 billion, $17.9 billion and $12.5 billion in 2018, 2017 and 2016, respectively.
Table 27.2: Parent-Only Statement of Comprehensive Income
Year ended December 31,
(in millions)
Net income
Other comprehensive income (loss), net of tax:
Debt securities (1)
Derivatives and hedging activities
Defined benefit plans adjustment
Equity in other comprehensive income (loss) of subsidiaries
Other comprehensive income (loss), net of tax:
2018
$
22,393
2017
22,183
(12)
(198)
(132)
(3,332)
(3,674)
94
(158)
118
771
825
Total comprehensive income
$
18,719
23,008
2016
21,938
(76)
—
(20)
(3,338)
(3,434)
18,504
(1) The years ended December 31, 2017 and 2016, includes net unrealized gains arising during the period from equity securities of $3 million and $7 million and
reclassification of net (gains) to net income related to equity securities of $(21) million and $(30) million, respectively. In connection with our adoption in first quarter 2018
of ASU 2016-01 – Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, the year ended
December 31, 2018, reflects net unrealized gains (losses) arising during the period and reclassification of net (gains) losses to net income from only debt securities.
275
Wells Fargo & Company
275
Note 27: Parent-Only Financial Statements (continued)
Table 27.3: Parent-Only Balance Sheet
(in millions)
Assets
Cash, cash equivalents, and restricted cash due from (1):
Subsidiary banks
Nonaffiliates
Debt securities:
Trading, at fair value (2)
Available-for-sale, at fair value (2)
Loans to nonbank subsidiaries
Investments in subsidiaries (3)
Equity securities (2)
Other assets (2)
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
Dec 31,
2018
Dec 31,
2017
$
16,301
23,180
—
—
1
139,163
202,695
2,164
4,639
1
24
5
138,681
206,367
2,414
4,731
$
364,963
375,403
$
6,986 $
7,902
135,079
26,732
168,797
196,166
$
364,963
146,130
14,435
168,467
206,936
375,403
(1) Financial information has been revised to reflect the impact of our adoption in first quarter 2018 of ASU 2016-18 – Statement of Cash Flows (Topic 230): Restricted Cash in
which we changed the presentation of our cash and cash equivalents to include both cash and due from banks as well as interest-earning deposits with banks, which are
inclusive of restricted cash. See Note 1 (Summary of Significant Accounting Policies) for more information.
(2) Financial information for the prior period has been revised to reflect presentation changes made in connection with our adoption in first quarter 2018 of ASU 2016-01 –
Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. See Note 1 (Summary of Significant
Accounting Policies) for more information.
(3) The years ended December 31, 2018, and December 31, 2017, include indirect ownership of bank subsidiaries with equity of $167.6 billion and $170.5 billion, respectively.
276
Wells Fargo & Company
276
Table 27.4: Parent-Only Statement of Cash Flows
(in millions)
Cash flows from operating activities:
Year ended December 31,
2018
2017
2016
Net cash provided by operating activities (1)
$
19,024
22,233
10,654
Cash flows from investing activities:
Available-for-sale debt securities:
Proceeds from sales:
Subsidiary banks
Nonaffiliates (1)
Prepayments and maturities:
Subsidiary banks
Purchases:
Subsidiary banks
Nonaffiliates
Equity securities, not held for trading:
Proceeds from sales and capital returns (1)
Purchases (1)
Loans:
Net repayments from (advances to) subsidiaries
Capital notes and term loans made to subsidiaries
Principal collected on notes/loans made to subsidiaries
Net decrease (increase) in investment in subsidiaries
Other, net
Net cash provided (used) by investing activities
Cash flows from financing activities:
—
—
—
—
—
355
(220)
(7)
(2,441)
756
2,407
109
959
8,658
8,824
—
5,201
10,250
15,000
(3,900)
—
743
(215)
(35,876)
(73,729)
69,286
(2,029)
113
(15,000)
(6,544)
583
(314)
3,174
(32,641)
15,164
(606)
18
(17,875)
(15,965)
Net increase (decrease) in short-term borrowings and indebtedness to subsidiaries
12,467
(8,685)
789
Long-term debt:
Proceeds from issuance
Repayment
Preferred stock:
Proceeds from issuance
Redeemed
Cash dividends paid
Common stock:
Proceeds from issuance
Stock tendered for payment of withholding taxes
Repurchased
Cash dividends paid
Other, net
Net cash provided (used) by financing activities
Net change in cash, cash equivalents, and restricted cash (2)
Cash, cash equivalents, and restricted cash at beginning of year (2)
1,876
(9,162)
—
(2,150)
(1,622)
632
(331)
(20,633)
(7,692)
(248)
(26,863)
(6,880)
23,181
Cash, cash equivalents, and restricted cash at end of year (2)
$
16,301
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
(1) Financial information for the prior period has been revised to reflect presentation changes made in connection with our adoption in first quarter 2018 of ASU 2016-01 –
Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. See Note 1 (Summary of Significant
Accounting Policies) for more information.
(2) Financial information has been revised to reflect the impact of our adoption in first quarter 2018 of ASU 2016-18 – Statement of Cash Flows (Topic 230): Restricted Cash in
which we changed the presentation of our cash and cash equivalents to include both cash and due from banks as well as interest-earning deposits with banks, which are
inclusive of restricted cash. See Note 1 (Summary of Significant Accounting Policies) for more information.
277
Wells Fargo & Company
277
Note 28: 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 28.1 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
Standardized Approach applies assigned risk weights to broad
risk categories, while the calculation of risk-weighted assets
(RWAs) under the Advanced Approach differs by requiring
applicable banks to utilize a risk-sensitive methodology, which
relies upon the use of internal credit models, and includes an
operational risk component. The Basel III capital rules are being
Table 28.1: Regulatory Capital Information
phased-in effective January 1, 2014, through the end of 2021.
Beginning January 1, 2018, the requirements for calculating
CET1 and tier 1 capital, along with RWAs, became fully phased-
in. Accordingly, the information presented reflects fully phased-
in CET1 capital, tier 1 capital, and RWAs, but reflects total
capital still in accordance with Transition Requirements.
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, 2018, 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, 2018
December 31, 2017
December 31, 2018
December 31, 2017
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
$ 146,363
146,363
Tier 1
Total
Assets:
167,866
167,866
198,798
207,041
154,765
178,209
210,333
154,765
178,209
220,097
142,685
142,685
142,685
142,685
155,558
163,380
143,292
143,292
156,661
143,292
143,292
165,734
Risk-weighted assets
$ 1,177,350
1,247,210
1,199,545
1,260,663
1,058,653
1,154,182
1,090,360
1,169,863
Adjusted average assets (1)
1,850,299
1,850,299
1,905,568
1,905,568
1,652,009
1,652,009
1,708,828
1,708,828
Regulatory capital ratios:
Common equity tier 1
capital
Tier 1 capital
Total capital
Tier 1 leverage (1)
12.43%
11.74 *
14.26
16.89
9.07
13.46 *
16.60 *
9.07
12.90
14.86
17.53
9.35
12.28 *
14.14 *
17.46 *
9.35
13.48
13.48
14.69
8.64
12.36 *
12.36 *
14.16 *
8.64
13.14
13.14
14.37
8.39
12.25 *
12.25 *
14.17 *
8.39
*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 28.2 presents the minimum required regulatory
capital ratios under Transition Requirements to which the
Company and the Bank were subject as of December 31, 2018,
and December 31, 2017.
Table 28.2: 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, 2018
December 31, 2017
December 31, 2018
December 31, 2017
Wells Fargo & Company
Wells Fargo Bank, N.A.
7.875%
9.375
11.375
4.000
6.750
8.250
10.250
4.000
6.375
7.875
9.875
4.000
5.750
7.250
9.250
4.000
(1) At December 31, 2018, under transition requirements, the CET1, tier 1 and total capital minimum ratio requirements for Wells Fargo & Company include a capital
conservation buffer of 1.875% and a global systemically important bank (G-SIB) surcharge of 1.500%. Only the 1.875% capital conservation buffer applies to the Bank at
December 31, 2018.
278
Wells Fargo & Company
278
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, 2018 and 2017, 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, 2018, 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, 2018 and 2017, and the results of its operations and its cash flows for each of the years in the three-year
period ended December 31, 2018, 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, 2018, 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 February 27, 2019, 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
February 27, 2019
279
Wells Fargo & Company
279
Quarterly Financial Data
Condensed Consolidated Statement of Income - Quarterly (Unaudited)
2018
Quarter ended
2017
Quarter ended
(in millions, except per share amounts)
Dec 31,
Sep 30,
Jun 30, Mar 31,
Dec 31,
Sep 30,
Jun 30,
Mar 31,
Interest income
Interest expense
Net interest income
Provision for credit losses
$16,921
16,364
16,015
15,347
14,958
15,044
14,694
14,213
4,277
3,792
3,474
3,109
2,645
2,595
2,223
1,889
12,644
12,572
12,541
12,238
12,313
12,449
12,471
12,324
521
580
452
191
651
717
555
605
Net interest income after provision for credit losses
12,123
11,992
12,089
12,047
11,662
11,732
11,916
11,719
Noninterest income
Service charges on deposit accounts
Trust and investment fees
Card fees
Other fees
Mortgage banking
Insurance
Net gains (losses) from trading activities (1)
Net gains on debt securities
Net gains from equity securities (1)
Lease income
Other
Total noninterest income
Noninterest expense
Salaries
Commission and incentive compensation
Employee benefits
Equipment
Net occupancy
Core deposit and other intangibles
FDIC and other deposit assessments
1,176
3,520
981
888
467
109
10
957
21
402
753
1,204
3,631
1,017
1,163
3,675
1,001
850
846
104
158
416
453
633
846
770
102
191
41
295
443
485
1,173
3,683
1,246
3,687
908
800
934
114
243
1
783
455
602
996
913
928
223
(1)
157
572
458
558
1,276
3,609
1,000
877
1,276
3,629
1,019
902
1,313
3,570
945
865
1,046
1,148
1,228
269
120
166
363
475
199
280
151
120
274
493
472
277
272
36
570
481
374
8,336
9,369
9,012
9,696
9,737
9,400
9,764
9,931
4,545
2,427
706
643
735
264
153
4,461
2,427
1,377
634
718
264
336
4,465
2,642
1,245
550
722
265
297
4,363
2,768
1,598
617
713
265
324
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
Other
3,866
3,546
3,796
4,394
6,516
4,322
3,541
3,209
Total noninterest expense
13,339
13,763
13,982
15,042
16,800
14,351
13,541
13,792
Income before income tax expense
Income tax expense (benefit)
7,120
966
7,598
1,512
7,119
1,810
6,701
1,374
4,599
(1,642)
Net income before noncontrolling interests
6,154
6,086
5,309
5,327
6,241
Less: Net income from noncontrolling interests
90
79
123
191
90
6,781
2,181
4,600
58
8,139
2,245
5,894
38
7,858
2,133
5,725
91
Wells Fargo net income
$ 6,064
6,007
5,186
5,136
6,151
4,542
5,856
5,634
Less: Preferred stock dividends and other
353
554
394
403
411
411
406
401
Wells Fargo net income applicable to common
stock
Per share information
Earnings per common share
Diluted earnings per common share
$ 5,711
5,453
4,792
4,733
5,740
4,131
5,450
5,233
$ 1.22
1.21
1.14
1.13
0.98
0.98
0.97
0.96
1.17
1.16
0.83
0.83
1.09
1.08
1.05
1.03
Average common shares outstanding
4,665.8
4,784.0
4,865.8
4,885.7
4,912.5
4,948.6
4,989.9
5,008.6
Diluted average common shares outstanding
4,700.8
4,823.2
4,899.8
4,930.7
4,963.1
4,996.8
5,037.7
5,070.4
(1) Financial information for the prior periods of 2017 has been revised to reflect presentation changes made in connection with our adoption in first quarter 2018 of
Accounting Standards Update (ASU) 2016-01 – Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial
Liabilities. See Note 1 (Summary of Significant Accounting Policies) for more information.
280
Wells Fargo & Company
280
Average Balances, Yields and Rates Paid (Taxable-Equivalent basis) - Quarterly (1)(2) - (Unaudited)
(in millions)
Earning assets
Interest-earning deposits with banks (3)
Federal funds sold and securities purchased under resale agreements (3)
Debt securities (4):
Trading debt securities (5)
Available-for-sale debt 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 securities (5)
Total available-for-sale debt securities (5)
Held-to-maturity debt 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 debt securities
Total debt securities (5)
Mortgages loans held for sale (6)
Loans held for sale (5)(6)
Commercial loans:
Commercial and industrial - U.S.
Commercial and industrial - Non-U.S.
Real estate mortgage
Real estate construction
Lease financing
Total commercial loans
Consumer loans:
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 loans
Total loans (6)
Equity securities (5)
Other (5)
Total earning assets (5)
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 (5)
Total funding sources (5)
Net interest margin and net interest income on a taxable-equivalent basis (7)
Noninterest-earning assets
Cash and due from banks
Goodwill
Other (5)
Total noninterest-earning assets (5)
Noninterest-bearing funding sources
Deposits
Other liabilities
Total equity
Noninterest-bearing funding sources used to fund earning assets (5)
Net noninterest-bearing funding sources (5)
Total assets
Average
balance
Yields/
rates
2018
Interest
income/
expense
Quarter ended December 31,
2017
Average
balance
Yields/
rates
Interest
income/
expense
$ 150,091
76,108
2.18% $
2.22
825
426
189,114
75,826
1.27% $
1.20%
90,110
3.52
794
81,580
3.17
605
230
647
27
513
1,000
114
1,114
443
2,097
246
83
503
8
840
3,584
196
12
2,649
442
1,244
270
31
4,636
1.66
3.91
2.62
4.85
2.75
3.62
3.10
2.19
5.26
2.25
2.64
2.36
2.90
3.82
3.19
3.89
2.96
3.88
4.38
0.62
3.68
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
246
2.60
0.88
16
3.43% $ 15,301
86
0.68% $
319
0.19
17
0.31
255
1.49
254
0.81
931
0.39
256
0.99
1,344
2.32
115
1.86
2,646
0.81
—
—
0.59
2,646
2.84% $ 12,655
7,195
47,618
155,322
6,666
161,988
46,072
262,873
44,747
6,247
95,748
68
146,810
499,793
17,044
1,992
281,431
62,035
120,404
23,090
19,519
506,479
1.80
4.05
2.91
4.87
2.99
4.46
3.41
2.19
4.34
2.46
3.65
2.46
3.15
4.46
6.69
4.40
3.73
4.51
5.32
4.48
4.39
32
483
1,128
81
1,209
518
2,242
247
67
589
1
904
3,940
190
33
3,115
584
1,369
310
219
5,597
285,260
34,844
37,858
45,536
36,359
439,857
946,336
37,412
4,074
$ 1,732,850
2,868
4.02
491
5.60
1,211
12.69
592
5.16
637
6.95
5,799
5.25
11,396
4.79
261
2.79
1.78
18
3.93% $ 17,089
165
1.21% $
741
0.43
48
0.87
575
2.46
236
1.66
1,765
0.77
546
2.04
1,802
3.17
164
2.41
4,277
1.34
—
—
0.99
4,277
2.94% $ 12,812
$
53,983
689,639
21,955
92,676
56,098
914,351
105,962
226,591
27,365
1,274,269
458,581
$ 1,732,850
$
19,288
26,423
100,486
$ 146,197
$ 354,597
51,739
198,442
(458,581)
$ 146,197
$ 1,879,047
6,423
52,390
152,910
9,371
162,281
48,679
269,773
44,716
6,263
89,622
1,194
141,795
493,148
20,517
1,490
270,294
59,233
127,199
24,408
19,226
500,360
281,966
40,379
36,428
54,323
38,366
451,462
951,822
38,001
7,103
1,777,021
50,483
679,893
20,920
68,187
124,597
944,080
102,142
231,598
24,728
1,302,548
474,473
1,777,021
19,152
26,579
112,566
158,297
367,512
57,845
207,413
(474,473)
158,297
1,935,318
(1) Our average prime rate was 5.28% and 4.30% for the quarters ended December 31, 2018 and 2017, respectively. The average three-month London Interbank Offered
Rate (LIBOR) was 2.62% and 1.46% 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) Financial information for the prior period has been revised to reflect the impact of our adoption of Accounting Standards Update (ASU) 2016-18 – Statement of Cash Flows
(Topic 230): Restricted Cash in which we changed the presentation of our cash and cash equivalents to include both cash and due from banks as well as interest-earning
deposits with banks, which are inclusive of any restricted cash.
(4) 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.
(5) Financial information for the prior period has been revised to reflect presentation changes made in connection with our adoption in first quarter 2018 of ASU 2016-01 –
Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.
(6) Nonaccrual loans and related income are included in their respective loan categories.
(7)
Includes taxable-equivalent adjustments of $168 million and $342 million for the quarters ended December 31, 2018 and 2017, respectively, predominantly related to tax-
exempt income on certain loans and securities. The federal statutory tax rate was 21% and 35% for the periods ended December 31, 2018 and 2017, respectively.
281
Wells Fargo & Company
281
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
FICO
FNMA
FRB
GAAP
Asset-backed security
Allowance for credit losses
Asset/Liability Management Committee
Adjustable-rate mortgage
Accounting Standards Codification
Accounting Standards Update
HAMP
Home Affordability Modification Program
HUD
LCR
LHFS
LIBOR
LIHTC
U.S. Department of Housing and Urban Development
Liquidity coverage ratio
Loans held for sale
London Interbank Offered Rate
Low income housing tax credit
Assets under administration
LOCOM
Lower of cost or market value
Assets under management
Automated valuation model
Basel Committee on Bank Supervision
LTV
MBS
MHA
Loan-to-value
Mortgage-backed security
Making Home Affordable programs
Bank holding company
MLHFS
Mortgage loans held for sale
Comprehensive Capital Analysis and Review
Certificate of deposit
Collateralized debt obligation
Credit default swaps
Current expected credit loss
Common Equity Tier 1
Consumer Financial Protection Bureau
Collateralized loan obligation
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
Combined loan-to-value
PCI Loans
Purchased credit-impaired loans
Commercial mortgage-backed securities
Collateral protection insurance
PTPP
RBC
Pre-tax pre-provision profit
Risk-based capital
Capital Purchase Program
Commercial real estate
Days past due
Employee Stock Ownership Plan
Statement of Financial Accounting Standards
Financial Accounting Standards Board
Federal Deposit Insurance Corporation
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
RMBS
Residential mortgage-backed securities
ROA
ROE
ROTCE
RWAs
SEC
S&P
SLR
SOFR
SPE
TARP
TDR
Wells Fargo net income to average total assets
Wells Fargo net income applicable to common stock
to average Wells Fargo common stockholders’ equity
Return on average tangible common equity
Risk-weighted assets
Securities and Exchange Commission
Standard & Poor’s Ratings Services
Supplementary leverage ratio
Secured Overnight Financing Rate
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
G-SIB
Government-sponsored entity
Globally systemic important bank
VA
VaR
VIE
WIM
Department of Veterans Affairs
Value-at-Risk
Variable interest entity
Wealth and Investment Management
282
Wells Fargo & Company
282
STOC K PERFO RM AN CE
These graphs compare the cumulative total stockholder return and total compound annual growth rate
(CAGR) for our common stock (NYSE: WFC) for the five- and ten-year periods ended December 31, 2018,
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.
F I V E Y E A R P E R F O R M A N C E G R A P H
$260
$240
$220
$200
$180
$160
$140
$120
$100
$ 80
$ 60
$ 40
$ 20
Wells Fargo
(WFC)
S&P 500
KBW Nasdaq
Bank Index
2013
$100
100
100
2014
$124
114
109
2015
$126
115
110
2016
$132
129
141
2017
$149
157
168
2018
$117
150
138
5-year
CAGR
3% Wells Fargo
8% S&P 500
7% KBW Nasdaq
Bank Index
T E N Y E A R P E R F O R M A N C E G R A P H
$360
$340
$320
$300
$280
$260
$240
$220
$200
$180
$160
$140
$120
$100
$ 80
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
Wells Fargo
(WFC)
S&P 500
KBW Nasdaq
Bank Index
10-year
CAGR
$100
100
100
$95
126
98
$110
146
121
$99
149
93
$127
$173
$215
$219
$228
$259
$202
7% Wells Fargo
172
124
228
170
259
186
263
187
294
241
359
286
343
235
13% S&P 500
9% KBW Nasdaq
Bank Index
283
WEL LS FARGO & COMPANY
Wells Fargo & Company (NYSE: WFC) is a diversified, community-based financial services company with $1.9 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, Wells Fargo provides banking, investment and mortgage products and services, as well as
consumer and commercial finance, through 7,800 locations, more than 13,000 ATMs, the internet (wellsfargo.com), and mobile
banking, and has offices in 37 countries and territories to support customers who conduct business in the global economy.
With approximately 259,000 team members, Wells Fargo serves one in three households in the United States. Wells Fargo
& Company was ranked No. 26 on Fortune’s 2018 rankings of America’s largest corporations.
C O M M O N S T O C K
S E C F I L I N G S
Wells Fargo & Company is listed and trades
on the New York Stock Exchange: WFC
4,581,253,608 common shares outstanding
(12/31/18)
S TO C K P U R C H A S E A N D D I V I D E N D
R E I N V E S T M E N T
You can buy Wells Fargo stock directly from
Wells Fargo, even if you’re not a Wells Fargo
stockholder, through optional cash payments
or automatic monthly deductions from a bank
account. You can also have your dividends
reinvested automatically. It’s a convenient,
economical way to increase your Wells Fargo
investment.
Call 1-877-840-0492 for an enrollment kit,
which includes a plan prospectus.
F O R M 1 0 - K
We will send Wells Fargo’s 2018 Annual
Report on Form 10-K (including the financial
statements filed with the Securities
and Exchange Commission) free to any
shareholder who asks for a copy in writing.
Shareholders 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,
MAC D1130-117, 301 S. Tryon Street,
11th 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.
F O R WA R D - L O O K I N G S TAT E M E N T S
This Annual Report contains forward-
looking statements about our future financial
performance and business. Because forward-
looking statements are based on our current
expectations and assumptions regarding
the future, they are subject to inherent risks
and uncertainties. Do not unduly rely on
forward-looking statements, as actual results
could differ materially from expectations.
Forward-looking statements speak only as
of the date made, and we do not undertake
to update them to reflect changes or events
that occur after that date. For information
about factors that could cause actual results
to differ materially from our expectations,
refer to the discussion under “Forward-
Looking Statements” and “Risk Factors”
in the Financial Review portion of this
Annual Report.
I N D E P E N D E N T
R E G I S T E R E D P U B L I C
A C C O U N T I N G F I R M
KPMG LLP
San Francisco, California
1-415-963-5100
I N V E S TO R R E L AT I O N S
1-415-371-2921
investorrelations@
wellsfargo.com
SH AREOWNER SE RVI CE S
A N D T R A N S F E R AG E N T
EQ Shareowner Services
P.O. Box 64854
St. Paul, Minnesota
55164-0854
1-877-840-0492
www.shareowneronline.com
AN NUAL SHA REHO LD ERS’
M E E T I N G
10:00 a.m. Central time
Tuesday, April 23, 2019
Grand Hyatt DFW
2337 South International
Parkway
Dallas, Texas 75261
C O M PA N Y
3rd
Total Deposits (2018)
FDIC data
4th
Total Assets (2018)
S&P Global Market Intelligence
7th
Biggest Public Company
in the World* (2018) Forbes
20th
Biggest Employer in
the United States (2018)
Fortune
B R A N D
Third-Most Valuable Financial
Services Brand in World (2018)
Brand Finance
Best in Social Media Marketing and
Services – North America (2018)
Global Finance
I N N OVAT I O N L E A D E R S H I P
#1
Overall Mobile Performance,
Functionality, and Quality &
Availability (March 2018)
Dynatrace
Most Comprehensive
Mobile App (2018)
S&P Global Market Intelligence
D I V E R S I T Y
Top Company for LGBT
(2018) DiversityInc
Perfect Score – 100 Corporate Equality
Index (2018, 15th year) Human Rights
Campaign
Perfect Score – 100 Disability Equality
Index® Best Places to Work™
(2018, 3rd year) American Association
of People with Disabilities
Top Military Employer and Top Military
Spouse Friendly Employer (2018)
Victory Media
Top 50 Best Companies for Diversity
(2018) Black Enterprise
Most Valuable Banking Brand in
North America and Retail Banking
(2018) Brand Finance
Best Integrated Corporate Bank Site –
North America (2018) Global Finance
*Based on sales, profits, assets, and market value.
284
WEL LS FARGO’ S EX TENS IVE N ET WORK
Data as of December 31 , 2018, unless otherwise noted.
Number of domestic
locations by state
HI
6
AK
59
Around the world
Argentina
Australia
Bahamas
Bangladesh
Brazil
Canada
L O C AT I O N S*
7,800
AT M s
13,000
WA
203
OR
139
MT
52
WY
32
ID
88
NV
119
CA
1,282
UT
123
CO
204
AZ
286
NM
95
ME
4
NY
192
9
6
5
1
8
ND
33
SD
63
NE
57
MN
195
IA
92
WI
84
MI
47
IL
106
IN
33
OH
70
KS
34
MO
36
OK
15
TX
768
AR
23
LA
20
MS
25
KY
10
TN
47
AL
146
WV
10
PA
333
7
4
2
3
VA
319
NC
377
SC
159
GA
317
FL
718
1
2
3
CT: 91
DC : 40
DE: 23
4 MD: 124
5 MA: 39
6
7
8
9
NH: 8
NJ: 345
RI: 6
VT: 6
Cayman Islands
Chile
China
Colombia
Dominican Republic
France
Germany
Hong Kong
India
Indonesia
Ireland
Israel
Italy
Japan
Korea, Republic of
Luxembourg
Mexico
Netherlands
New Zealand
Philippines
Singapore
South Africa
Spain
Sweden
Taiwan
Thailand
Turkey
United Arab Emirates
United Kingdom
Vietnam
C U S T O M E R S
70+ million
M O B I L E B A N K I N G* *
22.8 million
mobile active users
285
W E L L S F A R G O . C O M * *
29.2 million
digital (online and mobile) active customers
*Number of domestic and global locations. Includes Wells Fargo Advisors Private Client Group and Financial Network locations.
**Data as of November 2018.
C O R P O R AT E R E S P O N S I B I L I T Y
Top 50
Most community-minded companies
(2018) Points of Light
#2
Most Generous Cash Donor (U.S.)
(2018) The Chronicle of Philanthropy
I N S U P P O R T I N G H O M E OW N E R S
A N D C O N S U M E R S
#1
Home loan servicer (3Q18)
Inside Mortgage Finance
#1
Provider of private student loans
among banks (2018)
Company and competitor reports
#2
Retail mortgage lender (3Q18)
Inside Mortgage Finance
#3
Used auto lender (August 2018)
AutoCount
I N W E A LT H A N D I N V E S T M E N T
M A N A G E M E N T
Best Investment Management Services –
North America (2018) Global Finance
#3
U.S. full-service retail brokerage provider
(2Q18) Company and competitor reports
#4
U.S. wealth management provider
(2018) Barron’s
I N C O M M E R C I A L
R E A L E S TAT E
#1
Commercial real estate lender in the U.S.
(2018) MBA Commercial/Multifamily
Annual Origination Rankings
#1
Market share by commercial real estate
outstandings (2018)
Federal Reserve Form FRY-9C
WEL LS FARGO & COMPAN Y
420 MONTGOMERY STREET | S AN FRAN CI SCO, CA | 94104
1- 866-87 8-58 65 | WELLSFARG O.COM
© 2019 Wells Fargo & Company. All rights reserved.
Deposit products offered through Wells Fargo Bank, N.A. Member FDIC.
CCM9537 (Rev 00, 1/each)