W
E
L
L
S
F
A
R
G
O
W
E
L
L
S
F
A
R
G
O
&
C
O
M
P
A
N
Y
2
0
1
9
A
N
N
U
A
L
R
E
P
O
R
T
WELLS FARG O & COMPA N Y
420 MON TGOM ERY STR EE T | SA N FR AN C ISC O, CA | 9 4 10 4
1-866-878- 5865 | WE LL SFA RG O.COM
© 2020 Wells Fargo & Company. All rights reserved.
Deposit products offered through Wells Fargo Bank, N.A. Member FDIC.
CCM3520 (Rev 00, 1/each)
Wells Fargo & Company
2019 Annual Report
Wells Fargo’s Extensive Network
LOCATIONS*
7.4K
ATMs
13K
CUSTOMERS
70M+
WELLS FARGO.COM**
30.3M
digital (online and mobile) active customers
MOBILE BANKI NG**
24.4M
mobile active users
*Number of domestic and global locations. Includes Wells Fargo Advisors Private Client Group and Financial Network locations.
*
*Data as of November 2019.
N U M B E R O F D O M E S T I C L O C A T I O N S B Y S T AT E
WA
189
OR
128
NV
119
CA
1,232
MT
43
WY
30
ID
85
UT
115
CO
198
AZ
259
NM
91
ME
4
NY
191
9
6
5
1
8
7
4
2
3
PA
324
VA
313
NC
352
ND
27
SD
55
NE
54
MN
182
IA
85
WI
82
MI
42
IL
103
IN
34
OH
63
WV
10
KS
31
MO
36
OK
15
TX
740
AR
37
LA
20
MS
25
KY
9
TN
44
AL
140
SC
149
GA
302
FL
701
AK
53
HI
6
1
2
3
4
5
6
7
8
9
CT: 90
DC: 40
DE: 22
MD: 121
MA: 33
NH: 6
NJ: 336
RI: 6
VT: 7
Data as of December 31, 2019.
A R O U N D T H E W O R L D
Dominican Republic
Japan
Argentina
Australia
Bahamas
Bangladesh
Brazil
Canada
Cayman Islands
Chile
China
Colombia
France
Germany
Hong Kong
India
Ireland
Israel
Italy
Luxembourg
Netherlands
New Zealand
Philippines
Singapore
South Korea
Sweden
Taiwan
Thailand
United Arab Emirates
United Kingdom
Vietnam
t
r
o
p
e
R
l
a
u
n
n
A
9
1
0
2
|
Contents
2
8
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 E O
2 3
O u r P e r f o r m a n c e
2 4
B o a r d o f D i r e c t o r s
2 6
C o r p o r a t e R e s p o n s i b i l i t y : 2 0 1 9
E n v i r o n m e n t a l , S o c i a l , a n d G o v e r n a n c e H i g h l i g h t s
2 9
2 0 1 9 F i n a n c i a l R e p o r t
2 5 9
S t o c k P e r f o r m a n c e
t
r
o
p
e
R
l
a
u
n
n
A
9
1
0
2
|
2
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
3
F e b r u a r y 2 0 , 2 0 2 0
2019 brought a great deal of
change to Wells Fargo, including
the selection of our new CEO,
Charlie Scharf. Through it all,
the company’s foundational
commitment to helping
customers succeed fnancially
has remained a constant.
Working together, the company and our board continue to make
progress in our ongoing transformation. Although much work remains,
I am optimistic about our future as we move forward.
The board decided to conduct an external search for a new CEO after
Tim Sloan announced his retirement. I am pleased that our search led
to the appointment of Charlie as our CEO and president. Charlie is an
experienced CEO who has excelled at strategic leadership and execution.
t
r
o
p
e
R
l
a
u
n
n
A
9
1
0
2
|
4
With more than 24 years in leadership roles in the banking
and payments industries, Charlie has demonstrated a strong
track record in initiating and leading change, driving results,
strengthening operational risk and compliance, and innovating
amid a rapidly evolving digital landscape.
Charlie embodies the traits our board’s search committee was
looking for in Wells Fargo’s next leader — namely, financial and
business acumen, integrity, passion for diversity and inclusion, and
commitment to strong talent management. His proven ability to
build strong relationships with stakeholders, including customers,
employees, regulators, and investors, will be especially important
to rebuilding trust and resolving key regulatory issues. He has led
organizations in all our major business lines, and his experience with
businesses that operate at the scale and complexity of Wells Fargo
has prepared him well for this role.
What we have observed in the first few months of Charlie’s
tenure only confirms our initial high expectations. He brings to
Wells Fargo a willingness and ability to make important changes,
an urgency to address our regulatory issues, and a recognition of
the importance of actively engaging with our stakeholders. He is
actively developing his strategic priorities for the company and
evaluating them in light of our risk appetite and the capacity of
our risk management framework. He is making key organizational
changes and has already demonstrated a commitment to direct
and transparent communications.
I wish to thank the members of the board’s search committee —
Chair Jim Quigley, Wayne Hewett, Maria Morris, and Ron Sargent —
for conducting a thorough and successful search that was
comprehensive in its diligence and reach. I also would like to thank
Allen Parker for his exemplary service as interim CEO and president.
His leadership during a time of transition enabled Wells Fargo and
our team members to continue moving forward in a focused and
transparent way.
5
N E W B O A R D M E M B E R S
As the company makes important changes, so does the Board
of Directors. We continued our efforts to further enhance board
efectiveness by adding more directors with expertise in fnancial
services, regulatory matters, and financial reporting.
In June 2019, we welcomed Chuck Noski to the board. Chuck
brings broad experience as a corporate director through service
on numerous boards, including Booking Holdings Inc., and until
recently Microsoft Corporation. He also has financial industry
experience through his prior roles as a director of Morgan Stanley
and as CFO of Bank of America. In addition to his extensive
experience in public accounting and as CFO of Fortune 500
companies, he is the immediate past chairman of the Board
of Trustees of the Financial Accounting Foundation, overseer
of the Financial Accounting Standards Board. Chuck serves on
our board’s Audit Committee.
Dick Payne joined the board in October. Dick is a seasoned
banking professional with more than 40 years of experience
in corporate and commercial banking as well as capital markets
with large financial institutions, serving middle-market and large
corporate customers in many of the same geographic markets and
businesses served by Wells Fargo. He has a deep understanding
of banking and the regulatory environment and brings experience
and valuable perspective to the board.
Both new directors are already contributing to our progress as
we work to transform Wells Fargo, meet the expectations of our
regulators, and rebuild trust with our stakeholders.
I also wish to thank John Baker, a member of the Board of Directors,
for his years of service and many contributions to the board.
John will retire as a director at the company’s 2020 annual meeting
of shareholders.
t
r
o
p
e
R
l
a
u
n
n
A
9
1
0
2
|
6
L O N G -T E R M S H A R E H O L D E R VA L U E
While much of the work underway is necessary to meet our
regulatory requirements, it will also make us a stronger, nimbler, and
more efcient company. The board’s oversight is ultimately focused
on ensuring the alignment of strategy with risk management, and
our ability to satisfy the fnancial needs of customers while creating
value for shareholders. Several examples of actions taken over the
past few years include the following:
We changed the organizational structure of Wells Fargo from
a decentralized to a centralized model.
We reviewed, and continue to review, all business processes for
effectiveness and standardization.
We continued to make strategic choices about the businesses we
are in. Over the past few years, we have divested businesses that
did not meet our strategic objectives, such as the institutional
retirement business, commercial real estate brokerage, crop
insurance, property and casualty insurance, stock transfer agent,
and payroll services businesses.
In the Consumer Bank, management has continually reviewed and
evaluated the branch network, closing some branches and selling others
as a result of our customers’ steady migration to digital channels.
Throughout 2017 and 2018, the Auto business intentionally slowed
its originations in order to make needed changes to its business
structure, including centralizing back-off ice functions from over
50 locations into four hubs across the country, re-engineering
processes to improve eff iciency and the customer experience, and
better managing risk. Following this restructuring, the Auto portfolio
started to grow again in 2019.
Charlie and Wells Fargo’s management team are taking the strategic
business review even further. They are looking inside our businesses,
including core franchise businesses, to understand the business
fundamentals, competitive position, distribution channels, growth
prospects, and required investment to bring each to best-in-class
status. At the same time, they are examining the structure,
capabilities, and organizational maturity of enterprise functions
such as technology, human resources, risk, and finance.
7
Over the course of 2020, the board and
Charlie will work together to design and
communicate a strategy that will provide
the blueprint for the future of Wells Fargo.
In doing so, we remain committed to our
diversified business model. And we are
mindful of the important role Wells Fargo
plays in the economic success of the U.S.
and in each customer’s financial success.
Moving forward, the company has a renewed
focus and commitment around our risk
management structure and resources to
execute against our business strategy and
safely and efectively serve our customers.
I N A P P R E C I AT I O N
On behalf of the Board of Directors, we’d
like to thank you, our shareholders, for your
continued investment in Wells Fargo. We
recognize the commitment you have made
to the company and the responsibility that
entails. With the sense of urgency Charlie
brings to the company, the leadership of
our management team, and the hard work
of Wells Fargo’s 260,000 team members, I’m
confident that we can address our current
challenges while doing the work necessary
to build a strong foundation for the future.
While navigating change is difficult, I have
faith in the ultimate value of what we are
creating together.
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
t
r
o
p
e
R
l
a
u
n
n
A
9
1
0
2
|
8
F e b r u a r y 2 0 , 2 0 2 0
I write this note just four months after joining Wells Fargo.
It has been a busy time as I’ve been working to get to know the
company and working with the senior team to understand both
our opportunities and our challenges. While I’ve learned a great
deal, as I discuss my observations here, please recognize that it is
still early days and I do not pretend to have all of the answers yet.
I was honored to be
chosen to lead Wells Fargo
because I believe this is an
extraordinary company
that plays an important
role in this country.
We came out of the financial crisis as the most valuable and
most respected bank in the United States. However, we also had
substantial problems that needed fixing. Significant parts of
our operating model were flawed, and we broke our customers’
trust in the past. We have not yet efectively addressed all of our
problems and these circumstances hurt our employees, hurt our
customers, and also have led to financial underperformance.
9
C H A R L E S W. S C H A R F
W e l l s F a r g o & C o m p a n y
C E O
t
r
o
p
e
R
l
a
u
n
n
A
9
1
0
2
|
10
But we have one of the most enviable
remediation, as well as $739 million of
fnancial services franchises in the world
deferred compensation expense, which
and employees who want to do what’s
is P&L neutral, as this expense is ofset by
necessary to again be one of the most
deferred compensation investment gains.
respected and successful banks in the
U.S. The opportunity to do so is in our
reach. I will discuss the actions we are
taking, but frst let me cover our 2019
fnancial and business performance.
F I N A N C I A L P E R F O R M A N C E
Our financial results in 2019 reflected
the ongoing impact of our historical
shortcomings. Even after adjusting for
these items, our results were not as strong
as we aspire them to be. These items
primarily relate to litigation, customer
remediation related to previously
disclosed retail sales practices matters,
as well as other regulatory matters. Our
results also included business divestitures
and loan sales. They are all detailed in our
fnancial disclosures.
Wells Fargo generated $19.5 billion in
net income in 2019, or $4.05 per diluted
common share. Our revenue declined
$1.3 billion, or 2%, from a year ago as
4% growth in noninterest income was
more than offset by a 6% decline in
net interest income, driven by lower
interest rates. Our noninterest expense
increased $2.1 billion, or 4%, from a
year ago. Expenses included $4.3 billion
of operating losses ($1.2 billion higher
than 2018), primarily for litigation and
We continued to serve our customers and
grew both loans and deposits in 2019.
Loans increased $9.2 billion, or 1%, from a
year ago, with growth in both commercial
and consumer loans. Deposits grew
$36.5 billion, or 3%, from a year ago.
At the same time, credit quality continued
to be strong. Our net charge-of rate
remained near historic lows at 0.29% of
average loans in 2019, and nonaccrual
loans as a percentage of total loans
declined to 0.56%, the lowest level in
over 10 years.
In 2019, we returned a record $30.2 billion
to shareholders through common stock
dividends and net share repurchases,
reducing our common shares outstanding
by 10% while maintaining a level of
Common Equity Tier 1 that is well in
excess of our regulatory requirements.
This was the seventh consecutive year
we have reduced our common share
count, which is down 21% since 2012.
In July 2019, we increased our quarterly
common stock dividend to 51 cents per
share, a 13% increase.
B U S I N E S S H I G H L I G H T S
The strength of our franchise remains
evident. We serve one in three U.S.
11
households, we have strong distribution across both physical
and digital channels, and we remain one of the largest lenders
in the U.S. across a large and diversified client base. Despite
our recent challenges, these strengths endure and you can
see that if you look at the growth of some of our underlying
business drivers. To be clear, we can do better, but I’ll touch on
some key highlights across our businesses over the past year.
In Community Banking, primary consumer checking customers
increased 2% year-over-year, our ninth consecutive quarter of
year-over-year growth. Our customers spent $448 billion across
our debit and credit cards, an increase of 6%. We continued to
invest across our various channels and delivered diferentiated
experiences to meet our customer needs. We ended the year
with over 30 million digital active customers, a 4% increase, and
mobile active customers of 24.4 million were 7% higher. Our
card customers can now complete transactions more seamlessly,
as we have begun rolling out new tap-to-pay contactless
cards. This functionality is available at millions of merchants, in
addition to our own more than 13,000 ATMs across the nation.
We’re making steady progress and the hard work of our teams is
refected in what we are hearing from customers, as our branch
survey scores for both customer loyalty (64.2%, up from 60.2%)
and overall satisfaction with most recent visit (79.9%, up from
78.7%) increased year-over-year.
On the Consumer Lending side, origination momentum
accelerated across our Home Lending and Auto platforms.
Our Auto portfolio returned to growth in 2019 after a
multiyear transformation. In addition, we continued to invest
to improve the customer experience and enhance our own
operational capabilities in both these areas. As evidence, in
2019, for the frst time, we had a month when more than half
of all mortgage applications came to us through our online
mortgage app. The online mortgage app is fully digital and
shortens the time from origination to customer approval by
approximately 30%.
t
r
o
p
e
R
l
a
u
n
n
A
9
1
0
2
|
12
And in Auto, our automated decisioning went from 40% at the end of
2018 to 57% today, which allows us to be responsive to dealers for
whom speed is a top priority and also drive consistency that supports
our focus on risk management.
Our wholesale businesses, including Commercial Banking and
Corporate and Investment Banking, saw loan growth of 1% as we
selectively expanded the portfolio. In Commercial Banking, we
accelerated our efforts to deliver a more consistent customer
experience by segmenting customers to the most appropriate
coverage channel, virtual or market-based. Additionally, we
developed a revamped customer onboarding platform and have
begun rolling it out to customers. Over 12,000 accounts have
been opened to date on the platform and the early results so far
have been impressive, reducing the customer onboarding cycle
time by two-thirds. These changes are critical to our ongoing
efforts to not only serve our customers better, but also reduce
risk and improve our operational capabilities. It is our intent
to leverage these efforts and roll out the common onboarding
platform to our other wholesale businesses.
The Corporate and Investment Bank performed well in 2019.
We grew our overall U.S. investment banking fee market share
by 50 basis points to 3.7% driven by strong growth in high-grade
debt capital markets and in loan syndications. Overall, we raised
$115 billion of debt capital for our clients. And our Markets
businesses performed well, with strong performance across
the FICC franchise, up 15%, including particularly strong results
in our Credit, Rates, and Commodities businesses.
In Wealth and Investment Management, we continued to simplify
our go-to-market and operating model. We brought together our
private wealth management businesses and centralized previously
siloed key supporting capabilities like Lending, Banking, and
Operations across the platform. We also divested the Institutional
13
Retirement and Trust business. These
behind us, and our future depends on
changes are designed to simplify and
doing this successfully so we can regain
focus our businesses to better serve
trust with all stakeholders. This includes
the needs of our changing client base.
our clients, employees, regulators,
In addition, we had solid investment
lawmakers, shareholders, as well as the
broader American population. Ultimately,
performance — on average, Wells Fargo
we know our actions will dictate when
Investment Institute’s actively managed
that trust is completely regained, not
portfolios outperformed relevant
Morningstar benchmarks by over
150 basis points. Client assets of
our words. Given their importance, I’ve
been spending the majority of my time
on addressing these issues since joining
$1.9 trillion increased 10% and we saw
the company.
further momentum resulting from
our Community Bank and Wealth and
A S S E S S M E N T – In an organization
Investment Management partnership as
like Wells Fargo, providing an honest
closed referred investment assets grew
assessment and clear priorities to the
18% year-over-year in the fourth quarter.
entire organization is critical. I’ve given a
Again, while we need to improve
our overall financial results, positive
momentum across many of our
underlying business drivers speaks
to the strength of the franchise and
the substantial opportunities we have
to improve financial performance
in the future.
clear message that we have not yet met
our own expectations or the expectations
of others. We must do what’s necessary
to put these issues behind us. Our ability
to maximize the value of this great
franchise is dependent on us running the
company with the highest standards of
operational excellence and integrity —
beyond what we’ve done to date.
T H E P AT H T O S U C C E S S
D O I N G T H E W O R K N E C E S S A R Y
T O B U I L D A S T R O N G F O U N D A T I O N
To fully capture the opportunity to once
R E G U L A T O R S – I am often asked
about our regulatory relationships so let
me provide my perspective. My experience
again be one of the most respected and
is that our regulators are clear, direct,
successful banks in the country, we must
tough, but fair. We are appropriately a
have a strong foundation and move with
highly regulated institution, and while we
an extreme sense of urgency to fx what
need to fulfll regulatory expectations, we
was wrong with the bank. We still have
recognize that what we want and what
much more work to do to put these issues
regulators want are not diferent. We are
t
r
o
p
e
R
l
a
u
n
n
A
9
1
0
2
|
14
responsible for our actions and they are
at the company. They understand our
responsible for ensuring our actions are
lack of progress makes their jobs far
consistent with a clearly defined set of
more difficult — and they are looking
standards. It’s our job to run the company
to management to do more to move
such that we fulfll their expectations and
the company forward.
those of the American public and other
countries where we operate. Our job is to
To set us up for success, we will ensure
do the work that’s necessary. Regulators
we have the right people in place to
and other stakeholders will determine
when it’s done to their satisfaction.
both resolve these issues and be the
stewards of this great company as we
move forward. To that end, we have made
W H AT W E A R E D O I N G – Like any
some important changes to the senior
other problem, recognition of the
management team to complement the
importance and severity is a necessary
talent that’s here at Wells Fargo.
first step — but this by itself is
inadequate. We will take whatever actions
Scott Powell joined us as COO. When
are necessary. The management team
will be judged and held accountable for
resolving these issues.
I arrived at the company, many on the
senior management team made clear to
me that we needed stronger execution
skills. After several weeks at the
We are making signifcant changes to
company, I came to quickly agree. Scott
our management, structure, processes,
will lead a transformation across the
and culture to accomplish our work —
company where high-quality execution,
changes that will make us more efective.
clear accountability, and operational
excellence become part of our culture.
T H E T E A M – First, I want to
acknowledge that we have so many
Mike Weinbach will join us as CEO
wonderful people at Wells Fargo who
of Consumer Lending and will have
have done an amazing job serving
responsibility for Home Lending, Auto,
our clients and customers in the face
Credit Cards & Merchant Services,
of adversity for several years now.
and Personal Lines & Loans, including
They have been through so much and
Student Lending. We are one of the
have helped us sustain such a great
largest providers of consumer credit
franchise — so I do want to say thank
in the country and want to continue
you to them for all that they’ve done.
serving that important role for our
The warmth and support I’ve been
customers and the U.S. economy. Mike
greeted with as I’ve discussed our past
has the right experience, skills, and
issues and work in front of us tells a
knowledge to lead these franchises
great deal about the character of many
going forward.
15
Bill Daley joined as head of Public Affairs. He has a strong
and experienced voice and brings perspectives from the public
sector that we in business do not generally have but are critical
for us as we make decisions.
Allen Parker, who served both as General Counsel and Interim
CEO, has announced that he will be leaving the company in
March. As I write this, we are engaged in a General Counsel
search and have seen some terrific candidates.
Avid Modjtabai has announced that she will be retiring in
March after 26 years at Wells Fargo. I will discuss below how
we are restructuring Avid’s responsibilities.
Ray Fischer has also joined us to run our Credit Cards &
Merchant Services businesses, which will be part of Consumer
Lending (more details below). Our card business is important to
our franchise and we have an opportunity to make it even more
significant. Ray is an experienced card and merchant services
executive who brings deep knowledge and a fresh perspective
to our business.
Saul Van Beurden joined us as our new head of Technology
earlier in 2019. Saul has great experience as a technology leader
in fnancial services and his impact will certainly be a key element
of the company’s control, customer experience, business and risk
management transformation, and growth agenda.
Julie Scammahorn also joined us as our Chief Auditor earlier
in 2019. Julie will play a critical role and hold us to the highest
standards as we build effective execution into all we do.
These changes are all critical to our future, and I will continue
to look at the structure and roles of our team to ensure we
are best positioned for success. We need and will have the
best talent and strong leadership at the company.
t
r
o
p
e
R
l
a
u
n
n
A
9
1
0
2
|
16
O R G A N I Z A T I O N S T R U C T U R E – We have made several
changes which I believe enable us to be more effective in
pursuing our goals. First, we reorganized the company into five
lines of business and announced several new business leaders to
help further drive operating, control, and business performance.
Consumer and Small Business Banking – Mary Mack, who most recently
led Consumer Banking, is now CEO of Consumer and Small Business
Banking, responsible for Branch Banking and Small Business, which
includes the company’s 5,400 branches and delivers a full range of deposit,
lending, investment, and payment products. Mary will now have additional
responsibilities for Deposits and a newly established Digital team focused
on acquiring and servicing new customers through digital channels.
Consumer Lending – as mentioned earlier, Mike Weinbach will join us
in a couple of months as CEO of Consumer Lending, elevating a core
competency of the company that provides critical capabilities to fulf ill
the f inancial needs of customers. Mike will be responsible for Home
Lending, Auto, Credit Cards & Merchant Services, and Personal Lines
& Loans, including Student Lending.
Commercial Banking – Perry Pelos is CEO of Commercial Banking, with
both relationship and product responsibilities in serving businesses with
annual sales generally in excess of $5 million. Perry is now responsible
for Middle Market Banking, Commercial Capital, and Treasury
Management. We’re proud of our market position and believe we have
great opportunities to expand our franchise by continuing to integrate
these products and capabilities.
Corporate and Investment Banking – Jon Weiss, who most recently ran
our Wealth and Investment Management business, is now CEO of our
Corporate and Investment Bank. The creation of a separate business
line supporting the capital markets, banking, and investment needs of
our corporate, government, and institutional clients is a recognition of
the successful franchise we have today and our belief that we continue
to have signifcant opportunities to serve the needs of our corporate and
middle market clients more broadly. Commercial Real Estate and our
International franchise will be a part of Corporate and Investment Banking.
17
Wealth and Investment Management –
Our lack of progress and under-
Our Wealth and Investment Management
performance point to shortcomings.
business provides a full range of
Going forward:
personalized wealth management,
investment, asset management, and
We will operate as one company, not
retirement products and services to
a series of decentralized businesses.
clients. We restructured the businesses
and management over the past couple
of years and are conducting a search to
We will continue to foster a culture of
partnership, but we will move past the
need for consensus and have open and
replace Jon as the leader of this business.
direct fact-based discussions where we
This new organizational structure is fatter
and provides important businesses more
direct representation on our Operating
Committee. It provides the necessary
clarity and accountability and sets us up
to build our businesses over the long term
and increases our ability to successfully
execute on our top priority, which is the
risk, regulatory, and control work.
C H A N G E S T O H O W W E R U N T H E
C O M PA N Y A N D O U R C U LT U R E –
We are also introducing a new set of
disciplines in how we run the company
which seek to preserve some important
pieces of our culture while recognizing
where we need to change. These
changes are critical for our future and I’m
confdent will improve our performance.
emerge with decisions.
We will have a different level of
management discipline than we’ve
had in the past and will value and
expect high-quality execution.
There will be clear responsibility
and accountability.
We will judge ourselves based upon
our outcomes — not our words.
And we will ultimately judge ourselves
versus the best as we believe that we
should be the best.
As we’ve begun to implement this
new culture, the response has been
overwhelmingly supportive. But
I understand it’s different and is
a signifcant change for many. We will
be respectful of our past and of those
Parts of our culture are wonderful and
who have built this great franchise — which
would take decades to recreate. People
includes so many still at the company
who work here love it. Wells Fargo really
today — but we must move forward.
is like a second family to many. We focus
I’m confdent these changes will be
on teamwork — not on the individual.
highly impactful. Respect was earned
People want to be successful and do
in the past, and we will earn it again.
what’s right — though we recognize
we have fallen short of this goal.
t
r
o
p
e
R
l
a
u
n
n
A
9
1
0
2
|
18
C O R P O R AT E A N D S O C I A L R E S P O N S I B I L I T Y
As we make the changes to build a stronger foundation for the
company, we will continue to recognize and act upon the broader role
we play in our communities. Notably, we became a proud signatory
of the Statement on the Purpose of a Corporation that was issued
by the Business Roundtable in August of this past year. It’s simple
and straightforward, and it’s a clear statement that businesses are
responsible to a broad set of constituents and have responsibilities
beyond what some companies have believed historically. Given
the businesses we’re in and the reach we have, I believe our
responsibilities and potential for impact are particularly great.
Like many companies, we are taking an active role in addressing
important social and environmental challenges, and we are
constantly asking ourselves: How can we improve these eforts to
drive even more positive impact? We believe the answer is to invest
in innovative solutions fueled by a range of resources and expertise
from across our entire company. We see our philanthropy, which
totaled $455 million in 2019, as only the beginning — a way to seed
investments that our core business capabilities, people, and built-in
scale can then power for even greater impact.
For example, we believe we have a responsibility to do our part to
support the transition to a low-carbon economy and to work with our
customers and communities to address the risks of climate change.
Our $200 billion sustainable finance commitment, announced in
2018, is central to our efforts in supporting sustainable business
opportunities, including providing needed capital to renewable
energy companies and empowering clean technology entrepreneurs.
We continued to make strong progress in 2019 and we have now
provided approximately $49 billion in sustainable fnancing toward
our commitment of $200 billion by 2030.
We are also one of the largest sources of capital for affordable
housing development in the country. In 2019, Wells Fargo
provided more than $4 billion of capital to support the
development of more than 15,000 affordable housing units in
communities in over 30 states. Building on this expertise, the
Wells Fargo Foundation announced a $1 billion philanthropy
commitment over six years to catalyze new ways to address the
19
growing housing affordability crisis in
And this isn’t just cheap talk — while it’s
the U.S., where more than 18 million
the right thing to do, it is my frm belief
households are spending 50% of their
that bringing together people of diferent
income on housing. We’re working
backgrounds, experiences, and identities
with a range of grantees to test and
leads to signifcantly better outcomes.
scale innovations that increase the
number of affordable rental units,
expand homeownership opportunities,
and develop solutions to persistent
homelessness in cities.
We’re very focused on this across the
company. I will be personally chairing
our Enterprise Diversity & Inclusion
Council. This group, composed of leaders
from across the organization, meets
Our employees also care deeply about
monthly and is charged with driving the
the communities we serve, and we have
education and change necessary for
introduced new ways to turn that caring
making meaningful progress against our
into opportunities to take action. In 2019,
objectives. We are setting clear, specifc,
more than 100,000 of our people provided
and measurable goals and will be holding
1.9 million hours of volunteer service
people accountable to advancing our
through eforts such as our new Dedicated
diversity and inclusion eforts at all levels.
Day of Service in which more than 900
Wells Fargo volunteer events were held
on a single day this past September.
To further support our efforts, we have
ten different Team Member Networks
(TMNs) formed around historically under-
These are just a few examples of our
represented segments. Our TMNs bring
ongoing commitment to the people and
together people of common interests,
communities in which we do business.
backgrounds, experiences, or identities,
Our goal is to combine our giving, our
and provide forums to support career
expertise, and our ingenuity in order
and professional development of their
to move the needle on social and
members, engage and volunteer in our
environmental issues that impact us all.
communities together, and serve as
D I V E R S I T Y A N D I N C L U S I O N
Diversity and inclusion are absolutely
integral parts of our business. We serve a
diverse group of clients and communities,
additional mechanisms for embedding
inclusive practices into our day-to-day
operations. We have approximately 74,000
active participants across these networks.
and it’s essential that our people refect
We’ve made progress on a number of
that diversity. Our goal is nothing less than
fronts but we also know we have much
ensuring that people across our workforce,
work to do. It won’t be a straight line,
communities, and supply chain feel valued
but we’re focused on it and will be holding
and respected and have equal access to
ourselves accountable for advancing
resources and opportunities to succeed.
these goals over a period of time.
t
r
o
p
e
R
l
a
u
n
n
A
9
1
0
2
|
20
M E D I U M A N D L O N G E R T E R M O P P O R T U N I T I E S
Our franchises are world class and are in the sweet spot of providing
necessary fnancial services for consumers, small businesses, and
middle market and large corporate companies. And importantly, we
play a signifcant role in helping our customers and clients prosper
as well as being an important enabler for U.S. economic growth.
While I have spoken at length of our problems and our commitment
to fix them, the underlying franchise itself remains strong, and
our opportunities are greater than ever. The success of our
business model is proven, assuming we run the company with
the appropriate controls and work as one company with the goal
of delivering for all our stakeholders.
All of our business segments have the breadth and scale that give
us signifcant competitive advantage and allow us to deliver truly
diferentiated products and experiences for our customers and
clients. Our opportunity to use technology to drive both automation
and new solutions will continue to grow.
Our franchises, both individually and collectively, are the envy of
many. So while our resources and attention today are appropriately
focused on historical issues, as we move forward, we will be in a
position to leverage our unique franchise and focus on generating
stronger financial results.
And just to be clear, we are well aware that our expense levels are
significantly too high. Part of this is driven by significant expense
related to resolving historical issues, part is due to the necessary
investments in technology, and part is due to significant
inefficiencies that exist across the organization. But there is no
reason why we shouldn’t have best-in-class efficiency with these
businesses at this scale — and that ultimately will be our goal.
And, though we’ve had pockets of strong performance, we are also
well aware that our rate of customer and revenue growth is too low.
Given what we’ve been through, this isn’t surprising. We have been
operating under an asset cap as part of the Federal Reserve consent
order from February 2018 and there is certainly an opportunity
21
cost to doing so. Management time and resources have not
been as focused on growth as they otherwise would have been.
But we have an opportunity to think diferently, with a diferent
level of rigor about how to grow the franchise. All of this points
to great opportunity.
We have begun a process to rethink our plans for 2020 and beyond
at a very detailed level. While the opportunities for improvement
are clear at a macro level, we need business-by-business plans.
Accordingly, we have begun conducting business reviews where we
are looking at our businesses and plans in detail. We are reviewing
all businesses as well as all of our enterprise functions.
This isn’t merely a review of the numbers, but one where we use
the facts to form a basis to discuss strategy and potential actions.
We are asking each business leader to show us what best-in-class
efficiency looks like — and what our path to achieve it is. We are
reviewing revenue growth and return performance as well — and
what a path to best-in-class looks like. We are discussing our
competitors — large and small — and we are thinking through our
unique options given our special franchise. These are analytical and
strategic discussions that I don’t think have occurred consistently
across the company in some time given what has occurred.
The output of this work is designed to provide us roadmaps to not
only improve our performance within each business but to also
position us to understand our opportunities across the company
and prioritize accordingly.
It’s still very early in our process — but I will say that every session
thus far has reinforced that our opportunities are meaningful.
To do this properly, and given our priorities, it will take time — much
of this year — to complete our work. But in the interim, we will
devote all necessary resources to risk and control, and spend what’s
necessary. We will be as diligent as ever to drive efficiencies and
control expenses, and we will begin to work through the business
opportunities we have in front of us.
t
r
o
p
e
R
l
a
u
n
n
A
9
1
0
2
|
22
C L O S I N G T H O U G H T S
In closing, I want to repeat my thanks to the wonderful people
at Wells Fargo who have worked tirelessly to sustain this great
company. We are lucky that you have persevered through the
tough times, and I and the members of our Operating Committee
will do all we can to help guide us through the necessary changes
we need to make.
I’m confident in our ability to realize our potential — one that
again puts us at the top of the respected financial institutions
list, with a far more efficient organization and higher revenue
growth than you see today. While there is much to do, and I know
the path to success will be bumpy, I’m optimistic about our
future and excited to be at a place with so many great people,
and such strong franchises, doing incredibly important work.
C H A R L E S W. S C H A R F
C E O
W e l l s F a r g o & C o m p a n y
Our Performance
23
$ in millions, except per share amounts
20 19
20 18
% 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 securities
Loans
Allowance for loan losses
Goodwill
Equity securities
Assets
Deposits
Common stockholders’ equity
Wells Fargo stockholders’ equity
Total equity
Tangible common equity1
Capital ratios5:
Total equity to assets
Risk-based capital6:
Common Equity Tier 1
Tier 1 capital
Total capital
Tier 1 leverage
Common shares outstanding
Book value per common share7
Tangible book value per common share1, 7
Team members (active, full-time equivalent)
$
$
$
$
$
19,549
17,938
4.05
22,393
20,689
4.28
1.02 %
1.19
10.23
12.20
68.4
85,063
26,885
1.92
4,393.1
4,425.4
11.53
13.73
65.0
86,408
30,282
1.64
4,799.7
4,838.4
950,956
1,913,444
1,286,261
749,967
945,197
1,888,892
1,275,857
747,183
2.73 %
2.91
497,125
962,265
9,551
26,390
68,241
1,927,555
1,322,626
166,669
187,146
187,984
138,506
484,689
953,110
9,775
26,418
55,148
1,895,883
1,286,170
174,359
196,166
197,066
145,980
9.75 %
10.39
11.14
12.76
15.31
8.31
4,134.4
40.31
33.50
259,800
11.74
13.46
16.60
9.07
4,581.3
38.06
31.86
258,700
(13)
(13)
(5)
(14)
(11)
(11)
5
(2)
(11)
17
(8)
(9)
1
1
1
–
(6)
3
1
(2)
–
24
2
3
(4)
(5)
(5)
(5)
(6)
(5)
(5)
(8)
(8)
(10)
6
5
–
1 Tangible common equity is a non-GAAP financial measure and represents total equity less preferred equity, noncontrolling interests, goodwill, certain identifiable intangible assets (other than mortgage servicing
rights) and goodwill and other intangibles on nonmarketable equity securities, 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 efciency ratio is noninterest expense divided by total revenue (net interest income and noninterest income).
3 Pre-tax pre-provision proft (PTPP) is total revenue less noninterest expense. Management believes that PTPP is a useful fnancial 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 See the “Financial Review – Capital Management” section and Note 29 (Regulatory and Agency Capital Requirements) to Financial Statements in this Report for additional information.
6 The risk-based capital ratios were calculated under the lower of the 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 refects fully phased-in common equity tier 1 capital, tier 1 capital and risk-weighted
assets for the years ended December 31, 2019 and 2018, but refects all other ratios still in accordance with Transition Requirements. See the “Financial Review – Capital Management” section and Note 29
(Regulatory and Agency Capital Requirements) to Financial Statements in this Report for additional information.
7 Book value per common share is common stockholders’ equity divided by common shares outstanding. Tangible book value per common share is tangible common equity divided by common shares outstanding.
Board of Directors
J O H N D. B A K E R I I 1 , 3 , 4
Executive Chairman and CEO
FRP Holdings, Inc.
C E L EST 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
T H EO D O R E F. C R AV E R , J R . 1 , 4
Retired Chairman, President and CEO
Edison International
E L I Z A B E T H A . D U K E 4 , 5 , 7
Chair
Wells Fargo & Company
Former member of the Federal
Reserve Board of Governors
WAY N E M . H EW E T T 2 , 6 , 7
Senior Advisor, Permira
and Chairman, DiversiTech Corporation
D O NA L D M . JA M ES 4 , 5 , 6
Retired Chairman
Vulcan Materials Company
t
r
o
p
e
R
l
a
u
n
n
A
9
1
0
2
|
24
25
M A R I A R . MO R R I S 6, 7
JA M ES H . QU I G L EY 1 , 7
Retired Executive Vice President
and Head of Global Employee
Benefits business
MetLife, Inc.
C H A R L ES H . NO S K I 1
Retired Vice Chairman and
Former Chief Financial Officer
Bank of America Corporation
CEO Emeritus and Retired Partner
Deloitte
RO NA L D L . SA RG E N T 1 , 5 , 6
Retired Chairman and CEO
Staples, Inc.
R I C H A R D B . PAY N E , J R . 3
C H A R L ES W. S C H A R F
Retired Vice Chairman
Wholesale Banking
U.S. Bancorp
CEO
Wells Fargo & Company
J UA N A . P U JA DAS 3, 4, 7
Retired Principal
PricewaterhouseCoopers LLP
and Former Vice Chairman
Global Advisory Services
PwC International
S U Z A N N E M . VAU T R I NOT 2 , 3 , 7
President, Kilovolt Consulting, Inc.
and Major General and Commander
United States Air Force (retired)
S T A N D I N G C O M M I T T E E S
1. Audit 2. Corporate Responsibilty 3. Credit 4. Finance
5. Governance and Nominating 6. Human Resources 7. Risk
| As of February 15, 2020
Corporate Responsibility: 2019
Environmental, Social, and Governance Highlights
Wells Fargo believes in creating a thriving global economy that benef its all stakeholders.
By combining our resources and expertise with scale of operations, the company can effect
positive societal change and inclusive economic growth. Below are examples of progress
made on that journey.
Building a better tomorrow starts with acknowledging the work still to be done. Wells Fargo
is committed to continuing to do its part to build a stronger and more resilient company,
workforce, global community, and environment.
C OMM IT TED
$1B
HELPE D
435K
PROVIDED
A P P R O X I M AT E LY
$49B
in philanthropic capital through 2025
to address the U.S. housing affordability
crisis — from homelessness and transitional
housing to rentals and homeownership
minority households purchase a home
since 2016 through our commitment
to increase homeownership among all
minority communities
in financing to sustainable businesses and
projects since 2018 — with 67% toward low-
carbon opportunities. Achieved 24% of our goal
to invest $200 billion by 2030 to accelerate
the transition to a low-carbon economy
26
ENABLED
9.2M
customers to better manage their
credit by providing free access to their
FICO® Score
ASSIS TED
23K
aspiring homeowners through LIFT
programs to become homeowners
through education and down payment
assistance grants since 2012
INT END TO MEET
100%
of our global electricity needs with
renewable energy* and entered our largest
long-term renewable energy purchase to
date, supporting a new utility scale solar
asset that is scheduled to begin delivering
solar energy to the grid in 2021
*Renewable energy sources include on-site solar, long-term contracts
that fund net new sources of off-site renewable energy, and the purchase
of renewable energy and renewable energy certificates (RECs).
27
INVESTED
$455M
in grants in 2019 to unlock economic
opportunity for people and communities
across the U.S. and internationally
HELPED
2M+
customers avoid overdraft
charges with Overdraft Rewind®
PROVIDED
$1.15M
in project financing for new wind,
solar, and fuel cell projects providing
2.6K+ megawatts of renewable
energy capacity
ACHIEVED A
100%
perfect score for the 16th year
on the Corporate Equality Index
(Human Rights Campaign)
All data is for January 1, 2019 – December 31, 2019, unless otherwise noted.
t
r
o
p
e
R
l
a
u
n
n
A
9
1
0
2
|
28
“I’m confident in our ability
to realize our potential — one
that again puts us at the top
of the respected financial
institutions list, with a far
more efficient organization
and higher revenue growth
than you see today.”
C H A R L E S W. S C H A R F
W E L L S FA R G O & C O M P A N Y 2 0 1 9 F I N A N C I A L RE P OR T
30
34
51
54
56
87
93
96
100
102
103
119
119
119
120
121
122
123
124
128
129
141
142
143
Financial Review
Overview
Earnings Performance
Balance Sheet Analysis
Off-Balance Sheet Arrangements
Risk Management
Capital Management
Regulatory Matters
144
151
165
167
169
5
6
7
8
9
Available-for-Sale and Held-to-Maturity Debt Securities
Loans and Allowance for Credit Losses
Leasing Activity
Equity Securities
Premises, Equipment and Other Assets
170
10
Securitizations and Variable Interest Entities
180
11
Mortgage Banking Activities
Critical Accounting Policies
182
12
Intangible Assets
Current Accounting Developments
183
13
Deposits
Forward-Looking Statements
184
14
Short-Term Borrowings
Risk Factors
185
15
Long-Term Debt
187
16
Guarantees, Pledged Assets and Collateral, and Other
Commitments
Controls and Procedures
192
17
Legal Actions
Disclosure Controls and Procedures
196
18
Derivatives
Internal Control Over Financial Reporting
207
19
Fair Values of Assets and Liabilities
Management’s Report on Internal Control over
Financial Reporting
Report of Independent Registered Public
Accounting Firm
227
20
Preferred Stock
230
21
Common Stock and Stock Plans
233
22
Revenue from Contracts with Customers
Financial Statements
236
23
Employee Benefits and Other Expenses
Consolidated Statement of Income
243
24
Income Taxes
Consolidated Statement of Comprehensive
245
25
Earnings and Dividends Per Common Share
Income
Consolidated Balance Sheet
246
26
Other Comprehensive Income
Consolidated Statement of Changes in Equity
248
27
Operating Segments
Consolidated Statement of Cash Flows
250
28
Parent-Only Financial Statements
253
29
Regulatory and Agency Capital Requirements
Notes to Financial Statements
Summary of Significant Accounting Policies
Business Combinations
Cash, Loan and Dividend Restrictions
Trading Activities
1
2
3
4
254
256
258
Report of Independent Registered Public
Accounting Firm
Quarterly Financial Data
Glossary of Acronyms
Wells Fargo & Company
29
This Annual Report, including the Financial Review and the Financial Statements and related Notes, contains forward-looking statements,
which may include forecasts of our financial results and condition, expectations for our operations and business, and our assumptions for those
forecasts and expectations. Do not unduly rely on forward-looking statements. Actual results may differ materially from our forward-looking
statements due to several factors. Factors that could cause our actual results to differ materially from our forward-looking statements are
described in this Report, including in the “Forward-Looking Statements” and “Risk Factors” sections, and in the “Regulation and Supervision”
section of our Annual Report on Form 10-K for the year ended December 31, 2019 (2019 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 definitions of terms used
throughout this Report.
Financial Review
Overview
Wells Fargo & Company is a diversified, community-based
financial services company with $1.9 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 7,400 locations,
more than 13,000 ATMs, digital (online, mobile and social), and
contact centers (phone, email and correspondence), and we have
offices in 32 countries and territories to support customers who
conduct business in the global economy. With approximately
260,000 active, full-time equivalent team members, we serve
one in three households in the United States and ranked No. 29
on Fortune’s 2019 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, 2019.
On February 11, 2020, we announced a new organizational
structure with five principal lines of business: Consumer and
Small Business Banking; Consumer Lending; Commercial
Banking; Corporate and Investment Banking; and Wealth and
Investment Management.
Wells Fargo’s top priority remains meeting its regulatory
requirements in order to build the right foundation for all that
lies ahead. To do that, the Company is committing the resources
necessary to ensure that we operate with the strongest business
practices and controls, maintain the highest level of integrity, and
have in place the appropriate culture.
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 Company’s Board of
Directors (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 Company continues to engage with
the FRB as the Company works to address the consent order
provisions. The consent order also 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 an initial third-party review of the enhancements and
improvements provided for in the plans. Until this third-party
review is 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. As of the end of fourth quarter 2019,
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
In September 2016, we announced settlements with the CFPB,
the OCC, and the Office of the Los Angeles City Attorney, and
entered into related 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 a 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 to customers resulting from
these matters and providing remediation.
For additional information regarding retail sales practices
matters, including related legal matters, see the “Risk Factors”
30
Wells Fargo & Company
section and Note 17 (Legal Actions) to Financial Statements in
this Report.
Other Customer Remediation Activities
Our priority of rebuilding trust has also included an effort to
identify other areas or instances where customers may have
experienced financial harm, provide remediation as appropriate,
and implement additional operational and control procedures.
We are working with our regulatory agencies in this effort. We
have previously disclosed key areas of focus as part of our
rebuilding trust efforts and are in the process of providing
remediation for those matters. We have accrued for the
reasonably estimable remediation costs related to our rebuilding
trust efforts, which amounts may change based on additional
facts and information, as well as ongoing reviews and
communications with our regulators.
As our ongoing reviews continue, it is possible that in the
future we may identify additional items or areas of potential
concern. To the extent issues are identified, we will continue to
assess any customer harm and provide remediation as
appropriate. For more information, including related legal and
regulatory risk, see the “Risk Factors” section and Note 17 (Legal
Actions) to Financial Statements in this Report.
Financial Performance
In 2019, we generated $19.5 billion of net income and diluted
earnings per common share (EPS) of $4.05, compared with
$22.4 billion of net income and EPS of $4.28 for 2018. Financial
performance items for 2019 (compared with 2018) included:
•
revenue of $85.1 billion, down from $86.4 billion, with net
interest income of $47.2 billion, down $2.8 billion, or 6%, and
noninterest income of $37.8 billion, up $1.4 billion, or 4%;
the net interest margin was 2.73%, down 18 basis points;
noninterest expense of $58.2 billion, up $2.1 billion, or 4%;
an efficiency ratio of 68.4%, compared with 65.0%;
average loans of $951.0 billion, up $5.8 billion;
average deposits of $1.3 trillion, up $10.4 billion;
our credit results remained strong with a net charge-off rate
of 0.29%, flat compared with a year ago;
nonaccrual loans of $5.3 billion, down $1.2 billion, or 18%;
$30.2 billion in capital returned to our shareholders through
common stock dividends and net share repurchases, up 17%
from $25.8 billion a year ago; and
return on assets (ROA) of 1.02% and return on equity (ROE)
of 10.23%, down from 1.19% and 11.53%, respectively.
•
•
•
•
•
•
•
•
•
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 2019 with strong
credit quality and solid levels of liquidity and capital. Our total
assets were $1.9 trillion at December 31, 2019. Cash and other
short-term investments decreased $10.1 billion from
December 31, 2018, reflecting lower cash balances, partially
offset by an increase in federal funds sold and securities
purchased under resale agreements. Debt securities increased
$12.4 billion from December 31, 2018, predominantly due to
increases in trading and held-to-maturity debt securities. Loans
increased $9.2 billion from December 31, 2018, driven by
increases in commercial and industrial loans, commercial real
estate mortgage loans, real estate 1-4 family first mortgage
loans, automobile loans, credit card loans, and lease financing,
partially offset by decreases in commercial real estate
construction loans, real estate 1-4 family junior lien mortgage
loans, and other revolving credit and installment loans.
Average deposits in 2019 were $1.3 trillion, up $10.4 billion
from 2018, reflecting higher other time deposits, mortgage
escrow deposits and commercial deposits. Our average deposit
cost in 2019 was 67 basis points, up 23 basis points from a year
ago, driven by increased retail banking promotional pricing for
new deposits and a continued deposit mix shift to higher cost
products.
Credit Quality
Credit quality remained solid in 2019, as losses remained low and
we continued to originate high-quality loans, reflecting our long-
term risk focus. Net charge-offs were $2.8 billion, or 0.29% of
average loans, in 2019, flat compared with 2018.
Our commercial portfolio net charge-offs were $652 million,
or 13 basis points of average commercial loans, in 2019,
compared with $429 million, or 9 basis points, in 2018,
predominantly driven by increased losses in our commercial and
industrial loan portfolio. Our consumer portfolio net charge-offs
were $2.1 billion, or 48 basis points of average consumer loans, in
2019, compared with $2.3 billion, or 52 basis points, in 2018,
predominantly driven by decreased losses in our automobile
portfolio, partially offset by increased losses in our credit card
portfolio.
The allowance for credit losses of $10.5 billion at
December 31, 2019, decreased $251 million from the prior year.
The allowance coverage for total loans was 1.09% at
December 31, 2019, compared with 1.12% at December 31,
2018. The allowance covered 3.8 times net charge-offs in 2019,
compared with 3.9 in 2018. Future amounts of the allowance for
credit losses will be based on a variety of factors, including loan
growth, portfolio performance and general economic conditions.
Our provision for credit losses in 2019 was $2.7 billion, compared
with $1.7 billion in 2018. The provision for credit losses in both
2019 and 2018 reflected continuing solid underlying credit
performance. The provision for credit losses in 2018 also
reflected a higher level of credit quality improvement compared
with 2019, as well as an improvement in the outlook associated
with 2017 hurricane-related losses.
Nonperforming assets (NPAs) at December 31, 2019, were
$5.6 billion, down $1.3 billion from December 31, 2018.
Nonaccrual loans decreased $1.2 billion from December 31,
2018, driven by improvement across all consumer loan
categories, including a decrease in consumer nonaccruals from
sales of residential real estate mortgage loans as well as the
reclassification of real estate 1-4 family mortgage nonaccrual
loans to mortgage loans held for sale (MLHFS) in 2019.
Foreclosed assets were down $148 million from December 31,
2018.
Capital
Our financial performance in 2019 allowed us to maintain a solid
capital position with total equity of $188.0 billion at
December 31, 2019, compared with $197.1 billion at
December 31, 2018. We returned $30.2 billion to shareholders in
2019 ($25.8 billion in 2018) 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 168%. During
2019, we increased our quarterly common stock dividend from
$0.43 to $0.51 per share. We continued to reduce our common
share count through the repurchase of 502.4 million common
Wells Fargo & Company
31
Overview (continued)
shares during the year. We expect our share count to continue to
decline in 2020 as a result of anticipated net share repurchases.
We believe an important measure of our capital strength is
our Common Equity Tier 1 (CET1) ratio, which was 11.14% as of
December 31, 2019, down from 11.74% a year ago, but still well
above our internal target of 10%. Likewise, our other regulatory
capital ratios remained strong. As of December 31, 2019, our
Table 1: Six-Year Summary of Selected Financial Data
eligible external total loss absorbing capacity (TLAC) as a
percentage of total risk-weighted assets was 23.28%, compared
with the required minimum of 22.0%. See the “Capital
Management” section in this Report for more information
regarding our capital, including the calculation of our regulatory
capital amounts.
(in millions, except per share amounts)
2019
2018
2017
2016
2015
2014
%
Change
2019/
2018
Five-year
compound
growth
rate
Income statement
Net interest income
Noninterest income
Revenue
Provision for credit losses
Noninterest expense
Net income before noncontrolling
interests
Less: Net income from noncontrolling
interests
Wells Fargo net income
Earnings per common share
Diluted earnings per common share
Dividends declared per common share
Balance sheet (at year end)
Federal funds sold and securities
$
47,231
37,832
85,063
2,687
58,178
20,041
492
19,549
4.08
4.05
1.920
purchased under resale agreements
$
102,140
Debt securities
Loans
Allowance for loan losses
Goodwill
Equity securities
Assets
Deposits
Long-term debt
Wells Fargo stockholders’ equity
Noncontrolling interests
Total equity
497,125
962,265
9,551
26,390
68,241
1,927,555
1,322,626
228,191
187,146
838
187,984
49,995
36,413
86,408
1,744
56,126
49,557
38,832
88,389
2,528
58,484
47,754
40,513
88,267
3,770
52,377
45,301
40,756
86,057
2,442
49,974
43,527
40,820
84,347
1,395
49,037
22,876
22,460
22,045
23,276
23,608
483
277
107
382
551
22,393
22,183
21,938
22,894
23,057
4.31
4.28
1.640
80,207
484,689
953,110
9,775
26,418
55,148
4.14
4.10
1.540
80,025
473,366
956,770
11,004
26,587
62,497
4.03
3.99
1.515
65,725
459,038
967,604
11,419
26,693
49,110
4.18
4.12
1.475
49,721
394,744
916,559
11,545
25,529
40,266
4.17
4.10
1.350
39,210
350,661
862,551
12,319
25,705
44,005
1,895,883
1,951,757
1,930,115
1,787,632
1,687,155
1,286,170
1,335,991
1,306,079
1,223,312
1,168,310
229,044
196,166
900
225,020
206,936
1,143
255,077
199,581
916
199,536
192,998
893
183,943
184,394
868
197,066
208,079
200,497
193,891
185,262
(6)%
4
(2)
54
4
(12)
2
(13)
(5)
(5)
17
27 %
3
1
(2)
—
24
2
3
—
(5)
(7)
(5)
2
(2)
—
14
3
(3)
(2)
(3)
—
—
7
21
7
2
(5)
1
9
3
3
4
—
(1)
—
32
Wells Fargo & Company
Table 2: Ratios and Per Common Share Data
Profitability ratios
Wells Fargo net income to average assets (ROA)
Wells Fargo net income applicable to common stock to average Wells Fargo common stockholders’ equity (ROE)
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)
Year ended December 31,
2019
2018
2017
1.02%
10.23
12.20
68.4
8.65
9.75
11.14
12.76
15.31
8.31
9.16
10.33
47.4
40.31
$
1.19
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
1.15
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
(1)
(2)
(3)
(4)
(5)
(6)
Tangible common equity is a non-GAAP financial measure and represents total equity less preferred equity, noncontrolling interests, goodwill, certain identifiable intangible assets (other than
mortgage servicing rights) and goodwill and other intangibles on nonmarketable equity securities, 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 generally accepted accounting principles (GAAP) financial measures, see the
“Capital Management – Tangible Common Equity” section in this Report.
The efficiency ratio is noninterest expense divided by total revenue (net interest income and noninterest income).
See the “Capital Management” section and Note 29 (Regulatory and Agency Capital Requirements) to Financial Statements in this Report for additional information.
The risk-based capital ratios were calculated under the lower of the 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 for the years ended December 31, 2019 and 2018, but reflects all other ratios still in accordance with Transition Requirements. See the “Capital Management”
section and Note 29 (Regulatory and Agency Capital Requirements) to Financial Statements in this Report for additional information.
Dividend payout ratio is dividends declared per common share as a percentage of diluted earnings per common share.
Book value per common share is common stockholders’ equity divided by common shares outstanding.
Wells Fargo & Company
33
Earnings Performance
Wells Fargo net income for 2019 was $19.5 billion ($4.05 diluted
EPS), compared with $22.4 billion ($4.28 diluted EPS) for 2018.
Net income decreased in 2019, compared with 2018, due to a
$2.8 billion decrease in net interest income, a $943 million
increase in provision for credit losses, and a $2.1 billion increase
in noninterest expense, partially offset by a $1.4 billion increase
in noninterest income, and a $1.5 billion decrease in income tax
expense. Net income in 2019 included a net discrete income tax
expense of $435 million, compared with a net discrete income
tax expense of $627 million in 2018.
Revenue, the sum of net interest income and noninterest
income, was $85.1 billion in 2019, compared with $86.4 billion in
2018. Revenue decreased $1.3 billion in 2019, compared with
2018, due to a decrease in net interest income, partially offset by
an increase in noninterest income. Our diversified sources of
revenue generated by our businesses continued to be balanced
between net interest income and noninterest income. In 2019,
net interest income of $47.2 billion represented 56% of revenue,
compared with $50.0 billion (58%) in 2018. See later in this
section for discussions of net interest income, noninterest
income and noninterest expense.
Table 3 presents the components of net interest income on
a tax-equivalent basis, noninterest income and noninterest
expense as a percentage of revenue for year-over-year results.
Net interest income is presented on a taxable-equivalent basis to
consistently reflect income from taxable and tax-exempt loans
and debt and equity securities based on a 21% federal statutory
tax rate for the periods ended December 31, 2019 and 2018, and
35% for the period ended December 31, 2017.
For a discussion of our 2018 financial results compared with
2017, see the “Earnings Performance” section of our Annual
Report on Form 10-K for the year ended December 31, 2018.
34
Wells Fargo & Company
Table 3: Net Interest Income, Noninterest Income and Noninterest Expense as a Percentage of Revenue
(in millions)
Interest income (on a taxable-equivalent basis)
Debt securities
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
Technology and 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)
(1)
(2)
See Table 7 – Noninterest Income in this Report for additional detail.
See Table 8 – Noninterest Expense in this Report for additional detail.
2019
% of
revenue
2018
% of
revenue
2017
% of
revenue
Year ended December 31,
$
15,456
18%
$
14,947
17%
$
14,084
16%
813
79
44,253
966
5,129
66,696
8,635
2,317
7,350
551
18,853
47,843
(612)
47,231
4,798
14,072
4,016
3,084
2,715
378
993
140
2,843
1,612
3,181
37,832
18,382
10,828
5,874
2,763
2,945
108
526
4,321
3,198
9,233
58,178
85,063
$
1
—
52
1
7
79
10
3
9
—
22
57
(1)
56
6
17
5
4
3
—
1
—
3
2
3
44
22
13
7
3
3
—
1
5
4
10
68
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
6
76
7
2
8
—
17
59
(1)
58
5
17
5
4
3
—
1
—
2
2
3
42
21
12
6
3
3
1
1
4
4
10
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
38,832
17,363
10,442
5,566
2,237
2,849
1,152
1,287
5,492
3,813
8,283
58,484
1
—
47
1
3
68
3
1
6
1
11
57
(1)
56
6
16
4
4
5
1
1
1
2
2
2
44
20
12
6
3
3
1
1
6
4
10
66
$
86,408
$
88,389
Wells Fargo & Company
35
Earnings Performance (continued)
Net Interest Income
Net interest income is the interest earned on debt securities,
loans (including yield-related loan fees) and other interest-
earning assets minus the interest paid on deposits, short-term
borrowings and long-term debt. The net interest margin is the
average yield on earning assets minus the average interest rate
paid for deposits and our other sources of funding.
Net interest income and the net interest margin 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, variable sources
of interest income, such as loan fees, periodic dividends, and
collection of interest on nonaccrual loans, can fluctuate from
period to period.
Net interest income on a taxable-equivalent basis was
$47.8 billion in 2019, compared with $50.7 billion in 2018. Net
interest margin on a taxable-equivalent basis was 2.73% in 2019,
compared with 2.91% in 2018. The decrease in both net interest
income and net interest margin in 2019, compared with 2018,
was driven by unfavorable impacts of repricing due to a
flattening yield curve and mix of earning assets and funding
sources, including sales of high yielding Pick-a-Pay loans, as well
as higher costs on promotional retail banking deposits.
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.
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 non-U.S. offices. Average
deposits were $1.3 trillion in 2019, flat compared with 2018, and
represented 135% of average loans in both 2019 and 2018.
Average deposits were 73% of average earning assets in both
2019 and 2018. Our average deposit cost in 2019 was 67 basis
points, up 23 basis points from a year ago, driven by increased
retail banking promotional pricing for new deposits and a
continued deposit mix shift to higher cost products.
Table 5 presents the individual components of net interest
income and the net interest margin. 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%
federal statutory tax rate for the periods ended December 31,
2019 and 2018, and 35% for the period ended December 31,
2017.
36
Wells Fargo & Company
Table 4: Average Earning Assets and Funding Sources as a Percentage of Average Earning Assets
(in millions)
Earning assets
Interest-earning deposits with banks
Federal funds sold and 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 and mortgage-backed securities
Other debt securities
Total held-to-maturity debt securities
Total debt securities
Mortgage loans held for sale (1)
Loans held for sale (1)
Loans:
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 non-U.S. 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.
2019
% of
earning
assets
Average
balance
Year ended December 31,
2018
Average
balance
% of
earning
assets
Change
from prior
year
% Change
from prior
year
$
135,741
99,286
$
8%
6
156,366
78,547
9%
5
$
(20,625)
20,739
(13)%
26
93,655
15,293
44,203
154,160
5,363
159,523
43,675
262,694
44,850
8,644
95,559
52
149,105
505,454
19,808
1,708
284,888
64,274
121,813
21,183
19,302
511,460
288,059
31,989
38,865
45,901
34,682
439,496
950,956
35,930
5,579
5
1
3
9
—
9
2
15
3
1
5
—
9
29
1
—
16
4
7
1
1
29
16
2
2
3
2
25
54
2
—
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
—
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
10,129
12
8,675
(3,681)
(1,892)
(2,406)
(4,298)
(3,200)
(2,504)
115
2,391
1,343
(309)
3,540
11,165
1,414
(818)
9,232
3,556
(1,134)
(2,426)
(90)
9,138
3,881
(4,698)
2,085
(2,214)
(2,433)
(3,379)
5,759
(2,162)
508
131
(8)
(1)
(31)
(3)
(7)
(1)
—
38
1
(86)
2
2
8
(32)
3
6
(1)
(10)
—
2
1
(13)
6
(5)
(7)
(1)
1
(6)
10
$
1,754,462
100%
$
1,738,482
100%
$
15,980
1 %
$
59,121
4%
$
$
(4,122)
(7)%
40
2
5
3
54
7
13
1
75
25
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
21,075
9,613
8,546
(10,507)
24,605
11,070
8,223
(1,877)
42,021
(26,041)
100%
$
1,738,482
100%
$
15,980
18,777
26,453
105,180
150,410
358,312
53,496
203,356
(464,754)
150,410
1,888,892
$
$
781
(44)
7,835
8,572
$
(14,201)
2,467
(5,735)
26,041
8,572
24,552
$
$
705,957
30,266
93,368
53,438
942,150
115,337
232,491
25,771
1,315,749
438,713
1,754,462
19,558
26,409
113,015
$
$
$
158,982
$
344,111
55,963
197,621
(438,713)
158,982
1,913,444
$
$
Wells Fargo & Company
3
47
10
(16)
3
11
4
(7)
3
(6)
1 %
4 %
—
7
6 %
(4)%
5
(3)
(6)
6 %
1 %
37
Earnings Performance (continued)
Table 5: Average Balances, Yields and Rates Paid (Taxable-Equivalent Basis) (1)
(in millions)
Earning assets
Interest-earning deposits with banks
Federal funds sold and securities purchased under resale agreements
Debt securities (2):
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
Total held-to-maturity debt securities
Total debt securities
Mortgage loans held for sale (3)
Loans held for sale (3)
Loans:
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 (3)
Equity securities
Other
Total earning assets
Funding sources
Deposits:
Interest-bearing checking
Market rate and other savings
Savings certificates
Other time deposits
Deposits in non-U.S. 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 (4)
Noninterest-earning assets
Cash and due from banks
Goodwill
Other
Total noninterest-earning assets
Noninterest-bearing funding sources
Deposits
Other liabilities
Total equity
Noninterest-bearing funding sources used to fund earning assets
Net noninterest-bearing funding sources
Total assets
Average
balance
Yields/
rates
2019
Interest
income/
expense
Average
balance
Yields/
rates
2018
Interest
income/
expense
Average
balance
Yields/
rates
2017
Interest
income/
expense
$ 135,741
99,286
2.12% $ 2,875
2,164
2.18
156,366
78,547
1.82% $ 2,854
1,431
1.82
201,864
74,697
1.07% $ 2,162
735
0.98
93,655
3.36
3,149
83,526
3.42
2,856
74,475
3.16
2,356
15,293
44,203
154,160
5,363
159,523
43,675
262,694
44,850
8,644
95,559
52
149,105
505,454
19,808
1,708
284,888
64,274
121,813
21,183
19,302
511,460
288,059
31,989
38,865
45,901
34,682
439,496
950,956
2.07
3.87
2.85
4.19
2.90
4.23
3.23
2.19
3.97
2.60
3.71
2.56
3.06
4.10
4.60
4.25
3.71
4.40
5.17
4.52
4.27
3.81
5.63
12.58
5.15
6.95
5.11
4.65
316
1,709
4,397
225
4,622
1,846
8,493
982
343
2,487
2
3,814
15,456
813
79
12,107
2,385
5,356
1,095
873
21,816
10,974
1,800
4,889
2,362
2,412
22,437
44,253
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
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
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
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
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
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
35,930
5,579
$ 1,754,462
966
2.69
1.62
90
3.80% $ 66,696
38,092
5,071
1,738,482
999
2.62
1.46
74
3.76% $ 65,308
36,105
5,069
1,776,590
821
2.27
0.85
44
3.40% $ 60,233
$
59,121
705,957
30,266
93,368
53,438
942,150
115,337
232,491
25,771
1,315,749
438,713
$ 1,754,462
$
19,558
26,409
113,015
$ 158,982
$ 344,111
55,963
197,621
(438,713)
$ 158,982
$ 1,913,444
1.33% $
0.59
1.59
2.46
1.75
0.92
2.01
3.16
2.13
1.43
—
1.07
789
4,132
481
2,295
938
8,635
2,317
7,350
551
18,853
—
18,853
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
0.96% $
0.31
0.57
2.25
1.30
0.61
1.65
2.99
2.21
1.15
—
0.85
606
2,157
118
1,906
835
5,622
1,719
6,703
610
14,654
—
14,654
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
0.49% $
0.14
0.30
1.43
0.68
0.32
0.77
2.09
1.94
0.72
—
0.53
242
983
67
880
841
3,013
761
5,157
424
9,355
—
9,355
2.73% $ 47,843
2.91% $ 50,654
2.87% $ 50,878
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
Average prime rate
Average three-month London Interbank Offered Rate (LIBOR)
5.28%
2.33
4.91%
2.31
4.10%
1.26
(1)
(2)
(3)
(4)
Yields/rates and amounts include the effects of hedge and risk management activities associated with the respective asset and liability categories.
Yields/rates are based on interest income/expense amounts for the period. The average balance amounts represent amortized cost for the periods presented.
Nonaccrual loans and related income are included in their respective loan categories.
Includes taxable-equivalent adjustments of $612 million, $659 million and $1.3 billion for the years ended December 31, 2019, 2018 and 2017, respectively, predominantly related to tax-exempt
income on certain loans and securities.
38
Wells Fargo & Company
Table 6 allocates the changes in net interest income on a
taxable-equivalent basis to changes in either average balances or
average rates for both interest-earning assets and interest-
bearing liabilities. Because of the numerous simultaneous
volume and rate changes during any period, it is not possible to
precisely allocate such changes between volume and rate. For
this table, changes that are not solely due to either volume or
rate are allocated to these categories on a pro-rata basis based
on the absolute value of the change due to average volume and
average rate.
Table 6: Analysis of Changes in Net Interest Income
(in millions)
Increase (decrease) in interest income:
Interest-earning deposits with banks
Federal funds sold and 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
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
Total increase in interest income
Increase (decrease) in interest expense:
Deposits:
Interest-bearing checking
Market rate and other savings
Savings certificates
Other time deposits
Deposits in non-U.S. offices
Total interest-bearing deposits
Short-term borrowings
Long-term debt
Other liabilities
2019 over 2018
Year ended December 31,
2018 over 2017
Volume
Rate
Total
Volume
Rate
Total
$
(407)
419
428
314
343
(50)
21
733
293
204
(97)
49
(133)
(84)
(134)
(111)
2
72
266
(13)
327
36
(61)
642
242
77
(72)
(46)
843
(507)
(175)
211
(129)
(76)
(676)
167
(33)
16
1,388
183
1,975
363
389
103
29
46
99
(30)
69
5
149
—
(25)
233
(1)
207
(23)
(21)
252
112
128
52
(42)
502
(662)
88
(51)
(14)
91
(548)
(46)
26
9
993
225
1,910
288
187
255
175
(143)
(50)
(103)
(153)
(139)
(260)
2
97
33
(12)
120
59
(40)
390
130
(51)
(124)
(4)
341
155
(263)
262
(115)
(167)
(128)
213
(59)
7
395
(42)
65
75
202
(152)
148
196
254
(38)
560
(165)
(569)
40
298
(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
—
(860)
82
4
(5)
407
(534)
(46)
43
(495)
122
(376)
(484)
1,261
656
202
30
(92)
281
(76)
205
256
399
—
(62)
16
22
(24)
86
43
692
696
500
(127)
(276)
566
(273)
293
186
76
1
(63)
389
(40)
287
(9)
90
1,131
1,269
399
692
201
194
504
420
150
204
2,617
2,547
27
225
177
(91)
196
534
3,151
131
30
5,935
282
1,170
56
619
528
2,655
915
2,041
64
5,675
260
275
(87)
323
(603)
80
(12)
2,535
178
30
5,075
364
1,174
51
1,026
(6)
2,609
958
1,546
186
5,299
(224)
Wells Fargo & Company
39
Total increase in interest expense
Increase (decrease) in net interest income on a taxable-equivalent basis
$
2,865
3,013
402
393
(21)
3,639
(2,646)
598
647
(59)
4,199
(2,811)
Earnings Performance (continued)
Noninterest Income
Table 7: Noninterest Income
(in millions)
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
Cash network fees
Commercial real estate
brokerage commissions
Wire transfer and other remittance fees
All other fees
Total other fees
Mortgage banking:
Servicing income, net
Net gains on mortgage loan
origination/sales activities
Total mortgage banking
Insurance
Net gains from trading activities
Net gains on debt securities
Net gains from equity securities
Lease income
Life insurance investment income
All other
Year ended December 31,
2019
$
4,798
2018
4,716
2017
5,111
9,237
3,038
1,797
14,072
4,016
1,379
452
358
474
421
9,436
3,316
1,757
14,509
3,907
1,526
481
468
477
432
9,358
3,372
1,765
14,495
3,960
1,568
506
462
448
573
3,084
3,384
3,557
522
1,373
1,427
2,193
2,715
378
993
140
2,843
1,612
658
2,523
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
Total
$ 37,832
36,413
38,832
Noninterest income of $37.8 billion represented 44% of revenue
for 2019, compared with $36.4 billion, or 42%, for 2018 and
$38.8 billion, or 44%, for 2017. The increase in noninterest
income in 2019, compared with 2018, was predominantly due to
higher net gains from equity securities (including higher deferred
compensation plan investment results, which are offset in
employee benefits expense), higher all other income, and higher
net gains from trading activities. These increases in 2019,
compared with 2018, were partially offset by lower trust and
investment fees, mortgage banking income, and other fees. The
decline in noninterest income in 2018, compared with 2017, was
predominantly due to lower net gains on mortgage loan
origination/sales activities driven by decreased origination
volumes and margins, 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 in
2018, compared with 2017, were partially offset by higher gains
from equity securities and higher all other income. For more
information on our performance obligations and the nature of
services performed for certain of our revenues discussed below,
see Note 22 (Revenue from Contracts with Customers) to
Financial Statements in this Report.
Service charges on deposit accounts increased to $4.8 billion
in 2019, compared with $4.7 billion in 2018, predominantly due
to higher overdraft fees resulting from increased consumer
payment transactions, partially offset by the impact of a higher
earnings credit rate applied to commercial accounts due to
higher interest rates.
Brokerage advisory, commissions and other fees decreased
to $9.2 billion in 2019, compared with $9.4 billion in 2018, due to
lower asset-based fees and lower transactional revenue. Retail
brokerage client assets totaled $1.6 trillion at December 31,
2019, compared with $1.5 trillion at December 31, 2018. Asset-
based fees are calculated on the market value of the assets as of
the beginning of each quarter. 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 fees decreased to
$3.0 billion in 2019, compared with $3.3 billion in 2018, largely
driven by lower trust fees due to the sale of our Institutional
Retirement and Trust (IRT) business in 2019.
Our assets under management (AUM), including IRT client
assets still on our platform, totaled $705.9 billion at
December 31, 2019, compared with $638.3 billion at
December 31, 2018. Substantially all of our AUM is managed by
our Wealth and Investment Management (WIM) operating
segment. Our assets under administration (AUA), including IRT
client assets still on our platform, totaled $1.8 trillion at
December 31, 2019, compared with $1.7 trillion at December 31,
2018. We had AUM and AUA associated with the IRT business of
$21 billion and $915 billion, respectively, at December 31, 2019.
No IRT client assets were transitioned to the buyer’s platform as
of December 31, 2019.
We closed the sale of our IRT business on July 1, 2019. We
will continue to administer client assets at the direction of the
buyer for up to 24 months from the closing date pursuant to a
transition services agreement. The buyer will receive post-closing
revenue from the client assets and will pay us a fee for certain
costs that we incur to administer the client assets during the
transition period. The transition services fee will be recognized as
other noninterest income, and the expenses we incur will be
recognized in the same manner as they were prior to the close of
the sale. Transition period revenue is expected to approximate
transition period expenses and is subject to downward
adjustment as client assets transition to the buyer’s platform.
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.
Other fees decreased to $3.1 billion in 2019 from
$3.4 billion in 2018, predominantly driven by the sale of our
commercial real estate brokerage business (Eastdil Secured
(Eastdil)) on October 1, 2019 and lower lending related charges
and fees.
Mortgage banking income, consisting of net servicing
income and net gains on loan origination/sales activities, totaled
$2.7 billion in 2019, compared with $3.0 billion in 2018. For more
information, see Note 11 (Mortgage Banking Activities) to
Financial Statements in this Report.
Net servicing income was $522 million in 2019, compared
with $1.4 billion in 2018, due to a decrease in net servicing fees
and changes in the fair value of mortgage servicing rights
(MSRs). Net servicing fees decreased $369 million from 2018,
primarily driven by a decrease in contractually specified fees as a
result of prepayments and sales of MSRs. In addition to servicing
fees, net servicing income includes amortization of commercial
MSRs, changes in the fair value of residential MSRs, as well as
changes in the fair value of derivatives (economic hedges) used
to hedge the residential MSRs. The total fair value of our
residential MSRs declined in 2019, compared with 2018, driven
by lower mortgage interest rates and higher prepayments. The
net MSR valuation loss on our residential MSRs increased in
40
Wells Fargo & Company
2019, compared with 2018, due to a decrease in hedge carry
income from a flatter yield curve environment in 2019. Table 7a
presents the components of the market-related valuation
changes to our residential MSRs, net of hedge results.
Table 7a: Market-Related Valuation Changes on Residential MSRs, Net
of Hedge Results
(in millions)
Year ended December 31,
2019
2018
2017
MSR valuation gain (loss)
$ (2,569)
960
(126)
Net derivative gains (losses) from economic
hedges of residential MSRs
2,318
(1,072)
Net MSR valuation gain (loss)
$
(251)
(112)
413
287
Our portfolio of loans serviced for others was $1.6 trillion at
December 31, 2019, and $1.7 trillion at December 31, 2018. At
December 31, 2019, the ratio of combined residential and
commercial MSRs to related loans serviced for others was 0.79%,
compared with 0.94% at December 31, 2018. See the “Risk
Management – Asset/Liability Management – Mortgage Banking
Interest Rate and Market Risk” section in this Report for
additional information regarding our MSRs risks and hedging
approach.
Net gains on mortgage loan origination/sales activities was
$2.2 billion in 2019, compared with $1.6 billion in 2018. The
increase in 2019, compared with 2018, was primarily due to
increases in origination volumes and margins. 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 7b presents the information used in determining the
production margin.
Table 7b: Selected Mortgage Production Data
Year ended December 31,
2019
2018
2017
Net gains on mortgage loan
origination/sales activities
(in millions):
Residential
Commercial
(A)
$
1,518
1,174
2,140
337
265
358
Residential pipeline and
unsold/repurchased loan
management (1)
Total
Residential real estate
originations (in billions):
Held-for-sale
(B)
Held-for-investment
Total
Production margin on
residential held-for-sale
mortgage originations
338
205
425
$
2,193
1,644
2,923
$
$
135
69
204
132
45
177
160
52
212
(A)/(B)
1.12%
0.89
1.34
(1)
Primarily 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 1.12% for 2019, compared with
0.89% for 2018. The increase in the production margin in 2019,
compared with 2018, was due to higher margins in both retail
and correspondent production channels and a shift to more retail
origination volume, which has a higher production margin.
Mortgage applications were $311 billion in 2019, compared
with $230 billion in 2018. The real estate 1-4 family first
mortgage unclosed pipeline was $33 billion at December 31,
2019, compared with $18 billion at December 31, 2018. 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 11 (Mortgage Banking Activities) and
Note 19 (Fair Values of Assets and Liabilities) to Financial
Statements in this Report.
Net gains from trading activities, which reflect unrealized
changes in fair value of our trading positions and realized gains
and losses, were $993 million in 2019, compared with
$602 million in 2018. The increase in 2019, compared with 2018,
reflected higher trading volumes for rates and commodities,
credit, and residential mortgage-backed securities, partially
offset by lower equity and foreign exchange trading income. Net
gains from trading activities exclude interest and dividend
income and expense on trading securities, which are reported
within interest income from debt and equity securities and other
interest income. 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 $3.0 billion
for 2019 and $1.6 billion for 2018. The increase in 2019 was
predominantly driven by higher deferred compensation gains
(offset in employee benefits expense) and higher unrealized
gains on equity securities, partially offset by lower net realized
gains from nonmarketable equity securities. Table 8a presents
results for our deferred compensation plan and related
investments. Net gains on debt and equity securities also
included other-than-temporary impairment (OTTI) write-downs
of $308 million for 2019 and $380 million for 2018. The
decrease in OTTI in 2019 reflected a $214 million impairment
taken in 2018 related to the sale of our ownership stake in The
Rock Creek Group, LP (RockCreek), partially offset by higher
write-downs in our investment portfolio in 2019.
Lease income was $1.6 billion in 2019, compared with
$1.8 billion in 2018. The decrease in 2019, compared with 2018,
was driven by reductions in the size of the equipment leasing
portfolio.
All other income was $2.5 billion in 2019, compared with
$1.8 billion in 2018. All other income includes losses on low
income housing tax credit investments (excluding related tax
credits recorded in income tax expense), 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 all other income in 2019, compared with 2018,
was predominantly driven by pre-tax gains on the sales of our IRT
business, Eastdil, and Business Payroll Services, partially offset
by lower gains from the sales of purchased credit-impaired (PCI)
loans in 2019, as well as higher losses on low income housing tax
credit investments in 2019.
Wells Fargo & Company
41
Earnings Performance (continued)
Noninterest Expense
Table 8: Noninterest Expense
(in millions)
Salaries
Commission and incentive compensation
10,828
$
18,382
Year ended December 31,
2019
2018
2017
Employee benefits
Technology and equipment
Net occupancy (1)
Core deposit and other intangibles
FDIC and other deposit assessments
Operating losses
Outside professional services
Contract services (2)
Leases (3)
Advertising and promotion
Outside data processing
Travel and entertainment
Postage, stationery and supplies
Telecommunications
Foreclosed assets
Insurance
All other (2)
Total
17,834
10,264
17,363
10,442
4,926
2,444
2,888
1,058
1,110
3,124
3,306
2,192
1,334
857
660
618
515
361
188
101
5,566
2,237
2,849
1,152
1,287
5,492
3,813
1,638
1,351
614
891
687
544
364
251
100
5,874
2,763
2,945
108
526
4,321
3,198
2,489
1,155
1,076
673
580
518
367
163
100
2,112
2,346
1,843
$
58,178
56,126
58,484
(1)
(2)
(3)
Represents expenses for both leased and owned properties.
The amount for 2017 has been revised to conform with the current period presentation
whereby temporary help is included in contract services rather than in all other noninterest
expense.
Represents expenses for assets we lease to customers.
Noninterest expense was $58.2 billion in 2019, up 4% from
$56.1 billion in 2018, which was down 4% from $58.5 billion in
2017. The increase in 2019, compared with 2018, was driven by
higher personnel expenses, operating losses, technology and
equipment, and advertising and promotion expense, partially
offset by lower core deposit and other intangibles expense,
Federal Deposit Insurance Corporation (FDIC), leases, and other
expense. The decrease in 2018, compared with 2017, was driven
by lower operating losses from a decline in litigation accruals,
lower personnel expenses, lower outside data processing, and
lower FDIC expense, partially offset by higher advertising and
promotion, technology and equipment, and other expense.
Personnel expenses, which include salaries, commissions,
incentive compensation and employee benefits, were up
$2.1 billion, or 6%, in 2019, compared with 2018, due to higher
deferred compensation costs (offset in net gains from equity
securities), higher salaries driven by the impact of staffing mix
changes and annual salary increases, as well as higher incentive
compensation and commissions. The increase in incentive
compensation and commissions was due to increased revenue
from mortgage banking originations, market sensitive
businesses (trading, debt and equity securities activities) and
investment banking, partially offset by lower brokerage fees.
Table 8a presents results for our deferred compensation plan and
related investments.
Table 8a: Deferred Compensation Plan and Related Investments
Year ended December 31,
(in millions)
Net interest income
$
Net gains (losses) from equity securities
Total revenue (losses) from deferred
compensation plan investments
Employee benefits expense (1)
2019
70
664
734
739
Income (loss) before income tax
expense
$
(5)
(1)
Represents change in deferred compensation plan liability.
2018
60
(303)
(243)
(242)
(1)
Technology and equipment expense was up 13% in 2019,
compared with 2018, due to higher impairment expenses on
capitalized software and computer software licensing and
maintenance costs, reflecting the strategic reassessment of
technology projects in WIM.
Core deposit and other intangibles expense was down 90%
in 2019, compared with 2018, due to lower amortization
expense reflecting the end of the 10-year amortization period on
Wachovia intangibles.
FDIC and other deposit assessments were down 53% in
2019, compared with 2018, due to the completion of the FDIC
surcharge which ended September 30, 2018.
Operating losses were up $1.2 billion, or 38%, in 2019,
compared with 2018, due to higher litigation accruals for a
variety of matters, including previously disclosed retail sales
practices matters, partially offset by lower remediation expense.
Outside professional and contract services expense was up
3% in 2019, compared with 2018, reflecting an increase in
project spending, partially offset by lower legal expense.
Leases expense was down 13% in 2019, compared with
2018, driven by reductions in the size of the operating lease
portfolio.
Advertising and promotion expense was up 26% in 2019,
compared with 2018, due to increases in marketing and brand
campaign volumes.
All other noninterest expense was down 10% in 2019,
compared with 2018, due to a sales tax refund in 2019, higher
gains on the sale of corporate properties in 2019, compared with
2018, and pension plan settlement expense in 2018 that did not
recur in 2019.
Income Tax Expense
Our effective income tax rate in 2019 was 17.5%, compared with
20.2% in 2018. The 2019 and 2018 effective income tax rates
reflected the non-tax-deductible treatment of certain litigation
accruals. The 2018 effective income tax rate also reflected
income tax expense related to the reconsideration of reserves
for state income taxes following the U.S. Supreme Court decision
in South Dakota v. Wayfair, Inc. and the recognition of
$164 million of income tax expense associated with the final re-
measurement of our initial estimates for the impacts of the Tax
Cuts & Jobs Act (Tax Act). See Note 24 (Income Taxes) to
Financial Statements in this Report for additional information
about our income taxes.
42
Wells Fargo & Company
Operating Segment Results
As of December 31, 2019, we were 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 reporting process. The management reporting
process is based on U.S. GAAP with specific adjustments, such as
for funds transfer pricing for asset/liability management, for
shared revenues and expenses, and tax-equivalent adjustments
to consistently reflect income from taxable and tax-exempt
sources. On February 11, 2020, we announced a new
organizational structure with five principal lines of business:
Consumer and Small Business Banking; Consumer Lending;
Commercial Banking; Corporate and Investment Banking; and
Wealth and Investment Management. This new organizational
Table 9: Operating Segment Results – Highlights
structure is intended to help drive operating, control, and
business performance. The Company is currently in the process
of transitioning to this new organizational structure, including
identifying leadership for some of these principal business lines
and aligning management reporting and allocation
methodologies. These changes will not impact the consolidated
financial results of the Company, but are expected to result in
changes to our operating segments. We will update our
operating segment disclosures, including comparative financial
results, when the Company completes its transition and is
managed in accordance with the new organizational structure.
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 reporting process, see Note 27
(Operating Segments) to Financial Statements in this Report.
(in millions, except average balances which are in billions)
2019
Revenue
Provision (reversal of provision) for credit losses
Net income (loss)
Average loans
Average deposits
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
Community
Banking
Wholesale
Banking
Wealth and
Investment
Management
Year ended December 31,
Other (1)
Consolidated
Company
$
45,316
2,319
7,398
459.4
782.0
$
27,677
378
10,696
475.3
422.5
17,341
5
2,713
75.6
146.0
$
46,913
28,706
16,376
1,783
10,394
463.7
757.2
$
(58)
11,032
465.7
423.7
(5)
2,580
74.6
165.0
$
47,018
30,000
17,072
2,555
10,938
475.7
729.6
$
(19)
9,914
465.6
464.2
(5)
2,770
71.9
189.0
(5,271)
(15)
(1,258)
(59.3)
(64.2)
(5,587)
24
(1,613)
(58.8)
(70.0)
(5,701)
(3)
(1,439)
(57.1)
(78.2)
85,063
2,687
19,549
951.0
1,286.3
86,408
1,744
22,393
945.2
1,275.9
88,389
2,528
22,183
956.1
1,304.6
(1)
Includes the elimination of certain items that are included in more than one business segment, substantially all of which represents products and services for WIM customers served through
Community Banking distribution channels.
Wells Fargo & Company
43
Earnings Performance (continued)
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, automobile, student, mortgage,
home equity and small business lending, as well as referrals to
Wholesale Banking and WIM business partners. The Community
Table 9a: Community Banking
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. Table
9a provides additional financial information for Community
Banking.
(in millions, except average balances which are in billions)
2019
2018
% Change
2017
% 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 (1)
Trust and investment management (1)
Investment banking (2)
Total trust and investment fees
Card fees
Other fees
Mortgage banking
Insurance
Net gains (losses) from trading activities
Net gains (losses) on debt securities
Net gains from equity securities (3)
Other income of the segment
Total noninterest income
Total revenue
Provision for credit losses
Noninterest expense:
Personnel expense
Technology and equipment
Net occupancy
Core deposit and other intangibles
FDIC and other deposit assessments
Outside professional services
Operating losses
Other expense of the segment
Total noninterest expense
Income before income tax expense and noncontrolling interests
Income tax expense
Less: Net income from noncontrolling interests (4)
Net income
Average loans
Average deposits
$
27,610
29,219
(6)% $
28,658
2%
2,823
2,641
1,931
805
(93)
2,643
3,655
1,278
2,307
44
24
51
2,155
2,726
1,887
910
(35)
2,762
3,543
1,359
2,659
83
28
(3)
1,505
3,117
17,706
17,694
45,316
46,913
2,319
1,783
22,867
2,423
2,236
3
327
1,942
3,846
(948)
32,696
10,301
2,426
477
7,398
459.4
782.0
$
$
21,252
2,356
2,166
404
624
1,560
2,656
(527)
30,491
14,639
3,784
461
10,394
463.7
757.2
7
2
(12)
NM
(4)
3
(6)
(13)
(47)
(14)
NM
43
(13)
—
(3)
30
8
3
3
(99)
(48)
24
45
(80)
7
(30)
(36)
3
(29)
(1)
3
2,909
(9)
1,830
889
(59)
2,660
3,613
1,497
3,895
139
(251)
709
1,455
1,734
18,360
47,018
3
2
41
4
(2)
(9)
(32)
(40)
111
NM
3
80
(4)
—
2,555
(30)
20,381
2,157
2,111
446
715
1,875
5,312
(382)
32,615
11,848
634
276
10,938
475.7
729.6
$
$
4
9
3
(9)
(13)
(17)
(50)
(38)
(7)
24
497
67
(5)
(3)
4
NM - Not meaningful
(1)
(2)
Represents income on products and services for WIM customers served through Community Banking distribution channels which is eliminated in consolidation.
Includes underwriting fees paid to Wells Fargo Securities for services related to the issuance of our corporate securities which are offset in our Wholesale Banking segment and eliminated in
consolidation.
Largely represents gains resulting from venture capital investments.
Reflects results attributable to noncontrolling interests predominantly associated with the Company’s consolidated venture capital investments.
(3)
(4)
44
Wells Fargo & Company
Community Banking reported net income of $7.4 billion in
Income tax expense was $2.4 billion in 2019, down
$1.4 billion from $3.8 billion in 2018. The decrease in income tax
expense in 2019 was driven by lower pre-tax income, and
reflected the non-tax-deductible treatment of certain litigation
accruals.
Average loans decreased $4.3 billion in 2019, or 1%, from
2018 driven by decreases in real estate 1-4 family junior lien
mortgage, automobile, other revolving credit and installment,
and commercial loans, partially offset by higher real estate 1-4
family first mortgage and credit card loans. Average deposits
increased $24.8 billion in 2019, or 3%, from 2018.
2019, down $3.0 billion, or 29%, from 2018. Revenue was
$45.3 billion in 2019, down $1.6 billion, or 3%, from 2018. The
decrease in revenue in 2019 was due to lower net interest
income, gains from the sales of purchased credit-impaired (PCI)
residential mortgage loans, mortgage banking revenue driven by
a decrease in servicing income, and trust and investment fees,
partially offset by higher gains on equity securities, service
charges on deposit accounts, and card fees.
The provision for credit losses in 2019 increased
$536 million from 2018 due to a higher level of credit quality
improvement in 2018 compared with 2019, partially offset by
lower net charge-offs in the automobile portfolio in 2019.
Noninterest expense of $32.7 billion in 2019 increased
$2.2 billion, or 7%, from 2018. The increase in 2019 was
predominantly driven by higher personnel expense, operating
losses reflecting litigation accruals for a variety of matters,
including previously disclosed retail sales practices matters, and
outside professional services expense, partially offset by lower
other expense, core deposit and other intangibles amortization
expense, and FDIC and other deposit assessments expense.
Wells Fargo & Company
45
Earnings Performance (continued)
Wholesale Banking provides financial solutions to businesses
with annual sales generally in excess of $5 million and to financial
institutions globally. 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)
2019
2018
% Change
2017
% 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
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
Total revenue
$
17,699
18,690
(5)% $
18,810
(1)%
2,201
(6)
1,974
2,074
292
486
1,889
2,667
359
1,801
412
303
915
89
416
1,042
9,978
317
445
1,783
2,545
362
2,019
362
312
516
102
293
1,431
10,016
27,677
28,706
(5)
(8)
9
6
5
(1)
(11)
14
(3)
77
(13)
42
(27)
—
(4)
304
523
1,827
2,654
345
2,054
458
872
701
(232)
116
2,021
11,190
30,000
Provision (reversal of provision) for credit losses
378
(58)
752
(19)
Noninterest expense:
Personnel expense
Technology and 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 (1)
Less: Net income (loss) from noncontrolling interest
Net income
Average loans
Average deposits
5,560
5,567
38
388
92
172
600
35
8,467
15,352
11,947
1,246
5
10,696
475.3
422.5
$
$
48
403
378
419
958
246
8,138
16,157
12,607
1,555
20
11,032
465.7
423.7
—
(21)
(4)
(76)
(59)
(37)
(86)
4
(5)
(5)
(20)
(75)
(3)
2
—
$
$
6,603
55
425
414
481
1,134
74
7,438
16,624
13,395
3,496
(15)
9,914
465.6
464.2
NM - Not meaningful
(1)
Income tax expense for our Wholesale Banking operating segment included income tax credits related to low-income housing and renewable energy investments of $1.8 billion, $1.6 billion and
$1.4 billion for the years ended December 31, 2019, 2018 and 2017, respectively.
Wholesale Banking reported net income of $10.7 billion in
The provision for credit losses in 2019 increased
2019, down $336 million, or 3%, from 2018. The decrease in
2019 was predominantly due to lower net interest income,
partially offset by lower noninterest expense. Revenue of
$27.7 billion in 2019 decreased $1.0 billion, or 4%, from 2018.
Net interest income of $17.7 billion in 2019 decreased
$1.0 billion, or 5%, from 2018. The decrease in net interest
income in 2019 was due to lower credit spreads on loans, trading
assets, and debt securities, as well as the impact of migration
from noninterest-bearing to interest-bearing deposits.
Noninterest income of $10.0 billion in 2019 was flat
compared with 2018.
$436 million from 2018, driven by lower recoveries reflecting a
higher level of credit quality improvement in 2018 compared
with 2019.
Noninterest expense of $15.4 billion in 2019 decreased
$805 million, or 5%, compared with 2018. The decrease in 2019
was predominantly due to lower core deposit and other
intangibles amortization expense, FDIC and other deposit
assessments expense, operating losses, and lease expense
(within other expense), as well as the impact of the sale of
Eastdil, partially offset by increased project expense (within
other expense).
46
Wells Fargo & Company
4
(15)
(2)
(4)
5
(2)
(21)
(64)
(26)
144
153
(29)
(10)
(4)
NM
(16)
(13)
(5)
(9)
(13)
(16)
232
9
(3)
(6)
(56)
233
11
—
(9)
Average loans of $475.3 billion in 2019 increased
$9.6 billion, or 2%, compared with 2018. Loan growth in 2019
from commercial and industrial loans was partially offset by
declines in commercial real estate loans. Average deposits of
$422.5 billion in 2019 decreased $1.2 billion from 2018. The
decline in 2019 was driven by commercial customers allocating
more cash to alternative higher-rate liquid investments.
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, 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 and provide investment management
capabilities delivered to global institutional clients through
separate accounts and the Wells Fargo Funds. The sale of our IRT
business closed on July 1, 2019. For additional information on
the sale of our IRT business, including its impact on our AUM,
AUA and associated revenue and expenses, see the “Noninterest
Income” section in this Report. Tables 9c through 9f provide
additional financial information for WIM.
Table 9c: Wealth and Investment Management
(in millions, except average balances which are in billions)
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 on debt securities
Net gains (losses) from equity securities
Other income of the segment
Total noninterest income
Total revenue
Provision (reversal of provision) for credit losses
Noninterest expense:
Personnel expense
Technology and 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
Less: Net income from noncontrolling interest
Net income
Average loans
Average deposits
NM - Not meaningful
2019
$
4,037
2018
4,441
% Change
2017
% Change
(9)% $
4,641
(4)%
Year ended December 31,
16
16
—
17
8,946
2,587
6
9,161
2,893
9
11,539
12,063
6
17
(12)
72
53
—
6
17
(11)
82
57
9
272
1,341
13,304
(283)
(21)
11,935
17,341
16,376
5
(5)
8,477
8,085
304
448
13
49
684
452
3,282
13,709
3,627
904
10
2,713
75.6
146.0
$
$
42
440
276
116
815
232
2,932
12,938
3,443
861
2
2,580
74.6
165.0
(2)
(11)
(33)
(4)
—
—
(9)
(12)
(7)
(100)
196
NM
11
6
200
5
624
2
(95)
(58)
(16)
95
12
6
5
5
400
5
1
(12)
$
$
9,072
2,877
(2)
11,947
6
18
(10)
88
92
2
208
63
12,431
17,072
(5)
8,126
28
431
292
154
834
115
2,643
12,623
4,454
1,668
16
2,770
71.9
189.0
(6)
1
1
550
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)
WIM reported net income of $2.7 billion in 2019, up
$133 million, or 5%, from 2018. Revenue of $17.3 billion in 2019
increased $965 million, or 6%, from 2018.
Net interest income of $4.0 billion in 2019 decreased
$404 million, or 9%, from 2018 predominantly due to the impact
of lower deposit balances.
Noninterest income of $13.3 billion in 2019 increased
$1.4 billion, or 11%, from 2018, predominantly due to the
$1.1 billion gain on the sale of our IRT business and higher net
gains from equity securities on increased deferred compensation
plan investment results (largely offset by higher employee
benefits expense), partially offset by lower asset-based fees.
Wells Fargo & Company
47
Earnings Performance (continued)
Noninterest income in 2018 reflected an impairment on the sale
of our ownership stake in RockCreek.
The provision for credit losses was $5 million in 2019,
compared with a reversal of provision of $5 million in 2018.
Noninterest expense of $13.7 billion in 2019 increased
$771 million, or 6%, from 2018 due to higher personnel expense
on increased deferred compensation plan expense (offset in net
gains from equity securities), technology and equipment expense
including $265 million of capitalized software impairment and
computer software licensing and maintenance costs, reflecting
the strategic reassessment of technology projects, operating
losses, and project expense (within other expense), partially
offset by lower core deposits and other intangibles amortization
expense.
Average loans of $75.6 billion in 2019 increased $1.0 billion
from 2018 driven by growth in nonconforming mortgage loans.
Average deposits of $146.0 billion in 2019 decreased
$19.0 billion, or 12%, from 2018 as customers allocated more
cash into higher yielding liquid alternatives.
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
represent transactional commissions based on the number and
size of transactions executed at the client’s direction. Fees from
advisory accounts are based on 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 services provided,
and are affected by investment performance as well as asset
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, 2019, 2018 and 2017.
48
Wells Fargo & Company
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
Year ended December 31,
2019
$
1,646.0
589.5
36%
2018
1,487.6
501.1
34
2017
1,651.3
542.8
33
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. For the years ended December 31,
2019, 2018 and 2017, 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, 2019, 2018 and 2017. The
activity in 2019 reflected higher market valuations and net
outflows primarily from the correspondent clearing business.
Table 9e: Retail Brokerage Advisory Account Client Assets
(in billions)
December 31, 2019
Client directed (4)
Financial advisor directed (5)
Separate accounts (6)
Mutual fund advisory (7)
Total advisory client assets
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
Balance, beginning
of period
Inflows (1)
Outflows (2) Market impact (3)
Year ended
Balance, end of
period
$
$
$
$
$
$
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
33.5
33.9
24.2
11.8
103.4
33.6
30.0
23.8
12.8
100.2
37.1
30.6
26.1
13.1
106.9
(41.8)
(34.7)
(29.7)
(14.1)
(120.3)
(41.0)
(32.9)
(29.1)
(13.8)
(116.8)
(39.2)
(24.5)
(23.5)
(11.1)
(98.3)
26.2
35.2
29.2
14.7
105.3
(12.0)
(2.2)
(7.4)
(3.5)
(25.1)
13.9
25.2
20.8
10.5
70.4
169.4
176.3
160.1
83.7
589.5
151.5
141.9
136.4
71.3
501.1
170.9
147.0
149.1
75.8
542.8
(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.
Professionally managed portfolios with fees earned based on respective strategies and as a percentage of certain client assets.
Professional advisory portfolios managed by Wells Fargo Asset Management or third-party asset managers. Fees are earned based on a percentage of certain client assets.
Program with portfolios constructed of load-waived, no-load and institutional share class mutual funds. Fees are earned based on a percentage of certain client assets.
(5)
(6)
(7)
Wells Fargo & Company
49
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, separate accounts,
and personal trust assets, through our asset management and
wealth businesses. Prior to the sale of our IRT business, which
closed on July 1, 2019, we also earned fees from managing
employee benefit trusts through the retirement business. Our
asset management business is conducted by Wells Fargo Asset
Management (WFAM), which offers Wells Fargo proprietary
mutual funds and manages institutional separate accounts, and
our wealth business manages assets for high net worth 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. For additional
information on the sale of our IRT business, including its impact
on our AUM, AUA and associated revenue and expenses, see the
“Noninterest Income” section in this Report. Table 9f presents
AUM activity for the years ended December 31, 2019, 2018 and
2017.
Table 9f: WIM Trust and Investment – Assets Under Management
(in billions)
December 31, 2019
Assets managed by WFAM (4):
Money market funds (5)
Other assets managed
Assets managed by Wealth and IRT (6)
Total assets under management
December 31, 2018
Assets managed by WFAM (4):
Money market funds (5)
Other assets managed
Assets managed by Wealth and IRT (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 IRT (6)
Total assets under management
Balance, beginning
of period
Inflows (1)
Outflows (2) Market impact (3)
Year ended
Balance, end of
period
$
$
$
$
$
$
112.4
353.5
170.7
636.6
108.2
395.7
186.2
690.1
102.6
379.6
168.5
650.7
18.2
75.1
33.6
126.9
4.2
85.5
36.3
126.0
5.6
116.0
41.1
162.7
—
(86.1)
(40.5)
(126.6)
—
(120.2)
(39.5)
(159.7)
—
(130.9)
(39.4)
(170.3)
—
35.7
23.6
59.3
—
(7.5)
(12.3)
(19.8)
—
31.0
16.0
47.0
130.6
378.2
187.4
696.2
112.4
353.5
170.7
636.6
108.2
395.7
186.2
690.1
(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 $5.0 billion, $4.9 billion and $5.5 billion as of December 31, 2019, 2018 and 2017, respectively, of client assets invested in proprietary funds managed by WFAM.
50
Wells Fargo & Company
Balance Sheet Analysis
At December 31, 2019, our assets totaled $1.9 trillion, up
$31.7 billion from December 31, 2018. Asset growth was
predominantly due to increases in federal funds sold and
securities purchased under resale agreements, debt securities,
and equity securities, which increased $21.9 billion, $12.4 billion,
and $13.1 billion, respectively, partially offset by a $30.2 billion
decline in interest-earning deposits with banks.
Available-for-Sale and Held-to-Maturity Debt Securities
Table 10: Available-for-Sale and Held-to-Maturity Debt Securities
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 29 (Regulatory and Agency
Capital Requirements) to Financial Statements in this Report.
(in millions)
Available-for-sale
Held-to-maturity
Total (1)
December 31, 2019
December 31, 2018
Amortized
cost
$
260,060
153,933
413,993
Net
unrealized
gain (loss)
3,399
2,927
6,326
Fair
value
263,459
156,860
420,319
Amortized
cost
272,471
144,788
417,259
Net
unrealized
gain (loss)
(2,559)
(2,673)
(5,232)
Fair
value
269,912
142,115
412,027
(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 held-
to-maturity debt securities, which increased $2.7 billion in
balance sheet carrying value from December 31, 2018, due to
higher net unrealized gains, partially offset by paydowns, sales
and maturities exceeding purchases.
The total net unrealized gains on available-for-sale debt
securities were $3.4 billion at December 31, 2019, up from net
unrealized losses of $2.6 billion at December 31, 2018, driven by
lower interest rates and tighter credit spreads.
The size and composition of our available-for-sale and held-
to-maturity debt securities is 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 primarily
consists of liquid, high-quality U.S. Treasury and federal agency
debt, and agency mortgage-backed securities (MBS), in addition
to securities issued by U.S. states and political subdivisions,
corporate debt securities, and highly rated collateralized loan
obligations (CLOs). 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.
The held-to-maturity debt securities portfolio
predominantly consists of high-quality U.S. Treasury debt,
agency MBS and securities issued by U.S. states and political
subdivisions 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 OTTI quarterly or more
often if a potential loss-triggering event occurs. In 2019, we
recognized $63 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, 2019, debt securities included $53.8 billion
of municipal bonds, of which 96.9% were rated “A-” or better
based predominantly on external 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 4.7 years at December 31, 2019. The
expected remaining maturity is shorter than the remaining
contractual maturity for the 63.5% 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.
Wells Fargo & Company
51
Balance Sheet Analysis (continued)
Table 11: Mortgage-Backed Securities Available for Sale
(in billions)
At December 31, 2019
Actual
Assuming a 200 basis point:
Increase in interest rates
Decrease in interest rates
Fair
value
Net
unrealized
gain (loss)
Expected
remaining
maturity
(in years)
167.2
2.2
151.3
176.9
(13.7)
11.9
4.6
6.9
3.2
The weighted-average expected remaining maturity of debt
securities held-to-maturity (HTM) was 4.9 years at
December 31, 2019. HTM debt securities are measured at
amortized cost and, therefore, changes in the fair value of our
held-to-maturity MBS resulting from changes in interest rates
are not recognized in earnings. 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.
Loan Portfolios
Table 12 provides a summary of total outstanding loans by
portfolio segment. Total loans increased $9.2 billion from
December 31, 2018, largely driven by an increase in consumer
loans.
Consumer loans were up $6.8 billion from December 31,
2018, predominantly due to growth in the real estate 1-4 family
first mortgage portfolio, as mortgage loan originations were
partially offset by paydowns and $4.0 billion of sales of PCI loans,
predominantly Pick-a-Pay, in 2019. We also purchased
$3.3 billion of mortgage loans in 2019 as a result of exercising
servicer cleanup calls. In addition, during 2019, we reclassified
$1.9 billion of existing mortgage loans to MLHFS in anticipation
of future whole loan sales.
Commercial loans also increased from December 31, 2018,
predominantly driven by growth in our commercial and industrial
loan portfolio, reflecting growth in our Corporate and
Investment Banking business and purchases of CLOs in loan form
within our Credit Investment Portfolio, partially offset by
declines in our Commercial Banking business.
Table 12: Loan Portfolios
(in millions)
Commercial
Consumer
Total loans
Change from prior year
December 31, 2019
December 31, 2018
$
$
515,719
446,546
962,265
9,155
513,405
439,705
953,110
(3,660)
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 information are in Note 6 (Loans
and Allowance for Credit Losses) to Financial Statements in this
Report.
Table 13 shows contractual maturities for selected classes
of commercial loans and the distribution of loans to changes in
interest rates.
Table 13: Maturities for Selected Commercial Loan Categories
(in millions)
Selected loan maturities:
Commercial and industrial
Real estate mortgage
Real estate construction
Total selected loans
Distribution of loans to changes in interest rates:
Loans at fixed interest rates
Loans at floating/variable interest rates
Total selected loans
Within
one
year
After
one year
through
five years
$
130,342
196,460
27,951
9,219
64,506
10,178
December 31, 2019
After
five
years
27,323
29,367
542
Total
354,125
121,824
19,939
$
167,512
271,144
57,232
495,888
$
22,660
28,688
144,852
242,456
18,479
38,753
69,827
426,061
$
167,512
271,144
57,232
495,888
52
Wells Fargo & Company
Deposits
Deposits were $1.3 trillion at December 31, 2019, up
$36.5 billion from December 31, 2018, due to an increase in
commercial deposits, consumer and small business banking
deposits, and mortgage escrow deposits reflecting an inflow of
higher mortgage payoffs to be remitted to investors in
accordance with servicing contracts, partially offset by a
decrease in other time deposits. The increase in commercial
deposits was due to higher balances in corporate and investment
banking deposits, and commercial real estate deposits. The
increase in consumer and small business banking deposits was
due to higher balances in high-yield savings, certificates of
deposit (CDs), and noninterest-bearing deposits, partially offset
by declines in brokerage sweeps. Table 14 provides additional
information regarding deposits. Information regarding the
impact of deposits on net interest income and a comparison of
average deposit balances is provided in the “Earnings
Performance – Net Interest Income” section and Table 5 earlier in
this Report.
Table 14: Deposits
($ in millions)
Noninterest-bearing
Interest-bearing checking
Market rate and other savings
Savings certificates
Other time deposits
Deposits in non-U.S. offices (1)
Total deposits
Dec 31,
2019
% of
total
deposits
Dec 31,
2018
% of
total
deposits
% Change
$
344,496
26%
$
349,534
62,814
751,080
31,715
78,609
53,912
5
57
2
6
4
56,797
703,338
22,648
95,602
58,251
27%
4
55
2
7
5
$
1,322,626
100% $
1,286,170
100%
(1)
11
7
40
(18)
(7)
3
(1)
Includes Eurodollar sweep balances of $34.2 billion and $31.8 billion at December 31, 2019 and 2018, respectively.
Equity
Total equity was $188.0 billion at December 31, 2019, compared
with $197.1 billion at December 31, 2018. The decrease was
driven by a $21.6 billion increase in treasury stock and a
$1.7 billion decline in preferred stock, partially offset by an
$8.5 billion increase in retained earnings net of dividends paid,
and a $5.0 billion increase in cumulative other comprehensive
income predominantly due to fair value adjustments to available-
for-sale debt securities. The increase in treasury stock was the
result of the repurchase of 502.4 million shares of common stock
in 2019, an increase of 34% from 2018.
Wells Fargo & Company
53
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.
Guarantees and Other 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, direct pay
letters of credit, written options, recourse obligations, exchange
and clearing house guarantees, indemnifications, and other types
of similar arrangements. For more information, see Note 16
(Guarantees, Pledged Assets and Collateral, and Other
Commitments) to Financial Statements in this Report.
Derivatives
We use derivatives to manage exposure to market risk, including
interest rate risk, credit risk and foreign currency risk, and to
assist customers with their risk management objectives.
Derivatives are recorded on the balance sheet at fair value, and
volume can be measured in terms of the notional amount, which
is generally not exchanged, but is used only as the basis on which
interest and other payments are determined. The notional
amount is not recorded on the balance sheet and is not, when
viewed in isolation, a meaningful measure of the risk profile of
the instruments. For more information, see Note 18
(Derivatives) to Financial Statements in this Report.
Commitments to Lend
We enter into commitments to lend to customers, which are
usually at a stated interest rate, if funded, and for specific
purposes and time periods. When we enter into 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
not funded. For more information, see Note 6 (Loans and
Allowance for Credit Losses) to Financial Statements in this
Report.
Commitments to Purchase Debt and Equity Securities
We enter into commitments to purchase securities under resale
agreements. We also may enter into commitments to purchase
debt and equity securities to provide capital for customers’
funding, liquidity or other future needs. For more information,
see Note 16 (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, see Note 10
(Securitizations and Variable Interest Entities) to Financial
Statements in this Report.
54
Wells Fargo & Company
Contractual Cash Obligations
In the ordinary course of business, we enter into other
contractual obligations that may require future cash payments,
including debt issuances for the funding of operations and leases
for premises and equipment.
Table 15 summarizes these contractual obligations as of
December 31, 2019, excluding accrued expenses and other
liabilities, short-term borrowings and obligations for pension and
postretirement benefit plans. For more information, see Note 14
(Short-Term Borrowings) and Note 23 (Employee Benefits and
Other Expenses) to Financial Statements in this Report.
Table 15: Contractual Cash Obligations
(in millions)
Contractual payments by period:
Deposits (1)
Long-term debt (2)
Interest (3)
Operating leases
Unrecognized tax obligations
Commitments to purchase debt
and equity securities (4)
Purchase and other obligations (5)
Note(s) to
Financial
Statements
Less than
1 year
1-3
years
3-5
years
13
15
7
24
16
$
88,259
39,646
6,805
1,006
5
2,706
855
21,484
73,329
8,748
1,942
—
—
1,009
6,036
29,776
5,733
1,347
—
—
438
December 31, 2019
Indeterminate
maturity
Total
1,203,777
1,322,626
—
—
—
3,676
—
—
228,191
40,934
5,967
3,681
2,724
2,616
More
than
5 years
3,070
85,440
19,648
1,672
—
18
314
Total contractual obligations
$
139,282
106,512
43,330
110,162
1,207,453
1,606,739
(1)
(2)
(3)
(4)
(5)
Includes interest-bearing and noninterest-bearing checking, and market rate and other savings accounts.
Balances are presented net of unamortized debt discounts and premiums and purchase accounting adjustments.
Represents the future interest obligations related to interest-bearing time deposits and long-term debt in the normal course of business including a net reduction of $7.1 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, 2019, rates, which we held
constant until maturity. We have excluded interest related to structured notes where our payment obligation is contingent on the performance of certain benchmarks.
Includes unfunded commitments to purchase debt securities of $18 million and equity securities of $2.7 billion, respectively. Substantially all of our equity commitments are included in the ‘Less than
one year’ category as there are no specified contribution dates in the agreements. These obligations may be requested at any time by the investment manager.
Represents agreements related to unrecognized obligations to purchase goods or services.
We are subject to the income tax laws of the U.S., its states
and municipalities, and those of the non-U.S. 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 24 (Income Taxes) to
Financial Statements in this Report for more information.
Wells Fargo & Company
55
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, shareholders, regulators and
other stakeholders.
Risk is Part of our Business Model The Company measures and
manages risk as part of our business, including in connection with
the products and services we offer to our customers. The risks
we take include financial, such as credit, interest rate, market,
liquidity and funding risks, and non-financial, such as operational
including compliance and model risks, strategic and reputation
risks.
Risk Profile Our risk profile is a holistic view of all risks we hold
at a point in time, including emerging risks. The Company
monitors its risk profile, and the Board periodically reviews
reports and analysis concerning our risk profile.
Risk Capacity Risk capacity refers to the maximum level of risk
that the Company could assume given its current level of
resources before triggering regulatory and other constraints on
its capital and liquidity needs.
Risk Appetite Management defines and the Board approves the
Company’s risk appetite, which is the amount of risk the
Company is comfortable taking given its current level of
resources. Risk appetite defines which risks are acceptable and at
what level and guides business and risk leaders. Risk appetite
boundaries are set within the Company’s risk capacity. The
Company’s risk appetite is articulated in a statement of risk
appetite, which is approved at least annually by the Board. The
Company continuously monitors its risk appetite, and the Board
reviews periodic risk appetite reports and analysis.
Risk and Strategy The Company’s risk profile, risk capacity, risk
appetite, and risk management effectiveness (e.g., the holistic
measure of the quality and effectiveness of the Company’s risk
management activities, including the functional or programmatic
use of controls and capabilities to manage risks) are considered
in the strategic planning process, which is closely linked with the
Company’s capital planning process. The Company’s Independent
Risk Management (IRM) organization participates in strategic
planning at several points in the process, providing challenge to
and independent assessment of the Company’s self-assessment
of the risks associated with strategic planning initiatives. IRM
also independently assesses the impact of the strategic plan on
risk capacity, risk appetite, and risk management effectiveness at
the business group, enterprise function, and aggregate Company
level. Risk decisions related to the strategic plan are approved by
the Enterprise Risk & Control Committee (ERCC), a management
governance committee that governs the management of all risk
types. After a critical review, the strategic plan is presented to
the Board each year for review and approval.
Everyone Manages Risk Every team member creates risk in the
course of performing business activities and is required to
manage that risk. Risk is everyone’s responsibility. Every team
member is required to comply with applicable laws, regulations,
and Company policies.
Risk and Culture The Board holds management accountable for
establishing and maintaining the right risk culture and effectively
managing risk. Team members are strongly encouraged and
expected to speak up when they see something that could cause
harm to the Company’s customers, communities, team
members, shareholders, or reputation. Because risk management
is everyone’s responsibility, all team members are expected to
challenge risk decisions when appropriate and to escalate their
concerns when they have not been addressed. Team member
performance evaluations are tied to, and take into account,
effective risk management. The Company’s performance
management and incentive compensation programs are
designed to establish a balanced framework for risk and reward
under core principles that team members are expected to know
and practice. The Board, through its Human Resources
Committee, plays an important role in overseeing and providing
credible challenge to the Company’s performance management
and incentive compensation programs.
Risk Management Framework The Company’s risk
management framework sets forth the core principles on how
the Company seeks to manage and govern its risk. Many
Company policies and documents anchor to the risk
management framework’s core principles. The Board’s Risk
Committee annually reviews and approves the risk management
framework.
Risk Governance
Role of the Board The Board oversees the Company’s business,
including its risk management. The Board assesses
management’s performance, provides credible challenge, and
holds management accountable for maintaining an effective risk
management program and for adhering to risk management
expectations.
Board Committee Structure The Board carries out its risk
oversight responsibilities directly and through its committees.
The Risk Committee approves the Company’s risk
management framework and oversees its implementation,
including the processes established by management to identify,
assess, measure, monitor, and manage risks. It also monitors the
Company’s adherence to its risk appetite. In addition, the Risk
Committee oversees IRM and the performance of the Chief Risk
Officer (CRO) who reports functionally to the Risk Committee
and administratively to the CEO.
Management Committee Structure The Company has
established management committees, including those focused
on risk, that support management in carrying out its governance
and risk management responsibilities. One type of management
committee is a governance committee, which is a decision
making body that operates for a particular purpose.
Each management governance committee is expected to
discuss, document, and make decisions regarding significant risk
issues, emerging risks, and risk acceptances; review and monitor
progress related to critical and high-risk issues and remediation
efforts within its scope, including lessons learned; and report key
challenges, decisions, escalations, other actions, and open issues
as appropriate.
56
Wells Fargo & Company
Table 16 below presents the structure of the Company’s
Board committees and management governance committees,
including relevant reporting and escalation paths.
Table 16: Board and Management-level Governance Committee Structure
Wells Fargo & Company
Audit
Committee (1)
Finance
Committee
Corporate
Responsibility
Committee
Risk
Committee
Governance &
Nominating
Committee
Credit
Committee
Human
Resources
Committee
Management Governance Committees
Regulatory and
Risk Reporting
Oversight
Committee
Capital
Management
Committee
Enterprise
Risk & Control
Committee
Allowance for
Credit Losses
Approval
Governance
Committee
Incentive
Compensation
Committee
Disclosure
Committee
Corporate
Asset/Liability
Committee
Recovery and
Resolution
Committee
(1)
The Audit 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.
Management Governance Committees Reporting to the Risk
Committee of the Board The ERCC governs the management of
all risk types, including financial risks and non-financial risks. The
ERCC receives information about risk and control events,
addresses escalated risks and issues, actively oversees risk
control, and provides regular updates to the Risk Committee
regarding current and emerging risks and management’s
assessment of the effectiveness of the Company’s risk
management program.
The ERCC is chaired by the CRO, with membership made up
of the CEO and the heads of business groups and certain
enterprise functions. The Chief Auditor attends all meetings of
the ERCC. The ERCC has a direct escalation path to the Risk
Committee. The ERCC also escalates credit risks and issues to
the Credit Committee and certain human capital risks and issues
to the Human Resources Committee. In addition, the CRO has
the authority to escalate anything directly to the Board. Risks
and issues are escalated to the ERCC in accordance with
applicable policies and procedures governing escalations.
Each business group and enterprise function has a risk and
control committee, which are management governance
committees with mandates that align with the ERCC but with
their scope limited to the relevant business groups or enterprise
functions. The focus of these committees is on the risks that
each business group or enterprise function generates and is
responsible for managing, and the controls each business group
or enterprise function is expected to have in place.
In addition to each risk and control committee, management
governance committees dedicated to specific risk types and risk
topics also report to the ERCC to help provide more
comprehensive governance of risks.
Risk Operating Model - Roles and Responsibilities
The Company has three lines of defense: the front line,
Independent Risk Management, and Internal Audit. Our risk
operating model creates necessary interaction,
interdependencies, and ongoing engagement among the lines of
defense:
•
Front Line The front line, which is composed of business
groups and certain activities of enterprise functions, is the
first line of defense. In the course of its business activities,
the front line identifies, measures and assesses, manages,
controls, monitors, and reports on risk associated with its
business activities and balances risk and reward in decision
making while remaining within the Company’s risk appetite.
Independent Risk Management IRM is the second line of
defense. It establishes and maintains the Company’s risk
management program and provides oversight, including
challenge to and independent assessment of the front line’s
execution of its risk management responsibilities.
Internal Audit Internal Audit is the third line of defense. It is
responsible for acting as an independent assurance function
and validates that the risk management program is
adequately designed and functioning effectively.
•
•
Risk Type Classifications
The Company uses common classifications, hierarchies, and
ratings to enable consistency across risk management programs
and aggregation of information. Risk type classifications permit
the Company to identify and prioritize its risk exposures,
including emerging risk exposures.
Wells Fargo & Company
57
Risk Management (continued)
Operational Risk Management
Operational risk, which in addition to those discussed in this
section, includes compliance risk and model risk, is the risk
resulting from inadequate or failed internal processes, people
and systems, or from external events.
The Board’s Risk Committee has primary oversight
responsibility for all aspects of operational risk, including
significant supporting programs and/or policies regarding the
Company’s business resiliency and disaster recovery, data
management, information security, 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 operational risk management program.
At the management level, the Operational Risk Group
organization, which is part of IRM, has primary oversight
responsibility for operational risk. The Operational Risk Group
reports to the CRO and also provides periodic reports related to
operational risk to the Board’s Risk Committee. Technology,
Third Party and Information Risk Oversight, which is part of the
Operational Risk Group, has oversight responsibility for
technology risk, third-party risk, information risk management,
and information security risk. Enterprise Data Governance, which
is part of the Operational Risk Group, has oversight responsibility
for data management risk. Oversight of human capital risk, an
operational risk, is performed by the Human Resources function
with reporting paths to relevant management governance
committees including to the ERCC.
Information security is a significant operational risk for
financial institutions such as Wells Fargo, and includes the risk
arising from unauthorized access, use, disclosure, disruption,
modification, or destruction of information or information
systems. The 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. A Technology Subcommittee of the Risk Committee
assists the Risk Committee in providing oversight of technology,
information security, and cybersecurity risks as well as data
management risk. The Technology Subcommittee reviews and
recommends to the Risk Committee for approval any significant
supporting information security risk (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,
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 (a type of operational risk) is the risk resulting
from the failure to comply with laws (legislation, regulations and
rules) and regulatory guidance, and the failure to appropriately
address associated impacts, including to customers. Compliance
risk encompasses violations of applicable internal policies,
program requirements, procedures, and standards related to
ethical principles applicable to the banking industry.
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
supporting compliance risk and financial crimes risk policies and
programs, and oversees the Company’s compliance risk
management and financial crimes risk management programs. A
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.
Conduct risk, a sub-category of compliance risk, is the risk of
inappropriate, unethical, or unlawful behavior on the part of
team members or individuals acting on behalf of the Company,
caused by deliberate or unintentional 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).
The Board’s Risk Committee has primary oversight responsibility
for enterprise-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 enterprise-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, Wells Fargo Compliance, which is
part of IRM, monitors the implementation of the Company’s
compliance and conduct risk programs. 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 reports related to
compliance risk to the Board’s Risk Committee and Compliance
Subcommittee. 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.
Model Risk Management
Model risk (a type of operational risk) is the risk arising from the
potential for adverse consequences from decisions made based
on model outputs that may be incorrect or used inappropriately.
The Board’s Risk Committee has primary oversight
responsibility for model risk. As part of its oversight
58
Wells Fargo & Company
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 Model Risk function, which is
part of IRM, has primary oversight responsibility for model risk
and is responsible for governance, validation and monitoring of
model risk across the Company. The Model Risk function reports
to the CRO and also provides periodic reports related to model
risk to the Board’s Risk Committee.
Strategic Risk Management
Strategic risk is the risk to earnings, capital, or liquidity arising
from adverse business decisions, improper implementation of
strategic initiatives, or inadequate responses to changes in the
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 and risk management effectiveness. 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 receives updates from
management regarding new business initiatives activity and risks
related to new or changing products, as appropriate.
At the management level, the Strategic Risk Oversight
function, which is part of IRM, has primary oversight
responsibility for strategic risk. The Strategic Risk Oversight
function reports into the CRO and also provides periodic reports
related to strategic risk to the Board’s Risk Committee.
Reputation Risk Management
Reputation risk is the risk arising from the potential that
negative stakeholder opinion or negative publicity regarding the
Company’s business practices, whether true or not, will adversely
impact current or projected financial conditions and resilience,
cause a decline in the customer base, or result in costly litigation.
Stakeholders include team members, customers, communities,
shareholders, regulators, elected officials, advocacy groups, and
media organizations.
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 IRM, has primary oversight
responsibility for reputation risk. The Reputation Risk Oversight
function reports into the CRO and also provides periodic reports
related to reputation risk to the Board’s Risk 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, Credit
Risk, which is part of IRM, has primary oversight responsibility
for credit risk. Credit Risk reports to the CRO and also provides
periodic reports related to credit risk to the Board’s Credit
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:
Commercial and industrial
Real estate mortgage
Real estate construction
Lease financing
Total commercial
Consumer:
Dec 31, 2019
Dec 31, 2018
$
354,125
121,824
19,939
19,831
515,719
350,199
121,014
22,496
19,696
513,405
Real estate 1-4 family first mortgage
293,847
285,065
Real estate 1-4 family junior lien mortgage
Credit card
Automobile
Other revolving credit and installment
Total consumer
Total loans
29,509
41,013
47,873
34,304
446,546
$
962,265
34,398
39,025
45,069
36,148
439,705
953,110
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
•
Loan concentrations and related credit quality
Counterparty credit risk
Economic and market conditions
Legislative or regulatory mandates
Changes in interest rates
Reputation risk
Our credit risk management oversight process is governed
centrally, but provides for decentralized management and
accountability by our lines of business. Our overall credit process
includes comprehensive credit policies, disciplined credit
underwriting, frequent and detailed risk measurement and
modeling, extensive credit training programs, and a continual
loan review and audit process.
Wells Fargo & Company
59
Risk Management – Credit Risk Management (continued)
A key to our credit risk management is adherence to a well-
controlled underwriting process, which we believe is appropriate
for the needs of our customers as well as investors who purchase
the loans or securities collateralized by the loans.
Credit Quality Overview Solid credit quality continued in 2019,
as our net charge-off rate remained low at 0.29% of average
total loans. Our loss rate reflected improvements in the credit
performance of our automobile portfolio, partially offset by a
lower volume of recoveries in other loan portfolios. In particular:
• Nonaccrual loans were $5.3 billion at December 31, 2019,
down from $6.5 billion at December 31, 2018. Commercial
nonaccrual loans increased to $2.3 billion at December 31,
2019, compared with $2.2 billion at December 31, 2018, and
consumer nonaccrual loans declined to $3.1 billion at
December 31, 2019, compared with $4.3 billion at
December 31, 2018. A decline in real estate 1-4 family
mortgage nonaccrual loans reflecting an improved housing
market, sales of nonaccrual mortgage loans, and the
reclassification of nonaccrual mortgage loans to MLHFS was
partially offset by an increase in commercial and industrial
nonaccrual loans driven by the oil and gas portfolio.
Nonaccrual loans represented 0.56% of total loans at
December 31, 2019, compared with 0.68% at December 31,
2018.
• Net charge-offs as a percentage of our average commercial
•
and consumer portfolios were 0.13% and 0.48%,
respectively, in 2019, compared with 0.09% and 0.52% in
2018.
Loans that are not government insured/guaranteed and
90 days or more past due and still accruing were $78 million
and $855 million in our commercial and consumer
portfolios, respectively, at December 31, 2019, compared
with $94 million and $885 million at December 31, 2018.
• Our provision for credit losses was $2.7 billion in 2019,
compared with $1.7 billion in 2018. The provision for credit
losses in both 2019 and 2018 reflected continuing solid
underlying credit performance. The provision for credit
losses in 2018 also reflected a higher level of credit quality
improvement compared with 2019, as well as an
improvement in the outlook associated with 2017
hurricane-related losses.
The allowance for credit losses declined to $10.5 billion, or
1.09% of total loans, at December 31, 2019, compared with
$10.7 billion, or 1.12%, at December 31, 2018.
•
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. A nonaccretable
difference is established for PCI loans to absorb losses expected
on the contractual amounts of those loans. Amounts absorbed
by the nonaccretable difference do not affect the income
statement or the allowance for credit losses. The carrying value
of PCI loans at December 31, 2019, totaled $568 million,
compared with $5.0 billion at December 31, 2018. The decline in
carrying value was due to the sale of $4.0 billion of PCI loans,
predominantly Pick-a-Pay, during 2019 and paydowns.
For additional information on PCI loans, see the “Risk
Management – Credit Risk Management – Real Estate 1-4 Family
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 segmented among special mention, substandard,
doubtful and loss categories.
The commercial and industrial loans and lease financing
portfolio totaled $374.0 billion, or 39% of total loans, at
December 31, 2019. The net charge-off rate for this portfolio
was 0.18% in 2019, compared with 0.13% in 2018. At
December 31, 2019, 0.44% of this portfolio was nonaccruing,
compared with 0.43% at December 31, 2018. Nonaccrual loans in
this portfolio increased $64 million in 2019, due to a customer in
the utilities industry, as well as increases in the oil, gas and
pipeline portfolio, partially offset by improvement across various
industry categories. Also, $16.6 billion of the commercial and
industrial loan and lease financing portfolio was internally
classified as criticized in accordance with regulatory guidance at
December 31, 2019, compared with $15.8 billion at
December 31, 2018.
Most of our commercial and industrial loans and lease
financing portfolio is secured by short-term assets, such as
accounts receivable, inventory and debt 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.
60
Wells Fargo & Company
Table 18 provides our commercial and industrial loans and
lease financing by industry, and includes non-U.S. loans of
$71.7 billion and $63.7 billion at December 31, 2019 and 2018,
respectively. Significant industry concentrations of non-U.S.
loans include $31.2 billion and $25.6 billion in the financials
except banks category and $19.9 billion and $18.1 billion in the
banks category at December 31, 2019 and 2018, respectively.
The industry categories were updated in 2019 to align with
industry groupings that our regulators use to monitor industry
concentration risks.
Loans to financials except banks, our largest industry
concentration, were $117.3 billion, or 12% of total outstanding
loans, at December 31, 2019, compared with $105.9 billion, or
11% of total outstanding loans, at December 31, 2018. This
industry category includes loans to investment firms, financial
vehicles, and non-bank creditors, including those that invest in
financial assets backed predominantly by commercial or
residential real estate or consumer loan assets. We limit our loan
amounts to a percentage of the value of the underlying assets
considering underlying credit risk, asset duration, and ongoing
performance.
Oil, gas and pipeline loans totaled $13.6 billion, or 1% of
total outstanding loans, at December 31, 2019, compared with
$12.8 billion, or 1% of total outstanding loans, at December 31,
2018.
Table 18: Commercial and Industrial Loans and Lease Financing by Industry (1)
(in millions)
Financials except banks
Equipment, machinery and parts manufacturing
Technology, telecom and media
Real estate and construction
Banks
Retail
Materials and commodities
Automobile related
Food and beverage manufacturing
Health care and pharmaceuticals
Oil, gas and pipelines
Entertainment and recreation
Transportation services
Commercial services
Agribusiness
Utilities
Insurance and fiduciaries
Government and education
Other (2)
Total
December 31, 2019
December 31, 2018
Nonaccrual
loans
Total
portfolio
% of total
loans
Nonaccrual
loans
Total
portfolio
% of total
loans
$
112
117,312
12%
$
305
105,925
11%
36
28
47
—
23,457
22,447
22,011
20,070
105
19,923
33
24
9
28
615
44
224
50
35
224
1
6
16,375
15,996
14,991
14,920
13,562
13,462
10,957
10,455
7,539
5,995
5,525
5,363
19
13,596
2
2
2
2
2
2
2
2
2
1
1
1
1
1
1
1
1
1
47
26
31
—
87
136
16
48
124
417
33
176
48
46
6
1
3
20,850
25,681
23,380
18,407
19,541
18,688
16,801
15,448
15,529
12,840
14,045
12,029
10,591
7,996
5,756
5,510
6,160
26
14,718
2
3
2
2
2
2
2
2
2
1
1
1
1
1
1
1
1
1
$
1,640
373,956
39%
$
1,576
369,895
39%
(1)
(2)
Industry categories are based on the North American Industry Classification System and the amounts reported include non-U.S. loans. The industry categories were updated in 2019 to align with
industry groupings that our regulators use to monitor industry concentration risks. The amounts for December 31, 2018, have been reclassified to conform with the current period presentation. See
Note 6 (Loans and Allowance for Credit Losses) to Financial Statements in this Report for a breakout of non-U.S. commercial loans.
No other single industry had total loans in excess of $4.7 billion and $4.5 billion at December 31, 2019 and 2018, respectively.
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
for credit losses 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.
Wells Fargo & Company
61
Risk Management – Credit Risk Management (continued)
COMMERCIAL REAL ESTATE (CRE) We generally subject CRE loans
to individual risk assessment using our internal borrower and
collateral quality ratings. Our ratings are aligned to regulatory
definitions of pass and criticized categories with criticized
segmented among special mention, substandard, doubtful and
loss categories. The CRE portfolio, which included $8.4 billion of
non-U.S. CRE loans, totaled $141.8 billion, or 15% of total loans,
at December 31, 2019, and consisted of $121.8 billion of
mortgage loans and $19.9 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
Table 19: CRE Loans by State and Property Type
geographic concentrations of CRE loans are in California, New
York, Florida and Texas, which combined represented 49% of the
total CRE portfolio. By property type, the largest concentrations
are office buildings at 26% and apartments at 17% of the
portfolio. CRE nonaccrual loans totaled 0.43% of the CRE
outstanding balance at both December 31, 2019, and
December 31, 2018. At December 31, 2019, we had $3.8 billion
of criticized CRE mortgage loans, compared with $4.5 billion at
December 31, 2018, and $187 million of criticized CRE
construction loans, compared with $289 million at December 31,
2018.
Real estate mortgage
Real estate construction
Nonaccrual
loans
Total
portfolio
Nonaccrual
loans
Total
portfolio
Nonaccrual
loans
December 31, 2019
% of
total
loans
(in millions)
By state:
California
New York
Florida
Texas
Arizona
Washington
North Carolina
Georgia
Virginia
New Jersey
Other
Total
By property:
Office buildings
Apartments
Industrial/warehouse
Retail (excluding shopping center)
Shopping center
Hotel/motel
Mixed use properties (2)
Institutional
Collateral pool
Agriculture
Other
Total
$
149
$
$
21
23
42
70
9
17
15
6
16
205
573
105
9
81
128
2
16
92
39
—
91
10
32,079
12,076
8,081
7,877
4,212
3,757
3,823
3,819
2,808
2,846
40,446
121,824
34,188
18,243
15,813
14,510
10,816
10,319
6,377
3,617
2,328
2,116
3,497
$
573
121,824
12
2
4
5
—
—
4
—
—
—
14
41
6
—
2
5
—
—
1
10
—
—
17
41
4,415
1,863
1,450
1,389
303
709
540
401
680
628
7,561
19,939
2,919
6,415
1,492
210
1,313
1,459
487
1,924
198
10
3,512
19,939
Total
Total
portfolio
36,494
13,939
9,531
9,266
4,515
4,466
4,363
4,220
3,488
3,474
48,007
(1)
141,763
37,107
24,658
17,305
14,720
12,129
11,778
6,864
5,541
2,526
2,126
7,009
161
23
27
47
70
9
21
15
6
16
219
614
111
9
83
133
2
16
93
49
—
91
27
4%
1
1
1
1
1
1
*
*
*
5
15%
4%
3
2
2
1
1
1
*
*
*
1
614
141,763
15%
Less than 1%.
Includes 40 states; no state had loans in excess of $3.5 billion.
*
(1)
(2) Mixed use properties combines residential, commercial, cultural, and other usage within the same building. This also includes data centers, flexible spaces leased to multiple tenants, light
manufacturing, and other specialized uses.
NON-U.S. LOANS Our classification of non-U.S. loans is based on
whether the borrower’s primary address is outside of the United
States. At December 31, 2019, non-U.S. loans totaled
$80.5 billion, representing approximately 8% of our total
consolidated loans outstanding, compared with $71.9 billion, or
approximately 8% of total consolidated loans outstanding, at
December 31, 2018. Non-U.S. loans were approximately 4% of
our consolidated total assets at both December 31, 2019, and
December 31, 2018.
COUNTRY RISK EXPOSURE Our country risk monitoring process
incorporates centralized monitoring of economic, political, social,
legal, and transfer risks in countries where we do or plan to do
business, along with frequent dialogue with our customers,
counterparties and regulatory agencies. We establish exposure
limits for each country through a centralized oversight process
based on customer needs, and through consideration of the
relevant and distinct risk of each country. 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 country
exposure outside the U.S. based on our assessment of risk at
62
Wells Fargo & Company
December 31, 2019, was the United Kingdom, which totaled
$31.6 billion, and included $8.0 billion of sovereign claims. Our
United Kingdom sovereign claims arise predominantly from
deposits we have placed with the Bank of England pursuant to
regulatory requirements in support of our London branch.
The United Kingdom withdrew from the European Union
(Brexit) on January 31, 2020, and is currently subject to a
transition period during which the terms and conditions of its
exit are being negotiated. As the United Kingdom exits from the
European Union, 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 those locations. We have an existing
authorized bank in Ireland and an asset management entity in
Luxembourg. Additionally, we established a broker dealer in
France. We are in the process of leveraging these entities to
continue to serve clients in the European Union and continue to
take actions to update our business operations in the United
Kingdom and European Union, including implementing new
Table 20: Select Country Exposures
supplier contracts and staffing arrangements. 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
consideration to the country of any guarantors and/or underlying
collateral. With respect to Table 20:
•
Lending exposure includes outstanding loans, unfunded
credit commitments, and deposits with non-U.S. banks.
These balances are presented prior to the deduction of
allowance for credit losses or collateral received under the
terms of the credit agreements, if any.
Securities exposure represents debt and equity securities of
non-U.S. issuers. Long and short positions are netted, and
net short positions are reflected as negative exposure.
• Derivatives and other exposure represents foreign exchange
contracts, derivative contracts, securities resale agreements,
and securities lending agreements.
•
(in millions)
Top 20 country exposures:
United Kingdom
Canada
Cayman Islands
Ireland
China
Luxembourg
Bermuda
Guernsey
Germany
Netherlands
South Korea
Brazil
France
Australia
India
Chile
Switzerland
Taiwan
United Arab Emirates
Hong Kong
Securities
Derivatives and other
December 31, 2019
Total exposure
Sovereign
Non-
sovereign
Sovereign
Non-
sovereign
Sovereign
Non-
sovereign (1)
Total
Lending
Non-
sovereign
21,617
17,661
—
(68)
7,442
4,971
4,022
3,636
3,824
3,554
2,773
2,019
2,023
2,075
1,882
1,720
1,734
1,698
1,482
1,369
1,323
1,333
—
—
5
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
881
194
31
102
408
654
103
1
128
364
268
1
137
145
130
(1)
(51)
(6)
—
(14)
2
—
—
—
59
—
—
—
3
20
—
1
29
—
—
—
—
1
—
1
1,067
7,991
272
126
137
20
83
54
65
42
126
6
1
9
8
—
—
57
2
3
2
(32)
—
225
64
—
—
—
3
20
—
1
29
—
—
—
—
1
—
1
23,565
18,127
31,556
18,095
7,599
5,210
4,450
4,373
3,981
3,620
2,943
2,509
2,297
2,077
2,028
1,873
1,864
1,697
1,488
1,365
1,326
1,321
7,599
5,435
4,514
4,373
3,981
3,620
2,946
2,529
2,297
2,078
2,057
1,873
1,864
1,697
1,488
1,366
1,326
1,322
Sovereign
$
7,989
36
—
225
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
Total top 20 country exposures
$
8,250
88,158
(63)
3,475
116
2,080
8,303
93,713
102,016
Eurozone exposure:
Eurozone countries included in Top 20 above (2)
$
225
15,281
Spain
Belgium
Austria
Other Eurozone countries
Total Eurozone exposure
—
—
—
—
401
766
305
230
$
225
16,983
—
—
—
—
—
—
1,385
466
(72)
—
55
1,834
52
—
—
—
—
52
397
30
1
—
1
429
277
—
—
—
—
277
17,063
17,340
897
695
305
286
897
695
305
286
19,246
19,523
(1)
(2)
For countries presented in the table, total non-sovereign exposure comprises $53.1 billion exposure to financial institutions and $42.8 billion to non-financial corporations at December 31, 2019.
Consists of exposure to Ireland, Luxembourg, Germany, Netherlands and France, which are included in the Top 20 country exposures.
Wells Fargo & Company
63
Risk Management – Credit Risk Management (continued)
REAL ESTATE 1-4 FAMILY MORTGAGE LOANS Our real estate 1-4
family mortgage loan portfolio is composed of both first and
junior lien mortgage loans, which are presented in Table 21.
Table 21: Real Estate 1-4 Family Mortgage Loans
(in millions)
Real estate 1-4 family first mortgage
Real estate 1-4 family junior lien mortgage
Total real estate 1-4 family mortgage loans
December 31, 2019
December 31, 2018
Balance
% of
portfolio
Balance
% of
portfolio
$
293,847
91%
$
285,065
29,509
9
34,398
$
323,356
100%
$
319,463
89%
11
100%
The real estate 1-4 family mortgage loan portfolio includes
Real estate 1-4 family mortgage loans by state are
presented in Table 22. Our real estate 1-4 family non-PCI
mortgage loans to borrowers in California represented 13% of
total loans at December 31, 2019, 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 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 original appraisals adjusted for the change in Home
Price Index (HPI) 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 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 mortgage commitments greater than
$250,000. Additional information about appraisals, 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 3% and 4% of total loans at
December 31, 2019 and 2018, respectively. We believe we have
manageable adjustable-rate mortgage (ARM) reset risk across
our 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 for credit losses 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 on the non-PCI mortgage
portfolio exclude government insured/guaranteed loans. Loans
30 days or more delinquent at December 31, 2019, totaled
$3.0 billion, or 1% of total non-PCI mortgages, compared with
$4.0 billion, or 1%, at December 31, 2018. Loans with FICO
scores lower than 640 totaled $7.6 billion, or 2% of total non-PCI
mortgages at December 31, 2019, compared with $9.7 billion, or
3%, at December 31, 2018. Mortgages with a LTV/CLTV greater
than 100% totaled $2.5 billion at December 31, 2019, or 1% of
total non-PCI mortgages, compared with $3.9 billion, or 1%, at
December 31, 2018. 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.
64
Wells Fargo & Company
Table 22: Real Estate 1-4 Family Mortgage Loans by State
(in millions)
Real estate 1-4 family mortgage loans (excluding PCI):
California
New York
New Jersey
Florida
Washington
Virginia
Texas
North Carolina
Colorado
Other (1)
Government insured/guaranteed loans (2)
Real estate 1-4 family loans (excluding PCI)
Real estate 1-4 family PCI loans
Total
December 31, 2019
Real estate
1-4 family
first
Real
Total real
estate 1-4
estate 1-4
family
junior lien
family
mortgage mortgage mortgage
% of
total
loans
126,310
13%
$ 118,256
31,336
14,113
11,804
10,863
8,857
8,963
5,839
6,382
65,709
11,170
8,054
1,508
2,744
2,600
655
1,712
596
1,388
664
9,575
—
32,844
16,857
14,404
11,518
10,569
9,559
7,227
7,046
75,284
11,170
293,292
29,496
322,788
555
13
568
$ 293,847
29,509
323,356
34%
3
2
2
1
1
1
1
1
8
1
34
—
(1)
(2)
Consists of 41 states; no state had loans in excess of $7.0 billion.
Represents loans whose repayments are predominantly insured by the Federal Housing Administration (FHA) or guaranteed by the Department of Veterans Affairs (VA).
First Mortgage Portfolio Our total real estate 1-4 family first
lien mortgage portfolio (first mortgage) increased $8.8 billion in
2019. Mortgage loan originations of $67.4 billion in 2019 were
partially offset by paydowns and $4.0 billion of sales of PCI loans,
predominantly Pick-a-Pay. Also, we purchased $3.3 billion of
mortgage loans in 2019 as a result of exercising servicer cleanup
calls. In addition, during 2019, we reclassified $1.9 billion of
existing mortgage loans to MLHFS in anticipation of future
whole loan sales. We also originated $3.4 billion of
nonconforming mortgage loan originations as MLHFS in 2019, in
anticipation of the issuance of residential mortgage-backed
securities.
The credit performance associated with our real estate 1-4
family first mortgage portfolio remained strong in 2019, as
Table 23: First Mortgage Portfolio Performance
measured through nonaccrual loans and net charge-offs.
Nonaccrual loans decreased to $2.2 billion at December 31,
2019, compared with $3.2 billion at December 31, 2018, driven
by nonaccrual loan sales, the reclassification of nonaccrual loans
to MLHFS in anticipation of future sales, and overall continued
credit improvement. Net charge-offs as a percentage of average
real estate 1-4 family first mortgage loans was a net recovery of
0.02% in 2019, compared with a net recovery of 0.03% in 2018.
Table 23 shows certain delinquency and loss information for
the first mortgage portfolio and lists the top five states by
outstanding balance.
(in millions)
California
New York
New Jersey
Florida
Washington
Other
Total
Government insured/guaranteed loans
PCI
Outstanding balance
% of loans 30 days
or more past due
Loss (recovery) rate
December 31,
December 31,
Year ended December 31,
2019
2018
$
118,256
109,092
31,336
14,113
11,804
10,863
95,750
282,122
11,170
555
28,954
13,811
12,350
9,677
93,261
267,145
12,932
4,988
2019
0.48%
0.83
1.40
1.81
0.29
1.20
0.86
2018
0.68
1.12
1.91
2.58
0.57
1.70
1.23
2019
(0.02)
0.02
0.02
(0.06)
(0.02)
(0.02)
(0.02)
2018
(0.06)
0.04
0.03
(0.17)
(0.06)
(0.02)
(0.03)
Total first mortgage portfolio
$
293,847
285,065
Wells Fargo & Company
65
Risk Management – Credit Risk Management (continued)
Pick-a-Pay Portfolio The Pick-a-Pay portfolio was one of the
consumer residential mortgage portfolios we acquired from
Wachovia. The Pick-a-Pay portfolio is included in consumer real
estate 1-4 family first mortgage loans throughout this Report.
Pick-a-Pay option payment loans may have fixed or adjustable
rates with payment options that may include a minimum
payment, an interest-only payment or fully amortizing payment
(both 15- and 30-year options). Table 24 provides balances by
types of loans as of December 31, 2019.
Table 24: Pick-a-Pay Portfolio
(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)
2019
% of total
Adjusted
unpaid principal
balance (1)
$
$
$
4,571
2,161
2,320
9,052
8,936
50%
$
24
26
100%
$
$
8,813
2,848
6,080
17,741
16,115
December 31,
2018
% of total
50%
16
34
100%
(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.
Our Pick-a-Pay portfolio included PCI loans with a carrying
value of $519 million at December 31, 2019, compared with
$4.9 billion at December 31, 2018. During 2019, we sold
$4.0 billion of Pick-a-Pay PCI loans that resulted in a gain of
$1.6 billion. The accretable yield balance of our Pick-a-Pay PCI
loan portfolio was $134 million ($229 million for all PCI loans) at
December 31, 2019, compared with $2.8 billion ($3.0 billion for
all PCI loans) at December 31, 2018. The decrease was
predominantly due to Pick-a-Pay PCI loan sales. The estimated
weighted-average life was approximately 5.1 years and 5.5 years
at December 31, 2019 and 2018, respectively. The accretable
yield percentage for Pick-a-Pay PCI loans for fourth quarter
2019 was 11.69%.
For additional information on PCI loans, see Note 1
(Summary of Significant Accounting Policies) to Financial
Statements in this Report.
66
Wells Fargo & Company
Junior Lien Mortgage Portfolio The junior lien mortgage
portfolio consists of residential mortgage lines and loans that are
subordinate in rights to an existing lien on the same property. It
is not unusual for these lines and loans to have draw periods,
interest-only payments, balloon payments, adjustable rates and
similar features. Junior lien loan products are mostly amortizing
payment loans with fixed interest rates and repayment periods
between five to 30 years.
We continuously monitor the credit performance of our
junior lien mortgage portfolio for trends and factors that
influence the frequency and severity of loss, such as junior lien
mortgage performance when the first mortgage loan is
delinquent. 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, 2018, predominantly
Table 25: Junior Lien Mortgage Portfolio Performance
reflected loan paydowns. As of December 31, 2019, 4% of the
outstanding balance of the junior lien mortgage portfolio was
associated with loans that had a combined loan to value (CLTV)
ratio in excess of 100%. Of those junior lien mortgages with a
CLTV ratio in excess of 100%, 3% were 30 days or more past due.
CLTV means the ratio of the total loan balance of first mortgages
and junior lien mortgages (including unused line amounts for
credit line products) to property collateral value. The unsecured
portion (the outstanding amount that was in excess of the most
recent property collateral value) of the outstanding balances of
these loans totaled 1% of the junior lien mortgage portfolio at
December 31, 2019. 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.
Outstanding balance
% of loans 30 days
or more past due
Loss (recovery) rate
December 31,
December 31,
Year ended December 31,
(in millions)
California
New Jersey
Florida
Virginia
Pennsylvania
Other
Total
PCI
$
2019
8,054
2,744
2,600
1,712
1,674
12,712
29,496
13
Total junior lien mortgage portfolio
$
29,509
2019
1.62%
2.74
2.93
1.97
2.16
2.05
2.07
2018
1.67
2.57
2.73
1.91
2.10
2.12
2.08
2019
(0.44)
0.07
(0.09)
(0.02)
(0.10)
(0.18)
(0.21)
2018
(0.46)
0.25
—
0.19
0.15
(0.07)
(0.11)
2018
9,338
3,152
3,140
2,020
1,929
14,802
34,381
17
34,398
Wells Fargo & Company
67
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 available during the draw
period of (1) interest-only or (2) 1.5% of outstanding principal
balance plus accrued interest. As of December 31, 2019, lines of
credit in a draw period primarily used the interest-only option.
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 2019, approximately 46% of these borrowers paid
only the minimum amount due and approximately 51% 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 65%
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. At December 31, 2019, $488 million, or 2%, of
lines in their draw period were 30 days or more past due,
compared with $399 million, or 4%, of amortizing lines of credit.
Included in the amortizing amounts in Table 26 is $46 million of
end-of-term balloon payments which were past due. The
unfunded credit commitments for junior and first lien lines
totaled $58.9 billion at December 31, 2019.
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
% of portfolios
Outstanding balance
December 31, 2019
2020
$
$
29,496
10,384
39,880
100%
334
139
473
1
Scheduled end of draw/term
2025 and
2021
863
414
1,277
3
2022
3,308
1,618
4,926
12
2023
2,276
1,214
3,490
9
2024
1,850
956
2,806
7
thereafter (1)
Amortizing
11,754
4,328
16,082
40
9,111
1,715
10,826
28
(1)
Substantially all lines and loans are scheduled to convert to amortizing loans by the end of 2029, with annual scheduled amounts through 2029 ranging from $1.9 billion to $4.8 billion and averaging
$3.2 billion per year.
CREDIT CARDS Our credit card portfolio totaled $41.0 billion at
December 31, 2019, which represented 4% of our total
outstanding loans. The net charge-off rate for our credit card
portfolio was 3.53% for 2019, compared with 3.51% for 2018.
AUTOMOBILE Our automobile portfolio totaled $47.9 billion at
December 31, 2019. The net charge-off rate for our automobile
portfolio was 0.67% for 2019, compared with 1.21% for 2018.
The decrease in the net charge-off rate for 2019, compared with
2018, was driven by lower early losses on higher quality
originations.
OTHER REVOLVING CREDIT AND INSTALLMENT Other revolving
credit and installment loans totaled $34.3 billion at
December 31, 2019, and largely included student and securities-
based loans. Our private student loan portfolio totaled
$10.6 billion at December 31, 2019. The net charge-off rate for
other revolving credit and installment loans was 1.59% for 2019,
compared with 1.53% for 2018.
68
Wells Fargo & Company
NONPERFORMING ASSETS (NONACCRUAL LOANS AND FORECLOSED
ASSETS) Table 27 summarizes nonperforming assets (NPAs) for
each of the last five years. We generally place loans on nonaccrual
status when:
•
the full and timely collection of interest or principal becomes
uncertain (generally based on an assessment of the
borrower’s financial condition and the adequacy of collateral,
if any), such as in bankruptcy or other circumstances;
they are 90 days (120 days with respect to real estate 1-4
family 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.
Table 27: Nonperforming Assets (Nonaccrual Loans and Foreclosed Assets)
Note 1 (Summary of Significant Accounting Policies – Loans)
to Financial Statements in this Report describes our accounting
policy for nonaccrual and impaired loans and foreclosed assets.
For additional information on impaired loans, see Note 6 (Loans
and Allowance for Credit Losses) to Financial Statements in this
Report.
Nonaccrual loans were $5.3 billion at December 31, 2019,
down $1.2 billion from a year ago. Consumer nonaccrual loans
were down $1.2 billion from a year ago predominantly due to a
decrease in real estate 1-4 family mortgage nonaccrual loans,
reflecting broad-based credit improvement, sales of nonaccrual
mortgage loans, and the reclassification of nonaccrual mortgage
loans to MLHFS. Commercial nonaccrual loans increased
$66 million from a year ago, predominantly due to an increase in
commercial and industrial nonaccrual loans, driven by a customer
in the utilities industry, as well as increases in the oil, gas and
pipeline portfolio, partially offset by credit improvement across
various industry categories. Additionally, foreclosed assets
decreased $148 million from December 31, 2018, driven by sales
of commercial assets.
(in millions)
Nonaccrual loans:
Commercial:
Commercial and industrial
Real estate mortgage
Real estate construction
Lease financing
Total commercial
Consumer:
Real estate 1-4 family first mortgage (1)
Real estate 1-4 family junior lien mortgage (1)
Automobile
Other revolving credit and installment
Total consumer
Total nonaccrual loans (2)(3)
As a percentage of total loans
Foreclosed assets:
Government insured/guaranteed (4)
Non-government insured/guaranteed
Total foreclosed assets
Total nonperforming assets
As a percentage of total loans
2019
2018
2017
2016
2015
December 31,
$
$
$
$
1,545
573
41
95
2,254
2,150
796
106
40
3,092
5,346
0.56%
50
253
303
5,649
0.59%
1,486
580
32
90
1,899
628
37
76
3,199
685
43
115
1,363
969
66
26
2,188
2,640
4,042
2,424
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
(1)
(2)
(3)
(4)
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.
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, and $464 million at December 31, 2017, 2016, and 2015, respectively.
Excludes PCI loans because they continue to earn interest income from accretable yield, independent of performance in accordance with their contractual terms.
Consistent with regulatory reporting requirements, foreclosed real estate resulting from government insured/guaranteed loans are classified as nonperforming. Both principal and interest related to
these foreclosed real estate assets are collectible because the loans were predominantly insured by the FHA or guaranteed by the VA. Receivables related to the foreclosure of certain government
guaranteed real estate mortgage loans are excluded from this table and included in Accounts Receivable in Other Assets. For more information on the classification of certain government-
guaranteed mortgage loans upon foreclosure, see Note 1 (Summary of Significant Accounting Policies) to Financial Statements in this Report.
Wells Fargo & Company
69
Risk Management – Credit Risk Management (continued)
Table 28 provides a summary of nonperforming assets
during 2019.
Table 28: Nonperforming Assets by Quarter During 2019
(in millions)
Nonaccrual loans:
Commercial:
Commercial and industrial
Real estate mortgage
Real estate construction
Lease financing
Total commercial
Consumer:
Real estate 1-4 family first mortgage (1)
Real estate 1-4 family junior lien mortgage (1)
Automobile
Other revolving credit and installment
Total consumer
Total nonaccrual loans (2)
Foreclosed assets:
Government insured/guaranteed (3)
Non-government insured/guaranteed
Total foreclosed assets
Total nonperforming assets
Change in NPAs from prior quarter
December 31, 2019
September 30, 2019
June 30, 2019
March 31, 2019
% of
total
loans
Balance
% of
total
loans
Balance
% of
total
loans
Balance
% of
total
loans
Balance
$
1,545
0.44% $
1,539
0.44% $
1,634
0.47% $
1,986
0.57%
0.47
0.21
0.48
0.44
0.73
2.70
0.22
0.12
0.69
0.56
573
41
95
2,254
2,150
796
106
40
3,092
5,346
50
253
303
0.55
0.16
0.37
0.45
0.78
2.66
0.24
0.12
0.73
0.58
669
32
72
2,312
2,261
819
110
43
3,233
5,545
59
378
437
0.60
0.17
0.33
0.48
0.85
2.71
0.25
0.13
0.79
0.62
737
36
63
2,470
2,425
868
115
44
3,452
5,922
68
309
377
0.57
0.16
0.40
0.55
1.06
2.77
0.26
0.14
0.94
0.73
699
36
76
2,797
3,026
916
116
50
4,108
6,905
75
361
436
$
$
5,649
(333)
0.59% $
5,982
0.63% $
6,299
0.66% $
7,341
0.77%
(317)
(1,042)
394
(1)
(2)
(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.
Excludes PCI loans because they continue to earn interest income from accretable yield, independent of performance in accordance with their contractual terms.
Consistent with regulatory reporting requirements, foreclosed real estate resulting from government insured/guaranteed loans are classified as nonperforming. Both principal and interest related to
these foreclosed real estate assets are collectible because the loans were predominantly insured by the FHA or guaranteed by the VA. Receivables related to the foreclosure of certain government
guaranteed real estate mortgage loans are excluded from this table and included in Accounts Receivable in Other Assets. For more information on the classification of certain government-
guaranteed residential mortgage loans upon foreclosure, see Note 1 (Summary of Significant Accounting Policies) to Financial Statements in this Report.
70
Wells Fargo & Company
Table 29 provides an analysis of the changes in nonaccrual
loans.
Table 29: Analysis of Changes in Nonaccrual Loans
$
(in millions)
Commercial nonaccrual loans
Balance, beginning of period
Inflows
Outflows:
Returned to accruing
Foreclosures
Charge-offs
Payments, sales and other
Total outflows
Balance, end of period
Consumer nonaccrual loans
Balance, beginning of period
Inflows
Outflows:
Returned to accruing
Foreclosures
Charge-offs
Payments, sales and other
Total outflows
Balance, end of period
Total nonaccrual loans
$
Dec 31,
2019
2,312
652
(124)
—
(201)
(385)
(710)
2,254
3,233
473
(227)
(29)
(45)
(313)
(614)
3,092
5,346
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.
While nonaccrual loans are not free of loss content, we
believe exposure to loss is significantly mitigated by the
following factors at December 31, 2019:
•
86% of total commercial nonaccrual loans and 99% of total
consumer nonaccrual loans are secured. Of the consumer
nonaccrual loans, 95% are secured by real estate and 88%
have a combined LTV (CLTV) ratio of 80% or less.
losses of $360 million and $941 million have already been
recognized on 19% of commercial nonaccrual loans and 35%
of consumer nonaccrual loans, respectively, in accordance
with our charge-off policies. Once we write down loans to
the net realizable value (fair value of collateral less
estimated costs to sell), we re-evaluate each loan regularly
and record additional write-downs if needed.
71% of commercial nonaccrual loans were current on
interest and 66% of commercial nonaccrual loans were
current on both principal and interest. These commercial
loans were on nonaccrual status because the full or timely
collection of interest or principal had become uncertain.
•
•
Sep 30,
2019
2,470
710
(52)
(78)
(194)
(544)
(868)
Quarter ended
Mar 31,
2019
2,188
1,238
(43)
(15)
(158)
(413)
(629)
Jun 30,
2019
2,797
621
(46)
(2)
(187)
(713)
(948)
2,312
2,470
2,797
3,452
448
(274)
(32)
(44)
(317)
(667)
3,233
5,545
4,108
437
(250)
(34)
(34)
(775)
(1,093)
3,452
5,922
4,308
552
(248)
(42)
(49)
(413)
(752)
4,108
6,905
Year ended Dec 31,
2019
2018
2,188
3,221
(265)
(95)
(740)
(2,055)
(3,155)
2,254
4,308
1,910
(999)
(137)
(172)
(1,818)
(3,126)
3,092
5,346
2,640
2,767
(323)
(12)
(636)
(2,248)
(3,219)
2,188
5,006
2,433
(1,304)
(166)
(292)
(1,369)
(3,131)
4,308
6,496
•
•
of the $1.3 billion of consumer loans in bankruptcy or
discharged in bankruptcy, and classified as nonaccrual,
$916 million were current.
the remaining risk of loss of all nonaccrual loans has been
considered and we believe is adequately covered by the
allowance for loan losses.
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 status at year end) had
been accrued under the original terms, approximately
$361 million of interest would have been recorded as income on
these loans, compared with $316 million actually recorded as
interest income in 2019, versus $446 million and $426 million,
respectively, in 2018.
Wells Fargo & Company
71
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
Government insured/guaranteed
Commercial
Consumer
Total foreclosed assets
Analysis of changes in foreclosed assets
Balance, beginning of period
Net change in government insured/guaranteed (1)
Additions to foreclosed assets (2)
Reductions:
Sales
Write-downs and gains (losses) on sales
Total reductions
Balance, end of period
Dec 31,
2019
Sep 30,
2019
Jun 30,
2019
Mar 31,
2019
Year ended Dec 31,
2019
2018
Quarter ended
$
$
$
50
62
191
303
437
(9)
126
(250)
(1)
(251)
303
59
180
198
437
377
(9)
235
(155)
(11)
(166)
437
68
101
208
377
436
(7)
144
(199)
3
(196)
377
75
124
237
436
451
(13)
193
(205)
10
(195)
436
50
62
191
303
451
(38)
698
(809)
1
(808)
303
88
127
236
451
642
(32)
778
(957)
20
(937)
451
(1)
(2)
Foreclosed government insured/guaranteed loans are temporarily transferred to and held by us as servicer, until reimbursement is received from FHA or VA.
Includes loans moved into foreclosed assets from nonaccrual status, PCI loans transitioned directly to foreclosed assets and repossessed automobiles.
Foreclosed assets at December 31, 2019, included
$222 million of foreclosed residential real estate, of which 23% is
predominantly FHA insured or VA guaranteed and expected to
have minimal or no loss content. The remaining amount of
foreclosed assets has been written down to estimated net
realizable value. Of the $303 million in foreclosed assets at
December 31, 2019, 69% have been in the foreclosed assets
portfolio one year or less.
72
Wells Fargo & Company
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:
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
Table 32: TDRs Balance by Quarter During 2019
(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
$
$
$
2019
1,183
669
36
13
1,901
7,589
1,407
520
81
170
115
9,882
11,783
2,833
1,190
7,760
$
11,783
2018
2017
2016
2015
December 31,
1,623
704
39
56
2,096
901
44
35
2,584
1,119
91
6
2,422
3,076
3,800
10,629
1,639
449
89
154
149
13,109
15,531
4,058
1,299
10,174
15,531
12,080
1,849
356
87
126
194
14,692
17,768
4,801
1,359
11,608
17,768
14,134
2,074
300
85
101
299
16,993
20,793
6,193
1,526
13,074
20,793
1,123
1,456
125
1
2,705
16,812
2,306
299
105
73
402
19,997
22,702
6,506
1,771
14,425
22,702
Dec 31,
2019
Sep 30,
2019
Jun 30,
2019
Mar 31,
2019
$
$
$
1,183
669
36
13
1,901
7,589
1,407
520
81
170
115
9,882
11,783
2,833
1,190
7,760
$
11,783
1,162
598
40
16
1,294
620
43
31
1,740
681
45
46
1,816
1,988
2,512
7,905
1,457
504
82
167
123
10,238
12,054
2,775
1,199
8,080
12,054
8,218
1,550
486
85
159
127
10,625
12,613
3,058
1,209
8,346
12,613
10,343
1,604
473
85
156
136
12,797
15,309
4,037
1,275
9,997
15,309
Table 31 and Table 32 provide information regarding the
recorded investment of loans modified in TDRs. The allowance
for loan losses for TDRs was $1.0 billion and $1.2 billion at
December 31, 2019 and 2018, 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. 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
Wells Fargo & Company
73
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
equivalent, inclusive of consecutive payments made prior to
modification. Loans will also be placed on nonaccrual status, 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.
TDRs of $11.8 billion at December 31, 2019, decreased
$3.7 billion from December 31, 2018, due to paydowns, as well
as a reclassification of $1.7 billion in real estate 1-4 family first
mortgage TDR loans to MLHFS.
Table 33: Analysis of Changes in TDRs
(in millions)
Commercial TDRs
Balance, beginning of period
$
Inflows (1)
Outflows
Charge-offs
Foreclosure
Payments, sales and other (2)
Balance, end of period
Consumer TDRs
Balance, beginning of period
Inflows (1)
Outflows
Charge-offs
Foreclosure
Payments, sales and other (2)
Net change in trial modifications (3)
Balance, end of period
Total TDRs
Dec 31,
2019
Sep 30,
2019
Jun 30,
2019
Mar 31,
2019
2019
2018
Quarter ended
Year ended Dec 31,
1,816
476
(48)
(1)
(342)
1,901
10,238
350
(57)
(61)
(580)
(8)
9,882
$
11,783
1,988
293
(66)
—
(399)
1,816
10,625
360
(56)
(70)
(617)
(4)
10,238
12,054
2,512
232
(37)
—
(719)
1,988
12,797
336
(61)
(74)
(2,364)
(9)
10,625
12,613
2,422
539
(44)
—
(405)
2,512
13,109
439
(60)
(86)
(593)
(12)
12,797
15,309
2,422
1,540
(195)
(1)
(1,865)
1,901
13,109
1,485
(234)
(290)
(4,154)
(34)
9,882
11,783
3,076
1,764
(284)
(15)
(2,119)
2,422
14,692
1,747
(223)
(470)
(2,591)
(46)
13,109
15,531
(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 TDRs that modified in a
prior period.
(2) Other outflows include normal amortization/accretion of loan basis adjustments and loans transferred to held for sale. Occasionally, loans that have been refinanced or restructured at market terms
(3)
qualify as new loans, which are also included as other outflows.
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.
74
Wells Fargo & Company
LOANS 90 DAYS OR MORE PAST DUE AND STILL ACCRUING Loans 90
days or more past due 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, 2019, were down
$46 million, or 5%, from December 31, 2018, due to payments,
other loss mitigation activities, and credit stabilization.
Loans 90 days or more past due and still accruing whose
repayments are predominantly insured by the FHA or
guaranteed by the VA for mortgages were $6.4 billion at
December 31, 2019, down from $7.7 billion at December 31,
2018, due to an improvement in delinquencies, as well as a
reduction in the portfolio.
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.
Table 34: Loans 90 Days or More Past Due and Still Accruing (1)
(in millions)
Total (excluding PCI (2)):
Less: FHA insured/VA guaranteed (3)
Less: Student loans guaranteed under the FFELP (4)
Total, not government insured/guaranteed
By segment and class, not government insured/guaranteed:
Commercial:
Commercial and industrial
Real estate mortgage
Real estate construction
Total commercial
Consumer:
Real estate 1-4 family first mortgage
Real estate 1-4 family junior lien mortgage
Credit card
Automobile
Other revolving credit and installment
Total consumer
Total, not government insured/guaranteed
2019
7,285
6,352
—
933
47
31
—
78
112
32
546
78
87
855
933
$
$
$
$
2018
8,704
7,725
—
979
43
51
—
94
124
32
513
114
102
885
979
December 31,
2017
11,532
10,475
—
1,057
2016
11,437
10,467
3
967
2015
13,866
12,863
26
977
26
23
—
49
213
60
492
143
100
1,008
1,057
28
36
—
64
170
56
452
112
113
903
967
97
13
4
114
220
65
397
79
102
863
977
(1)
(2)
(3)
(4)
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 and $4 million at December 31, 2017, 2016 and 2015, respectively.
PCI loans totaled $102 million, $370 million, $1.4 billion, $2.0 billion and $2.9 billion at December 31, 2019, 2018, 2017, 2016 and 2015, respectively.
Represents loans whose repayments are predominantly insured by the FHA or guaranteed by the VA.
Represents loans whose repayments are largely guaranteed by agencies on behalf of the U.S. Department of Education under the Federal Family Education Loan Program (FFELP). All remaining
student loans guaranteed under the FFELP were sold as of March 31, 2017.
Wells Fargo & Company
75
Risk Management – Credit Risk Management (continued)
NET CHARGE-OFFS
Table 35: Net Charge-offs
($ in millions)
2019
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
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
Total
$
$
$
607
6
(12)
51
652
(50)
(66)
1,370
306
550
2,110
2,762
423
(28)
(13)
47
429
(88)
(40)
1,292
584
567
2,315
2,744
Year ended
December 31,
December 31,
September 30,
June 30,
Net loan
charge-
offs
% of
avg.
loans
Net loan
charge-
offs
% of
Net loan
% of
Net loan
% of
Net loan
avg.
loans (1)
charge-
offs
avg.
loans (1)
charge-
offs
avg.
loans (1)
charge-
offs
Quarter ended
March 31,
% of
avg.
loans (1)
0.17 % $
168
0.19 % $
147
0.17 % $
159
0.18 % $
133
—
(0.06)
0.26
0.13
(0.02)
(0.21)
3.53
0.67
1.59
0.48
0.29 % $
0.13 % $
(0.02)
(0.05)
0.24
0.09
(0.03)
(0.11)
3.51
1.21
1.53
0.52
0.29 % $
4
—
31
203
0.01
—
0.63
0.16
(8)
(8)
8
139
(0.02)
(0.14)
0.17
0.11
(3)
—
(5)
(0.01)
(16)
(0.20)
(22)
(0.28)
350
87
148
566
769
132
(12)
(1)
13
132
(22)
(10)
338
133
150
589
721
3.48
0.73
1.71
0.51
0.32 % $
319
76
138
506
645
3.22
0.65
1.60
0.46
0.27 % $
0.15 % $
148
0.18 % $
(0.04)
(0.01)
0.26
0.10
(0.03)
(0.11)
3.54
1.16
1.64
0.53
0.30 % $
(1)
(2)
7
152
(25)
(9)
299
130
133
528
680
—
(0.04)
0.14
0.12
(0.04)
(0.10)
3.22
1.10
1.44
0.47
0.29 % $
4
(2)
4
165
(30)
(19)
349
52
136
488
653
58
—
(6)
15
67
(23)
(13)
323
113
135
535
602
0.01
(0.04)
0.09
0.13
(0.04)
(0.24)
3.68
0.46
1.56
0.45
0.28 % $
0.07 % $
—
(0.09)
0.32
0.05
(0.03)
(0.13)
3.61
0.93
1.44
0.49
0.26 % $
6
(2)
8
145
0.15 %
0.02
(0.04)
0.17
0.11
(12)
(0.02)
(9)
(0.10)
352
91
128
550
695
85
(15)
(4)
12
78
(18)
(8)
332
208
149
663
741
3.73
0.82
1.47
0.51
0.30 %
0.10 %
(0.05)
(0.07)
0.25
0.06
(0.03)
(0.09)
3.69
1.64
1.60
0.60
0.32 %
(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 2019 and 2018. Net charge-offs in 2019 were $2.8 billion
(0.29% of average total loans outstanding), compared with
$2.7 billion (0.29%) in 2018.
The increase in commercial and industrial net charge-offs in
2019 was driven by lower recoveries, and higher losses in our oil
and gas portfolio. The decrease in consumer net charge-offs in
2019 was driven by lower losses, predominantly in the
automobile portfolio, partially offset by a slight increase in losses
in the credit card portfolio.
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 for credit
losses 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.
76
Wells Fargo & Company
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)
(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
Dec 31, 2019
Dec 31, 2018
Dec 31, 2017
Dec 31, 2016
Dec 31, 2015
Loans
as %
of total
loans
ACL
Loans
as %
of total
loans
ACL
Loans
as %
of total
loans
ACL
Loans
as %
of total
loans
ACL
Loans
as %
of total
loans
ACL
$
3,600
37% $ 3,628
37% $ 3,752
35% $ 4,560
34% $ 4,231
1,236
1,079
330
6,245
692
247
2,252
459
561
4,211
13
2
2
54
30
3
4
5
4
1,282
1,200
307
6,417
750
431
2,064
475
570
13
2
2
54
30
3
4
5
4
46
4,290
46
1,374
1,238
268
6,632
1,085
608
1,944
1,039
652
5,328
13
3
2
53
30
4
4
5
4
1,320
1,294
220
7,394
1,270
815
1,605
817
639
14
2
2
52
29
5
4
6
4
1,264
1,210
167
6,872
1,895
1,223
1,412
529
581
33%
13
3
1
50
30
6
4
6
4
$ 10,456
100% $ 10,707
100% $ 11,960
100% $ 12,540
100% $ 12,512
100%
Dec 31, 2019
Dec 31, 2018
Dec 31, 2017
Dec 31, 2016
Dec 31, 2015
47
5,146
48
5,640
50
$
$
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
9,551
905
10,456
0.99%
346
1.09
196
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
In addition to the allowance for credit losses, there was
$387 million at December 31, 2019, and $480 million at
December 31, 2018, of nonaccretable difference to absorb
losses on PCI loans of $568 million at December 31, 2019, and
$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. 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 $251 million, or
2%, in 2019, due to improvement in the credit quality of our
commercial and residential real estate portfolios, partially offset
by an increase in the allowance for the credit card portfolio
reflecting increased volume and a shift in portfolio mix. Total
provision for credit losses was $2.7 billion in 2019 and
$1.7 billion in 2018. The provision for credit losses was
$75 million less than net charge-offs in 2019, reflecting the
same changes mentioned above for the allowance for credit
losses, compared with $1.0 billion less than net charge-offs in
2018. For a discussion of our 2018 provision for credit losses
compared with 2017, see the “Risk Management – Credit Risk
Management – Allowance for Credit Losses” section of our
Annual Report on Form 10-K for the year ended December 31,
2018.
We believe the allowance for credit losses of $10.5 billion at
December 31, 2019, was appropriate to cover credit losses
inherent in the loan portfolio, including unfunded credit
commitments, at that date. The entire allowance for credit losses
is available to absorb credit losses inherent in the total loan
portfolio. The allowance for credit losses is subject to change and
reflects existing factors as of the date of determination,
including economic or market conditions and ongoing internal
and external examination processes. Due to the sensitivity of the
allowance for credit losses to changes in the economic and
business environment, it is possible that we will incur incremental
credit losses not anticipated as of the balance sheet date. Future
amounts of the allowance for credit losses will be based on a
variety of factors, including loan growth, portfolio performance
Wells Fargo & Company
77
Risk Management – Credit Risk Management (continued)
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.
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 Securities and Exchange
Commission (SEC), (4) if required by the securitization
documents, calculate distributions and loss allocations on the
mortgage-backed securities, (5) prepare tax and information
returns of the securitization trust, and (6) advance amounts
required by non-affiliated servicers who fail to perform their
advancing obligations.
Each agreement under which we act as servicer or master
servicer generally specifies a standard of responsibility for
actions we take in such capacity and provides protection against
expenses and liabilities we incur when acting in compliance with
the specified standard. For example, private label securitization
agreements under which we act as servicer or master servicer
typically provide that the servicer and the master servicer are
entitled to indemnification by the securitization trust for taking
action or refraining from taking action in good faith or for errors
in judgment. However, we are not indemnified, but rather are
required to indemnify the securitization trustee, against any
failure by us, as servicer or master servicer, to perform our
servicing obligations or against any of our acts or omissions that
involve willful misfeasance, bad faith or gross negligence in the
performance of, or reckless disregard of, our duties. In addition, if
we commit a material breach of our obligations as servicer or
master servicer, we may be subject to termination if the breach is
not cured within a specified period following notice, which can
generally be given by the securitization trustee or a specified
percentage of security holders. Whole loan sale contracts under
which we act as servicer generally include similar provisions with
respect to our actions as servicer. The standards governing
servicing in GSE-guaranteed securitizations, and the possible
remedies for violations of such standards, vary, and those
standards and remedies are determined by servicing guides
maintained by the GSEs, contracts between the GSEs and
individual servicers and topical guides published by the GSEs
from time to time. Such remedies could include indemnification
or repurchase of an affected mortgage loan. In addition, in
connection with our servicing activities, we could become subject
to consent orders and settlement agreements with federal and
state regulators for alleged servicing issues and practices. In
general, these can require us to provide customers with loan
modification relief, refinancing relief, and foreclosure prevention
78
Wells Fargo & Company
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, 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 Committee (Corporate ALCO), which
consists of management from finance, risk and business groups,
to oversee these risks and provide periodic reports 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
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.
•
•
•
•
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.
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
$
(1.8) - (1.3)
1.5 - 2.0
1.1 - 1.6
($ in billions)
Base
First Year of
Forecasting
Horizon
Net Interest Income
Sensitivity to Base
Scenario
Key Rates at Horizon
End
Fed Funds Target
1.87 %
10-year CMT (1)
1.97
0.87
0.97
2.87
2.97
3.87
3.97
Second Year of
Forecasting
Horizon
Net Interest Income
Sensitivity to Base
Scenario
Key Rates at Horizon
End
$
(4.4) - (3.9)
2.0 - 2.5
2.7 - 3.2
We assess interest rate risk by comparing outcomes under
10-year CMT (1)
2.36
Fed Funds Target
2.25 %
1.25
1.36
3.25
3.36
4.25
4.36
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
(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 banking activities, and may move in the
opposite direction of our net interest income. Mortgage
originations generally decline in response to higher interest rates
and generally increase, particularly refinancing activity, in
response to lower interest rates. 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
Wells Fargo & Company
79
Risk Management – Asset/Liability Management (continued)
reduce treasury management deposit service fees. Additionally,
for the trading portfolio, our trading assets are (before the
effects of certain economic hedges) generally less sensitive to
changes in interest rates than the related funding liabilities. As a
result, net interest income from the trading portfolio contracts
and expands as interest rates rise and fall, respectively. The
impact to net interest income does not include the fair value
changes of trading securities and loans, which, along with the
effects of related 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, 2019, and December 31, 2018, are presented in
Note 18 (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
2017, 2018, and 2019, 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 and 2019 to MLHFS in support of future
issuances of private label residential mortgage backed securities
(RMBS). We issued $2.4 billion and $441 million of RMBS in 2019
and 2018, respectively.
We initially measure all of our MSRs at fair value and carry
substantially all of them at fair value depending on our strategy
for managing interest rate risk. Under this method, the MSRs are
recorded at fair value at the time we sell or securitize the related
mortgage loans. The carrying value of MSRs carried at fair value
reflects changes in fair value at the end of each quarter and
changes are included in net servicing income, a component of
mortgage banking noninterest income. If the fair value of the
MSRs increases, income is recognized; if the fair value of the
MSRs decreases, a loss is recognized. We use a dynamic and
sophisticated model to estimate the fair value of our MSRs and
periodically benchmark our estimates to independent appraisals.
The valuation of MSRs can be highly subjective and involve
complex judgments by management about matters that are
inherently unpredictable. See “Critical Accounting Policies –
Valuation of Residential Mortgage Servicing Rights” section in
this Report for additional information. Changes in interest rates
influence a variety of significant assumptions included in the
periodic valuation of MSRs, including prepayment speeds,
expected returns and potential risks on the servicing asset
portfolio, costs to service, the value of escrow balances and other
servicing valuation elements. For key economic assumptions and
the sensitivity of the fair value of MSRs, see Table 10.6 in
Note 10 (Securitizations and Variable Interest Entities) to
Financial Statements in this Report.
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
80
Wells Fargo & Company
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 2019, our economic hedging strategy
primarily 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. Hedge results may also be impacted as the
overall level of hedges changes as interest rates change, or
as there are other changes in the market for mortgage
forwards that may affect the implied carry on the MSRs. For
example, the hedge-carry income on our economic hedges
for the MSRs did not continue at levels consistent with 2018
as the flat to inverted yield curve resulted in negative hedge
carry in 2019.
The total carrying value of our residential and commercial
MSRs was $12.9 billion and $16.1 billion at December 31, 2019
and 2018, respectively. The weighted-average note rate on our
portfolio of loans serviced for others was 4.25% and 4.32% at
December 31, 2019 and 2018, respectively. The carrying value of
our total MSRs represented 0.79% and 0.94% of mortgage loans
serviced for others at December 31, 2019 and 2018,
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
Wells Fargo & Company
81
Risk Management – Asset/Liability Management (continued)
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 exposure. This applies to implied volatility risk,
basis risk, and market liquidity risk. It also includes price risk in
the trading book, mortgage servicing rights and the 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 IRM, has primary
oversight responsibility for market risk. The Market and
Counterparty Risk Management function reports into the CRO
and also provides periodic reports related to market risk to the
Board’s Finance 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 risk 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.
82
Wells Fargo & Company
Table 38 shows the Company’s Trading General VaR by risk
category. Our Trading General VaR uses a historical simulation
model which assumes that historical changes in market values
are representative of the potential future outcomes and
measures the expected earnings loss of the Company over a
1-day time interval at a 99% confidence level. Our historical
simulation model is based on equally weighted data from a
12-month historical look-back period. We believe using a
12-month look-back period helps ensure the Company’s VaR is
responsive to current market conditions. The 99% confidence
level equates to an expectation that the Company would incur
single-day trading losses in excess of the VaR estimate on
average once every 100 trading days.
Average Company Trading General VaR was $22 million for
the year ended December 31, 2019, compared with $15 million
for the year ended December 31, 2018. The increase in average
Company Trading General VaR for the year ended December 31,
2019, was mainly driven by changes in portfolio composition.
Table 38: Trading 1-Day 99% General VaR by Risk Category
(in millions)
Company Trading General VaR Risk Categories
Credit
Interest rate
Equity
Commodity
Foreign exchange
Diversification benefit (1)
December 31, 2019
Year ended
December 31, 2018
Period
end
Average
Low
High
Period
end
Average
Low
High
$
15
14
5
2
1
17
27
5
2
1
11
9
4
1
1
(13)
(30)
30
49
11
6
1
10
6
2
1
0
55
52
16
4
3
18
28
5
2
1
(33)
21
16
17
8
1
1
(28)
15
Company Trading General VaR
$
24
22
(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 and observable price changes.
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, capital needs, the
viability of its business model, our exit strategy, and observable
price changes that are similar to the investments held.
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
Wells Fargo & Company
83
Risk Management – Asset/Liability Management (continued)
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 17 (Legal Actions) to Financial Statements in this Report.
As part of our business to support our customers, we trade
public equities, listed/OTC equity derivatives and convertible
bonds. We have parameters that govern these activities. We also
have marketable equity securities 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 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. 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 We are subject to a rule, issued by the FRB,
OCC and FDIC, that includes 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 (IDIs) with total assets
greater than $10 billion. In addition, rules issued by the FRB
Table 40: Primary Sources of Liquidity
impose enhanced liquidity management standards on large bank
holding companies (BHC) such as Wells Fargo.
The FRB, OCC and FDIC have proposed a rule that would
implement a stable funding requirement, the net stable funding
ratio (NSFR), which would require large banking organizations,
such as Wells Fargo, to maintain a sufficient amount of stable
funding in relation to their assets, derivative exposures and
commitments over a one-year horizon period.
Liquidity Coverage Ratio As of December 31, 2019, 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
(1)
(2)
Excludes excess HQLA at Wells Fargo Bank, N.A.
Net of applicable haircuts required under the LCR rule.
Average for Quarter ended
December 31, 2019
$ 373,362
312,019
120%
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 IDIs 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.
(in millions)
Total
Encumbered
Unencumbered
Total
Encumbered
Unencumbered
Interest-earning deposits with banks
Debt securities of U.S. Treasury and federal agencies
Mortgage-backed securities of federal agencies (1)
Total
$
119,493
61,099
258,589
$
439,181
—
3,107
41,135
44,242
119,493
149,736
57,992
57,688
217,454
244,211
394,939
451,635
—
1,504
35,656
37,160
149,736
56,184
208,555
414,475
(1)
Included in encumbered securities at December 31, 2019, were securities with a fair value of $263 million which were purchased in December 2019, but settled in January 2020.
December 31, 2019
December 31, 2018
84
Wells Fargo & Company
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 137% of total loans at
December 31, 2019, and 135% at December 31, 2018.
Additional funding is provided by long-term debt and short-
term borrowings. Table 41 shows selected information for short-
term borrowings, which generally mature in less than 30 days.
For additional information, see Note 14 (Short-Term Borrowings)
to Financial Statements in this Report.
Table 41: Short-Term Borrowings
(in millions)
Balance, period end
Federal funds purchased and securities sold under agreements to repurchase
Other short-term borrowings
Total
Average daily balance for period
Federal funds purchased and securities sold under agreements to repurchase
Other short-term borrowings
Total
Maximum month-end balance for period
Dec 31,
2019
Sep 30,
2019
Jun 30,
2019
Mar 31,
2019
Dec 31,
2018
Quarter ended
$
92,403
12,109
$
104,512
$
103,614
12,335
$
115,949
110,399
13,509
123,908
109,499
12,343
121,842
102,560
12,784
115,344
102,557
12,197
114,754
93,896
12,701
92,430
13,357
106,597
105,787
95,721
12,930
93,483
12,479
108,651
105,962
Federal funds purchased and securities sold under agreements to repurchase (1)
Other short-term borrowings (2)
$
111,727
12,708
110,399
13,509
105,098
12,784
97,650
14,129
93,918
13,357
(1)
(2)
Highest month-end balance in each of the last five quarters was in October, September, May and January 2019, and November 2018.
Highest month-end balance in each of the last five quarters was in October, September, June, and February 2019, and December 2018.
Long-Term Debt 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. We issue long-
term debt in a variety of maturities and currencies to achieve
cost-efficient funding and to maintain an appropriate maturity
profile. 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. We issued $53.4 billion of long-term debt in
2019 and $9.7 billion in January and February of 2020. For
additional information, see Note 15 (Long-Term Debt) to
Financial Statements in this Report.
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,
Table 42: Credit Ratings as of December 31, 2019
Moody’s
S&P Global Ratings
Fitch Ratings, Inc.
DBRS Morningstar
liquidity, asset quality, business mix, the level and quality of
earnings, and rating agency assumptions regarding the
probability and extent of federal financial assistance or support
for certain large financial institutions. Adverse changes in these
factors could result in a reduction of our credit rating; however,
our debt securities do not contain credit rating covenants.
On October 21, 2019, DBRS Morningstar confirmed the
Company’s ratings and maintained the stable trend for all
ratings. On December 16, 2019, Fitch Ratings, Inc., affirmed the
Company’s ratings and maintained the stable outlook for all
ratings. Both the Parent and Wells Fargo Bank, N.A., remain
among the highest-rated financial firms in the United States.
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 18 (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, 2019, 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)
Wells Fargo & Company
85
coordinate an enterprise-wide process for managing outreach
and communications with our customers, and (x) implement a
process to escalate key risks. When assessing risks associated
with the transition away from IBORs, the LTO is reviewing both
orderly and disorderly transition scenarios.
In an effort to mitigate the risks associated with a transition
away from IBORs, the LTO is in the process of implementing the
following initiatives: (i) compiling an enterprise contract
inventory of IBOR-related terms, (ii) implementing more robust
fallback language and disclosures related to LIBOR transition, (iii)
developing a plan to amend legacy contracts to reference
alternative reference rates, (iv) enhancing systems to support
new fallback language and new products linked to alternative
reference rates, (v) preparing internal and external
communications regarding an IBOR transition, (vi) developing
internal guidance focused on issues related to IBORs and
alternative reference rate products, and (vii) evaluating policies
and procedures in light of the transition away from LIBOR and
other IBORs and the introduction of new products linked to
alternative reference rates.
In addition, the Company is actively working with regulators,
industry working groups (such as the ARRC) and trade
associations that are developing guidance to facilitate an orderly
transition away from the use of LIBOR. We continue to assess
the risks and related impacts associated with a transition away
from IBORs. 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.
Although the Company did not issue any long-term debt
with an interest rate indexed to the Secured Overnight Financing
Rate (SOFR) in 2019, we did issue $1.0 billion of long-term debt
indexed to SOFR in 2018. SOFR is published by the Federal
Reserve Bank of New York as an alternative to U.S. dollar LIBOR
and is a broad measure of the cost of borrowing cash overnight
collateralized by U.S. Treasury securities.
Risk Management – Asset/Liability Management (continued)
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.
LIBOR TRANSITION Due to uncertainty surrounding the suitability
and sustainability of the London Interbank Offered Rate (LIBOR),
central banks and global regulators have called for financial
market participants to prepare for the discontinuation of LIBOR
by the end of 2021. LIBOR is a widely-referenced benchmark
rate, which is published in five currencies and a range of tenors,
and seeks to estimate the cost at which banks can borrow on an
unsecured basis from other banks. We have a significant number
of assets and liabilities referenced to LIBOR and other interbank
offered rates (IBORs) such as commercial loans, adjustable-rate
mortgage loans, derivatives, debt securities, and long-term debt.
As of December 31, 2019, we had over $500 billion of assets,
consisting mostly of commercial loans, over $80 billion of
liabilities, and over $400 billion of off-balance sheet
commitments linked to IBORs. These amounts exclude derivative
assets and liabilities on our consolidated balance sheet. As of
December 31, 2019, the notional amount of our IBOR-linked
interest rate derivative contracts was over $10 trillion, of which
over $8 trillion related to contracts with central counterparty
clearinghouses. Each of the IBOR-linked amounts referenced
above will vary in future periods as current contracts expire with
potential replacement contracts using either IBOR or an
alternative reference rate. As of December 31, 2019, U.S. dollar
LIBOR represented substantially all of the IBOR-linked amounts
referenced above; however, we had exposure to all primary
IBORs.
Accordingly, we established a LIBOR Transition Office (LTO)
in February 2018, with senior management and Board oversight.
The LTO is responsible for developing a coordinated strategy to
transition the IBOR-linked contracts and processes across Wells
Fargo to alternative reference rates and serves as primary
conduit between Wells Fargo and relevant industry groups, such
as the Alternative Reference Rates Committee (ARRC). Among
other activities, the program structure created by the LTO is
designed to (i) identify the types of exposures (e.g., products,
systems, models) and risks associated with the transition, (ii)
assess the provisions in our contracts that could apply in
connection with the transition, (iii) incorporate more robust
IBOR fallback language (contractual provisions that provide for
transition to alternative reference rates upon defined trigger
events) into new IBOR-linked product contracts, (iv) coordinate
alternative reference rate product design, (v) appraise
operational and infrastructure enhancements necessary to use
alternative reference rates, (vi) facilitate systems and application
revisions, including model development and validation, (vii)
assess the funding issues, basis risk, and other finance,
accounting, and tax impacts of transitioning away from IBORs,
(viii) develop plans to minimize negative financial outcomes, (ix)
86
Wells Fargo & Company
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
$8.5 billion from December 31, 2018, predominantly from
Wells Fargo net income of $19.5 billion, less common and
preferred stock dividends of $9.9 billion. During 2019, we issued
48.8 million shares of common stock, excluding conversions of
preferred shares. During 2019, we repurchased 502.4 million
shares of common stock at a cost of $24.5 billion. The amount of
our repurchases are subject to various factors as discussed in the
“Securities Repurchases” section below. For additional
information about share repurchases, see Note 1 (Summary of
Significant Accounting Policies) to Financial Statements in this
Report.
In third quarter 2019, we redeemed $1.6 billion of our
Preferred Stock, Series K. In January 2020, we issued $2.0 billion
of our Preferred Stock, Series Z. In February 2020, we announced
a redemption of the remaining outstanding shares of our
Preferred Stock, Series K, and a partial redemption of our
Preferred Stock, Series T. For more information, see Note 20
(Preferred Stock) to Financial Statements in this Report.
Regulatory Capital Guidelines
The Company and each of our IDIs 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 rules issued by federal banking regulators to
implement Basel III capital requirements for U.S. banking
organizations. 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 9.00%,
comprised of a 4.50% minimum requirement plus a capital
conservation buffer of 2.50% and for us, as a global
systemically important bank (G-SIB), a capital surcharge of
2.00%;
a minimum tier 1 capital ratio of 10.50%, comprised of a
6.00% minimum requirement plus the capital conservation
buffer of 2.50% and the G-SIB capital surcharge of 2.00%;
a minimum total capital ratio of 12.50%, comprised of a
8.00% minimum requirement plus the capital conservation
buffer of 2.50% and the G-SIB capital surcharge of 2.00%;
a potential countercyclical buffer of up to 2.50% to be
added to the minimum capital ratios, which 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; and
a minimum tier 1 leverage ratio of 4.00%.
•
•
•
•
The Basel III capital requirements for calculating CET1 and
tier 1 capital, along with risk-weighted assets (RWAs), are fully
phased-in. However, the requirements for determining tier 2
and total capital are still in accordance with Transition
Requirements and 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
and an Advanced Approach applicable to certain institutions,
including Wells Fargo. Accordingly, in the assessment of our
capital adequacy, we must report the lower of our CET1, tier 1
and total capital ratios calculated under the Standardized
Approach and under the Advanced Approach.
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 2.50% capital
conservation buffer under the Standardized Approach,
whereas the stress leverage buffer would be added to the
current 4.00% minimum tier 1 leverage ratio.
As a G-SIB, we are also subject to the FRB’s rule
implementing the additional capital surcharge of between
1.00-4.50% on the minimum capital requirements of 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. Because the G-SIB
capital surcharge is calculated annually based on data that can
differ over time, the amount of the surcharge is subject to
change in future years.
The tables that follow provide information about our risk-
based capital and related ratios as calculated under Basel III
capital guidelines. Although we continue to report certain capital
amounts and ratios in accordance with Transition Requirements
for banking industry regulatory reporting purposes, we are
managing our capital on a fully phased-in basis. For information
about our capital requirements calculated in accordance with
Transition Requirements, see Note 29 (Regulatory and Agency
Capital Requirements) to Financial Statements in this Report.
Wells Fargo & Company
87
Capital Management (continued)
Table 43 summarizes our CET1, tier 1 capital, total capital,
RWAs and capital ratios on a fully phased-in basis at
December 31, 2019 and 2018.
Table 43: Capital Components and Ratios (Fully Phased-In) (1)
(in millions, except ratios)
Common Equity Tier 1
Tier 1 Capital
Total Capital (2)
Risk-Weighted Assets
Common Equity Tier 1 Capital Ratio
Tier 1 Capital Ratio
Total Capital Ratio (2)
December 31, 2019
December 31, 2018
Required
Minimum
Capital Ratios
Advanced
Approach
Standardized
Approach
Advanced
Approach
Standardized
Approach
$
138,760
158,949
187,813
138,760
158,949
195,703
146,363
167,866
198,103
146,363
167,866
206,346
1,230,066
1,245,853
1,177,350
1,247,210
9.00%
10.50
12.50
11.28
12.92
15.27 *
11.14 *
12.76 *
15.71
12.43
14.26
16.83
11.74 *
13.46 *
16.54 *
(A)
(B)
(C)
(D)
(A)/(D)
(B)/(D)
(C)/(D)
*
(1)
(2)
Denotes the lowest capital ratio as determined under the Advanced and Standardized Approaches.
See Table 44 for information regarding the calculation and components of CET1, tier 1 capital, total capital and RWAs.
The 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 our fully phased-in total capital amounts, including a corresponding reconciliation
to GAAP financial measures.
88
Wells Fargo & Company
Table 44 provides information regarding the calculation and
composition of our risk-based capital under the Advanced and
Standardized Approaches at December 31, 2019 and
December 31, 2018.
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)
Goodwill and other intangibles on nonmarketable equity securities (included in other assets)
Applicable deferred taxes related to goodwill and other intangible assets (1)
Other
Common Equity Tier 1
Common Equity Tier 1
Preferred stock
Additional paid-in capital on ESOP preferred stock
Unearned ESOP shares
Other
Total Tier 1 capital
Long-term debt and other instruments qualifying as Tier 2
Qualifying allowance for credit losses (2)
Other
Total Tier 2 capital (Fully Phased-In)
Effect of Transition Requirements
Total Tier 2 capital (Transition Requirements)
Total qualifying capital (Fully Phased-In)
Total Effect of Transition Requirements
Total qualifying capital (Transition Requirements)
Risk-Weighted Assets (RWAs) (3)(4):
Credit risk
Market risk
Operational risk
Total RWAs
December 31, 2019
December 31, 2018
Advanced
Approach
Standardized
Approach
$
187,984
187,984
Advanced
Approach
197,066
Standardized
Approach
197,066
(21,549)
(71)
1,143
(838)
166,669
(26,390)
(437)
(2,146)
810
254
138,760
138,760
21,549
71
(1,143)
(288)
158,949
26,515
2,566
(217)
28,864
520
29,384
187,813
520
188,333
790,784
35,644
403,638
(21,549)
(71)
1,143
(838)
166,669
(26,390)
(437)
(2,146)
810
254
138,760
138,760
21,549
71
(1,143)
(288)
158,949
26,515
10,456
(217)
36,754
520
37,274
195,703
520
196,223
1,210,209
35,644
—
(23,214)
(95)
1,502
(900)
174,359
(26,418)
(559)
(2,187)
785
383
146,363
146,363
23,214
95
(1,502)
(304)
167,866
27,946
2,463
(172)
30,237
695
30,932
198,103
695
198,798
803,273
45,964
328,113
(23,214)
(95)
1,502
(900)
174,359
(26,418)
(559)
(2,187)
785
383
146,363
146,363
23,214
95
(1,502)
(304)
167,866
27,946
10,706
(172)
38,480
695
39,175
206,346
695
207,041
1,201,246
45,964
—
1,230,066
1,245,853
1,177,350
1,247,210
(A)
(B)
(A)+(B)
$
$
$
$
$
$
(1)
(2)
(3)
(4)
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.
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 0.60% of
Advanced credit RWAs, and under the Standardized Approach, the allowance for credit losses is includable in Tier 2 Capital up to 1.25% of Standardized credit RWAs, with any excess allowance for
credit losses being deducted from total RWAs.
RWAs calculated under the Advanced Approach utilize a risk-sensitive methodology, which relies upon the use of internal credit models based upon our experience with internal rating grades.
Advanced Approach also includes an operational risk component, which reflects the risk of operating loss resulting from inadequate or failed internal processes or systems.
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.
Wells Fargo & Company
89
Capital Management (continued)
Table 45 presents the changes in Common Equity Tier 1
under the Advanced Approach for the year ended December 31,
2019.
Table 45: Analysis of Changes in Common Equity Tier 1 (Advanced Approach)
(in millions)
Common Equity Tier 1 at December 31, 2018
Net income applicable to common stock
Common stock dividends
Common stock issued, repurchased, and stock compensation-related items
Changes in cumulative other comprehensive income
Cumulative effect from change in accounting policies (1)
Goodwill
Certain identifiable intangible assets (other than MSRs)
Goodwill and other intangibles on nonmarketable equity securities (included in other assets)
Applicable deferred taxes related to goodwill and other intangible assets (2)
Other
Change in Common Equity Tier 1
Common Equity Tier 1 at December 31, 2019
$
146,363
17,938
(8,444)
(21,719)
4,544
(11)
27
122
41
26
(127)
(7,603)
$
138,760
(1)
(2)
Effective January 1, 2019, we adopted Accounting Standards Update (ASU) 2016-02 – Leases (Topic 842) and subsequent related Updates, ASU 2017-08 – Receivables – Nonrefundable Fees and
Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities. See Note 1 (Summary of Significant Accounting Policies) for more information.
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, 2019.
Table 46: Analysis of Changes in RWAs
(in millions)
RWAs at December 31, 2018
Net change in credit risk RWAs
Net change in market risk RWAs
Net change in operational risk RWAs
Total change in RWAs
RWAs at December 31, 2019
Advanced Approach
Standardized Approach
1,177,350
1,247,210
(12,489)
(10,320)
75,525
52,716
8,963
(10,320)
—
(1,357)
1,230,066
1,245,853
$
$
90
Wells Fargo & Company
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,
goodwill, certain identifiable intangible assets (other than MSRs)
and goodwill and other intangibles on nonmarketable equity
securities, 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; and
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,
2019
Dec 31,
2018
Dec 31,
2017
Dec 31,
2019
Dec 31,
2018
Dec 31,
2017
$ 187,984
197,066
208,079
197,621
203,356
205,654
(21,549)
(23,214)
(25,358)
(22,522)
(24,956)
(25,592)
(71)
1,143
(838)
(95)
1,502
(900)
(122)
1,678
(1,143)
(81)
1,306
(962)
(125)
2,159
(929)
(139)
2,143
(948)
Total common stockholders’ equity
(A)
166,669
174,359
183,134
175,362
179,505
181,118
Adjustments:
Goodwill
(26,390)
(26,418)
(26,587)
(26,409)
(26,453)
(26,629)
Certain identifiable intangible assets (other than MSRs)
(437)
(559)
(1,624)
(493)
(1,088)
(2,176)
Goodwill and other intangibles on nonmarketable equity
securities (included in other assets)
Applicable deferred taxes related to goodwill and other
intangible assets (1)
Tangible common equity
Common shares outstanding
Net income applicable to common stock
Book value per common share
Tangible book value per common share
Return on average common stockholders’ equity (ROE)
Return on average tangible common equity (ROTCE)
(2,146)
(2,187)
(2,155)
(2,174)
(2,197)
(2,184)
810
785
962
792
866
1,570
(B)
(C)
(D)
(A)/(C)
(B)/(C)
(D)/(A)
(D)/(B)
$ 138,506
145,980
153,730
147,078
150,633
151,699
4,134.4
4,581.3
4,891.6
N/A
N/A
N/A
$
N/A
40.31
33.50
N/A
N/A
N/A
38.06
31.86
N/A
N/A
N/A
37.44
31.43
N/A
N/A
$
17,938
20,689
20,554
N/A
N/A
10.23%
12.20
N/A
N/A
11.53
13.73
N/A
N/A
11.35
13.55
(1)
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.
Wells Fargo & Company
91
Capital Management (continued)
SUPPLEMENTARY LEVERAGE RATIO As a BHC, we are required to
maintain a supplementary leverage ratio (SLR) of at least 5.00%
(comprised of a 3.00% minimum requirement plus a
supplementary leverage buffer of 2.00%) to avoid restrictions on
capital distributions and discretionary bonus payments. Our IDIs
are required to maintain a SLR of at least 6.00% to be considered
well-capitalized under applicable regulatory capital adequacy
guidelines. In April 2018, the FRB and OCC proposed rules (the
“Proposed SLR Rules”) that would replace the 2.00%
supplementary leverage buffer with a buffer equal to one-half of
our G-SIB capital surcharge. The Proposed SLR Rules would
similarly tailor the current 6.00% SLR requirement for our IDIs. At
December 31, 2019, our SLR for the Company was 7.07%, and
we also exceeded the applicable SLR requirements for each of
our IDIs. 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: Goodwill and other permitted Tier 1 capital
deductions (net of deferred tax liabilities)
Total adjusted average assets
Plus adjustments for off-balance sheet exposures:
Derivatives (1)
Repo-style transactions (2)
Other (3)
Total off-balance sheet exposures
Quarter ended
December 31, 2019
(A)
$
158,949
1,941,843
28,546
1,913,297
67,645
5,162
261,625
334,432
Total leverage exposure
(B)
$
2,247,729
Supplementary leverage ratio
(A)/(B)
7.07%
(1)
(2)
(3)
Adjustment represents derivatives and collateral netting exposures as defined for
supplementary leverage ratio determination purposes.
Adjustment represents counterparty credit risk for repo-style transactions where Wells
Fargo & Company is the principal (i.e., principal counterparty facing the client).
Adjustment represents credit equivalent amounts of other off-balance sheet exposures
not already included as derivatives and repo-style transactions exposures.
OTHER REGULATORY CAPITAL MATTERS As a G-SIB, we are
required to have a minimum amount of equity and unsecured
long-term debt for purposes of resolvability and resiliency, often
referred to as Total Loss Absorbing Capacity (TLAC). 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) 18.00% of RWAs and (ii) 7.50% 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 2.50% of RWAs plus our applicable G-SIB capital
surcharge calculated under method one plus any applicable
countercyclical buffer to be added to the 18.00% minimum and
(ii) an external TLAC leverage buffer equal to 2.00% of total
leverage exposure to be added to the 7.50% minimum, in order
to avoid restrictions on capital distributions and discretionary
bonus payments. U.S. G-SIBs are also required to have a
minimum amount of eligible unsecured long-term debt equal to
the greater of (i) 6.00% of RWAs plus our applicable G-SIB capital
surcharge calculated under method two and (ii) 4.50% of the
total leverage exposure. Under the Proposed SLR Rules, the
2.00% external TLAC leverage buffer would be replaced with a
buffer equal to one-half of our applicable G-SIB capital
surcharge, and the leverage component for calculating the
minimum amount of eligible unsecured long-term debt would be
modified from 4.50% of total leverage exposure to 2.50% of total
leverage exposure plus one-half of our applicable G-SIB capital
surcharge. As of December 31, 2019, our eligible external TLAC
as a percentage of total risk-weighted assets was 23.28%
compared with a required minimum of 22.00%. 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 capital 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
10.00%, which includes a 2.00% G-SIB capital 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 the “Capital Management –
Regulatory Capital Guidelines – Risk-Based Capital and Risk-
Weighted Assets” section of this Report, the FRB has proposed
including a stress capital buffer to replace the current 2.50%
capital conservation buffer. Under the proposal, it is expected
that the adoption of current expected credit loss (CECL)
accounting would be included in the calculation of the stress
capital buffer. We expect that implementation of the stress
capital buffer may increase the level and volatility of minimum
capital ratio requirements, which may cause our current long-
term CET1 capital ratio target of 10.00% 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, among other things,
the overall financial condition, risk profile, and capital adequacy
of BHCs when evaluating capital plans.
Our 2019 capital plan, which was submitted on April 4, 2019,
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 2019 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, 2019. On June 27, 2019, the FRB notified us that
it did not object to our capital plan included in the 2019 CCAR.
92
Wells Fargo & Company
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. Under the FRB’s stress testing rule, we were required to
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 2019. In October 2019, the FRB
finalized rules that 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
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 2019 Form 10-K, and the “Capital
Management,” “Forward-Looking Statements” and “Risk
Factors” sections and Note 29 (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 following provides additional
information on the Dodd-Frank Act, including 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
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 share repurchases occur at various price levels. We may
suspend share repurchase activity at any time.
In October 2018, the Board authorized the repurchase of
350 million shares of our common stock. In July 2019, the Board
authorized the repurchase of an additional 350 million shares of
our common stock. At December 31, 2019, we had remaining
authority to repurchase approximately 243 million shares,
subject to regulatory and legal conditions. For more information
about share repurchases during fourth quarter 2019, see Part II,
Item 5 in our 2019 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.
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
•
Wells Fargo & Company
93
Regulatory Matters (continued)
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 became 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 certain 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) jointly
released a final rule to implement the Volcker Rule’s
restrictions, and have adopted amendments to the rule to
streamline and tailor the requirements for compliance.
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 has
implemented parallel rules applicable to security-based
swaps, and is expected to implement additional related
rules. 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
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). The FRB has enacted a rule to implement the
Durbin Amendment to the Dodd-Frank Act, which limits
debit card interchange transaction fees to those reasonable
and proportional to the cost of the transaction. 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.
Regulatory Capital Guidelines and Capital Plans
The Company and each of our insured depository institutions are
subject to various regulatory capital adequacy requirements
administered by the FRB and the OCC. For example, the
Company is subject to rules issued by federal banking regulators
to implement Basel III capital requirements for U.S. banking
organizations. The Company and its insured depository
institutions are also required to maintain specified
supplementary leverage ratios. Federal banking regulators have
also issued a final rule regarding the U.S. implementation of 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”
and “Risk Management – Asset/Liability Management – Liquidity
and Funding – Liquidity Standards” sections 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 submit resolution plans, also known as
“living wills,” that would facilitate their rapid and orderly
resolution in the event of material financial distress or failure.
Under the rules, rapid and orderly resolution means a
reorganization or liquidation of the covered company under the
U.S. Bankruptcy Code that can be accomplished in a reasonable
period of time and in a manner that substantially mitigates the
risk that failure would have serious adverse effects on the
financial stability of the United States. In addition to the
Company’s resolution plan, our national bank subsidiary, Wells
Fargo Bank, N.A. (the “Bank”), is also required to prepare and
periodically submit a resolution plan. If the FRB and/or FDIC
determine 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 and/or FDIC
ultimately determine that we have been unable to remedy any
deficiencies, they could require us to divest certain assets or
operations. On June 27, 2019, we submitted our resolution plan
to the FRB and FDIC. On December 17, 2019, the FRB and FDIC
announced that the Company’s 2019 resolution plan did not
have any deficiencies, but they identified a specific shortcoming
that would need to be addressed.
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
Wells Fargo & Company
•
•
•
94
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.
The strategy described in our most recent resolution plan is
a single point of entry strategy, in which the Parent would likely
be the only material legal entity to enter resolution proceedings.
However, we are not obligated to maintain a single point of entry
strategy, and the strategy described in our resolution plan is 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. 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.
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,
on June 28, 2017, the Parent entered into a support agreement,
as amended and restated on June 26, 2019 (the “Support
Agreement”), with WFC Holdings, LLC, an intermediate holding
company and subsidiary of the Parent (the “IHC”), the Bank,
Wells Fargo Securities, LLC (“WFS”), Wells Fargo Clearing
Services, LLC (“WFCS”), and certain other direct and indirect
subsidiaries of the Parent designated as material entities for
resolution planning purposes (the “Covered Entities”) or
identified as related support entities in our resolution plan (the
“Related Support Entities”). 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, WFS, WFCS, and the Covered
Entities pursuant to 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,
or if the Parent’s board of directors authorizes it to file a case
under the U.S. Bankruptcy Code, the subordinated notes would
be forgiven, the committed line of credit would terminate, and
the IHC’s ability to pay dividends to the Parent would be
restricted, any of 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 respective obligations under the Support
Agreement of the Parent, the IHC, the Bank, and the Related
Support Entities are secured pursuant to a related security
agreement.
In addition to our resolution plans, 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 determines that our recovery plan is deficient, they may
impose fines, restrictions on our business or ultimately require us
to divest assets.
Other Regulatory Related Matters
•
Broker-dealer standards of conduct. In June 2019, the SEC
finalized a rule that requires 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 impacts
the manner in which business is conducted with customers
seeking investment advice and may affect certain
investment product offerings.
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
Company continues to engage with the FRB as the Company
works to address the consent order provisions. The consent
order also requires the Company, following the FRB’s
acceptance and approval of the plans and the Company’s
•
•
Wells Fargo & Company
95
Regulatory Matters (continued)
adoption and implementation of the plans, to complete an
initial third-party review of the enhancements and
improvements provided for in the plans. Until this third-
party review is 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. 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 penalties to resolve matters
regarding the Company’s compliance risk management
program and past practices involving certain automobile
collateral protection insurance policies and certain
•
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 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 increase or decrease the
allowance for credit losses. While our methodology attributes
portions of the allowance for credit losses to specific portfolio
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.
• OCC approval of director and senior executive officer
appointments and certain post-termination payments. Under
the April 2018 consent order with the OCC, Wells Fargo
Bank, N.A., remains subject to requirements that were
originally imposed in November 2016 to provide prior
written notice to, and obtain non-objection from, the OCC
with respect to changes in directors and senior executive
officers, and remains subject to certain regulatory
limitations on post-termination payments to certain
individuals and employees.
segments (commercial and consumer), the entire allowance for
credit losses is available to absorb credit losses inherent in the
total loan portfolio and unfunded credit commitments.
•
•
•
•
Judgment is specifically applied in:
Credit risk ratings applied to individual commercial loans and
unfunded credit commitments. We estimate the probability
of default in accordance with the borrower’s financial
strength using a borrower quality rating and the severity of
loss in the event of default using a collateral quality rating.
Collectively, these ratings are referred to as credit risk
ratings and are assigned to our commercial loans. Probability
of default and severity at the time of default are statistically
derived through historical observations of defaults and
losses after default within each credit risk rating.
Commercial loan risk ratings are evaluated based on each
situation by experienced senior credit officers and are
subject to periodic review by an internal team of credit
specialists.
Economic assumptions applied to pools of consumer loans
(statistically modeled). Losses are estimated using economic
variables to represent our best estimate of inherent loss.
Our forecasted losses are modeled using a range of
economic scenarios.
Selection of a credit loss estimation model that fits the credit
risk characteristics of its portfolio. We use both internally
developed and vendor supplied models in this process. We
often use expected loss, transition rate, flow rate,
competing hazard, vintage maturation, and time series or
statistical trend models, including those 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
96
Wells Fargo & Company
•
•
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.
SENSITIVITY TO CHANGES Table 49 demonstrates the impact of
the sensitivity of our estimates on our allowance for credit
losses.
Table 49: Allowance for Credit Losses Sensitivity Summary
(in billions)
Assumption:
Favorable (1)
Adverse (2)
December 31, 2019
Estimated
increase/(decrease)
in allowance
$
(3.1)
7.1
(1)
(2)
Represents a one risk rating upgrade throughout our commercial portfolio segment and a
more optimistic economic outlook for modeled losses on our consumer portfolio segment.
Represents a one risk rating downgrade throughout our commercial portfolio segment, a
more pessimistic economic outlook for modeled losses on our consumer portfolio
segment, and incremental deterioration for PCI loans.
The sensitivity analyses provided in the previous table are
hypothetical scenarios and are not considered probable. They do
not represent management’s view of inherent losses in the
portfolio as of the balance sheet date. Because significant
judgment is used, it is possible that others performing similar
analyses could reach different conclusions. See the “Risk
Management – Credit Risk Management – Allowance for Credit
Losses” section and Note 6 (Loans and Allowance for Credit
Losses) to Financial Statements in this Report for further
discussion of our allowance for credit losses.
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 acquired MSRs 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 in the cash flow
estimates such as from servicing operations (e.g., possible
changes in future servicing costs, ancillary income and
earnings on escrow accounts).
The expected cost to service loans used to estimate future net
servicing income. The cost to service loans includes
estimates for unreimbursed expenses, such as delinquency
and foreclosure costs, which considers the number of
defaulted loans as well as changes in servicing processes
associated with default and foreclosure management.
•
•
Both prepayment speed and discount rate assumptions can,
and generally will, change quarterly as market conditions and
mortgage interest rates change. For example, an increase in
either the prepayment speed or discount rate assumption results
in a decrease in the fair value of the MSRs, while a decrease in
either assumption would result in an increase in the fair value of
the MSRs. In recent years, there have been significant market-
driven fluctuations in loan prepayment speeds and the discount
rate. These fluctuations can be rapid and may be significant in
the future. Additionally, while our current valuation reflects our
best estimate of servicing costs, future regulatory 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 10 (Securitizations and Variable Interest Entities), Note 11
(Mortgage Banking Activities) and Note 19 (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 most of our residential MLHFS are carried at fair value each
period. Other financial instruments, such as certain MLHFS,
most nonmarketable equity securities and substantially all of
Wells Fargo & Company
97
Critical Accounting Policies (continued)
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 requirements 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 19 (Fair Values of Assets and Liabilities) to
Financial Statements in this Report.
When developing fair value measurements, we maximize the
use of observable inputs and minimize the use of unobservable
inputs. When available, we use quoted prices in active markets to
measure fair value. If quoted prices in active markets are not
available, fair value measurement is based upon models that
generally use 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. 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 19 (Fair Value of Assets and
Liabilities) to Financial Statements in this Report.
When using internally-developed models based on
unobservable inputs, 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. For
example, we adjust the vendor or broker price using internal
models based on discounted cash flows when the impact of
illiquid markets has not already been incorporated in the fair
value measurement. Additionally, for certain residential MLHFS
and certain debt and equity 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.
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.
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 1
(Summary of Significant Accounting Policies) 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 to estimate fair
value. 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 each instrument’s fair value
measurement in its entirety. If Level 3 inputs are considered
significant, the instrument is classified as Level 3.
Table 50 presents our (1) assets and liabilities recorded at
fair value on a recurring basis and (2) Level 3 assets and liabilities
recorded at fair value on a recurring basis, both presented as a
percentage of our total assets and total liabilities.
Table 50: Fair Value Level 3 Summary
December 31, 2019
December 31, 2018
($ in billions)
Total
balance
Level 3 (1)
Assets carried at fair value $ 428.6
24.3
Total
balance
408.4
Level 3 (1)
25.3
As a percentage
of total assets
22%
Liabilities carried at fair
value
$
26.5
As a percentage of
total liabilities
2%
* Less than 1%.
(1)
Before derivative netting adjustments.
1
1.8
*
22
28.2
2
1
1.6
*
See Note 19 (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, non-U.S. 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. 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.
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 basis 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.
We do not intend to distribute earnings of certain non-U.S.
subsidiaries in a taxable manner, and therefore intend to limit
98
Wells Fargo & Company
We apply judgment when establishing an accrual for
potential losses associated with legal actions and in establishing
the range of reasonably possible losses in excess of the accrual.
Our judgment in establishing accruals and the range of
reasonably possible losses in excess of the Company’s accrual for
probable and estimable losses is influenced by our understanding
of information currently available related to the legal evaluation
and potential outcome of actions, including input and advice on
these matters from our internal counsel, external counsel and
senior management. These matters may be in various stages of
investigation, discovery or proceedings. They may also involve a
wide variety of claims across our businesses, legal entities and
jurisdictions. The eventual outcome may be a scenario that was
not considered or was considered remote in anticipated
occurrence. Accordingly, our estimate of potential losses will
change over time and the actual losses may vary significantly.
The outcomes of legal actions are unpredictable and subject
to significant uncertainties, and it is inherently difficult to
determine whether any loss is probable or even possible. It is also
inherently difficult to estimate the amount of any loss and there
may be matters for which a loss is probable or reasonably
possible but not currently estimable. Accordingly, actual losses
may be in excess of the established accrual or the range of
reasonably possible loss.
See Note 17 (Legal Actions) to Financial Statements in this
Report for further information.
distributions of non-U.S. 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 non-U.S.
taxes. All other undistributed non-U.S. earnings will continue to
be permanently reinvested outside the U.S. and the related tax
liability on these earnings is insignificant.
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 international. Our
interpretations may be subjected to review during examination
by taxing authorities and disputes may arise over the respective
tax positions. We attempt to resolve these disputes during the
tax examination and audit process and ultimately through the
court systems when applicable.
We monitor relevant tax authorities and revise our estimate
of accrued income taxes due to changes in income tax laws and
their interpretation by the courts and regulatory authorities on a
quarterly basis. Revisions of our estimate of accrued income
taxes also may result from our own income tax planning and
from the resolution of income tax controversies. Such revisions
in our estimates may be material to our operating results for any
given quarter.
See Note 24 (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,
governmental, arbitration and other proceedings or
investigations concerning matters arising from the conduct of its
business activities, and many of those proceedings and
investigations expose the Company to potential financial loss.
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.
Wells Fargo & Company
99
Current Accounting Developments
Table 51 provides the significant accounting updates applicable
to us that have been issued by the Financial Accounting
Standards Board (FASB) but are not yet effective.
Table 51: Current Accounting Developments – Issued Standards
Description
Effective date and financial statement impact
ASU 2018-12 – Financial Services – Insurance (Topic 944):
Targeted Improvements to the Accounting for Long-Duration Contracts and subsequent related updates
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 guidance becomes effective on January 1, 2022. Certain of our variable annuity reinsurance products meet
the definition of market risk benefits and will require the associated insurance related reserves for these
products to be measured at fair value as of the earliest period presented, with the cumulative effect on fair
value for changes attributable to our own credit risk 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. As of
December 31, 2019, we held $1.1 billion in insurance-related reserves of which $489 million was in scope of
the Update. A total of $429 million was associated with products that meet the definition of market risk
benefits, and of this amount, $17 million was measured at fair value under current accounting standards. The
market risk benefits are largely indexed to U.S. equity and fixed income markets. Upon adoption, we may incur
periodic earnings volatility from changes in the fair value of market risk benefits generally due to the long
duration of these contracts. We plan to economically hedge this volatility, where feasible. The ultimate impact
of these changes will depend on the composition of our market risk benefits portfolio at the date of adoption.
Changes in the accounting for the liability of future policy benefits for traditional long-duration contracts and
deferred acquisition costs will be applied to all outstanding long-duration contracts on the basis of their
existing carrying amounts at the beginning of the earliest period presented, and are not expected to be
material.
We adopted the guidance on January 1, 2020. Our implementation process included development of loss
forecasting models, evaluation of technical accounting topics, updates to our allowance documentation,
reporting processes, and related internal controls.
Upon adoption, we recognized an overall decrease in our ACL of approximately $1.3 billion, as a
cumulative effect adjustment from change in accounting policies. This adjustment, net of income tax
adjustments, increased our retained earnings and regulatory capital amounts and ratios. For more information
on the impact of CECL by type of financial asset, see Table 51b (ASU 2016-03 Adoption Impact to Allowance
for Credit Losses (ACL)) in this Report.
Our approach for estimating expected life-time credit losses for loans and debt securities includes the
following key components:
•
ASU 2016-13 – Financial Instruments – Credit Losses (Topic 326):
Measurement of Credit Losses on Financial Instruments and subsequent related updates
The Update changes the accounting
for the measurement of credit losses
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 contractual term,
adjusted for prepayments, 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 an insignificant
deterioration of credit 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.
•
•
•
•
An initial loss 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 term, adjusted for prepayments, by
portfolio segment and class of financing receivables based on the change in key historical economic
variables during representative historical expansionary and recessionary periods.
A reversion period of up to two years connecting the initial loss forecast to the historical loss forecast
based on economic conditions at the measurement date.
Utilization of discounted cash flow (DCF) methods to measure credit impairment for loans modified in a
troubled debt restructuring, unless they are collateral dependent and measured at the fair value of
collateral. The DCF methods 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
utilize the DCF methods to measure the ACL, which incorporate expected credit losses using the
conceptual components described above. The ACL on available-for-sale debt securities is subject to a
limitation based on the fair value of the debt securities.
We expect future changes in our ACL to be more volatile under CECL. Future amounts of the ACL will be
based on a variety of factors, including changes in loan volumes, portfolio credit quality, and general economic
conditions. General economic conditions will be forecasted using economic variables, which will create
volatility as those variables change over time. See Table 51a for key economic variables used for our loan
portfolios.
100
Wells Fargo & Company
Table 51a: Key Economic Variables
Loan Portfolio
Total commercial
Real estate 1-4 family mortgage
Other consumer (including credit card, automobile, and other revolving credit and installment)
Key economic variables
Gross domestic product
Commercial real estate asset prices, where applicable
Home price index
Unemployment rate
Unemployment rate
•
•
•
•
•
Table 51b: ASU 2016-13 Adoption Impact to Allowance for Credit Losses (ACL) (1)
Balance
Outstanding
ACL Balance
Coverage
Dec 31, 2019
ASU 2016-13
Adoption
Impact
Jan 1, 2020
ACL Balance
Coverage
(in billions)
Total commercial (2)
$
Real estate 1-4 family mortgage (3)
Credit card (4)
Automobile (4)
Other revolving credit and installment (4)
Total consumer
Total loans
Available-for-sale and held-to-maturity debt securities
and other assets (5)
Total
515.7
323.4
41.0
47.9
34.3
446.5
962.3
420.0
$
1,382.3
6.2
0.9
2.3
0.5
0.6
4.2
10.5
0.1
10.6
1.2% $
(2.9)
0.3
5.5
1.0
1.6
0.9
1.1
NM
NM $
—
0.7
0.3
0.6
1.5
(1.3)
—
(1.3)
3.4
0.9
2.9
0.7
1.2
5.7
9.1
0.1
9.3
0.7%
0.3
7.1
1.5
3.5
1.3
0.9
NM
NM
NM – Not meaningful
(1)
(2)
(3)
Amounts presented in this table may not equal the sum of its components due to rounding.
Decrease reflecting shorter contractual maturities given limitation to contractual term.
Impact reflects an increase due to longer contractual term, offset by expectation of recoveries in collateral value on mortgage loans previously written down significantly below current recovery
value.
Increase due to longer contractual term or indeterminate maturities.
Excludes other financial assets in the scope of CECL that do not have an allowance for credit losses based on the nature of the asset.
(4)
(5)
Other Accounting Developments
The following Updates are applicable to us but are not expected
to have a material impact on our consolidated financial
statements:
•
ASU 2020-01 – Investments - Equity Securities (Topic 321),
Investments – Equity Method and Joint Ventures (Topic
323), and Derivatives and Hedging (Topic 815): Clarifying the
Interactions between Topic 321, Topic 323, and Topic 815 (a
consensus of the FASB Emerging Issues Task Force)
ASU 2019-12 – Income Taxes (Topic 740): Simplifying the
Accounting for Income Taxes
ASU 2019-04 – Codification Improvements to Topic 326,
Financial Instruments – Credit Losses, Topic 815, Derivatives
and Hedging, and Topic 825, Financial Instruments. This
Update includes guidance on recoveries of financial assets,
which has been included in the discussion for ASU 2016-13
above.
°
•
•
•
•
•
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)
ASU 2018-13 – Fair Value Measurement (Topic 820):
Disclosure Framework – Changes to the Disclosure
Requirements for Fair Value Measurement. We fully adopted
this guidance in first quarter 2020.
ASU 2017-04 – Intangibles – Goodwill and Other (Topic
350): Simplifying the Test for Goodwill Impairment
Wells Fargo & Company
101
Forward-Looking Statements
This document contains forward-looking statements. 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 our allowance for
credit losses; (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, our estimated Common Equity Tier 1
ratio, and our estimated total loss absorbing capacity ratio; (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)
expectations regarding our effective income tax rate; (xiii) the
outcome of contingencies, such as legal proceedings; and (xiv)
the Company’s plans, objectives and strategies.
Forward-looking statements are not based on historical
facts but instead represent our current expectations and
assumptions regarding our business, the economy and other
future conditions. Because forward-looking statements relate to
the future, they are subject to inherent uncertainties, risks and
changes in circumstances that are difficult to predict. Our actual
results may differ materially from those contemplated by the
forward-looking statements. We caution you, therefore, against
relying on any of these forward-looking statements. They are
neither statements of historical fact nor guarantees or
assurances of future performance. While there is no assurance
that any list of risks and uncertainties or risk factors is complete,
important factors that could cause actual results to differ
materially from those in the forward-looking statements include
the following, without limitation:
•
current and future economic and market conditions,
including the effects of declines in housing prices, high
unemployment rates, U.S. fiscal debt, budget and tax
matters, geopolitical matters, and 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
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 or in the level or composition of our
assets or liabilities 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;
negative effects from the retail banking sales practices
matter and from other instances where customers may have
experienced financial harm, including on our legal,
operational and compliance costs, our ability to engage in
certain business activities or offer certain products or
services, our ability to keep and attract customers, our
ability to attract and retain qualified team members, and our
reputation;
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;
changes to U.S. tax guidance and regulations, as well as the
effect of discrete items on our effective income tax rate;
our ability to develop and execute effective business plans
and strategies; and
the other risk factors and uncertainties described under
“Risk Factors” in this Report.
•
•
•
•
•
•
•
•
•
•
•
•
In addition to the above factors, we also caution that the
amount and timing of any future common stock dividends or
repurchases will depend on the earnings, cash requirements and
financial condition of the Company, market conditions, capital
requirements (including under Basel capital standards), common
stock issuance requirements, applicable law and regulations
(including federal securities laws and federal banking
regulations), and other factors deemed relevant by the
102
Wells Fargo & Company
Company’s Board of Directors, and may be subject to regulatory
approval or conditions.
For more information about factors that could cause actual
results to differ materially from our expectations, refer to our
reports filed with the Securities and Exchange Commission,
including the discussion under “Risk Factors” in this Report, as
filed with the Securities and Exchange Commission and available
on its website at www.sec.gov.
Any forward-looking statement made by us speaks only as
of the date on which it is made. Factors or events that could
cause our actual results to differ may emerge from time to time,
and it is not possible for us to predict all of them. We undertake
no obligation to publicly update any forward-looking statement,
whether as a result of new information, future developments or
otherwise, except as may be required by law.
Risk Factors
An investment in the Company involves risk, including the
possibility that the value of the investment could fall
substantially and that dividends or other distributions on the
investment could be reduced or eliminated. We discuss below
risk factors that could adversely affect our financial results and
condition, and the value of, and return on, an investment in the
Company.
RISKS RELATED TO THE ECONOMY, FINANCIAL MARKETS,
INTEREST RATES AND LIQUIDITY
As one of the largest lenders in the U.S. and a provider of
financial products and services to consumers and businesses
across the U.S. and internationally, our financial results have
been, and will continue to be, materially affected by
general economic conditions, and a deterioration in economic
conditions or in the financial markets may materially adversely
affect our lending and other businesses and our financial
results and condition. We generate revenue from the interest
and fees we charge on the loans and other products and services
we sell, and a substantial amount of our revenue and earnings
comes from the net interest income and fee income that we earn
from our consumer and commercial lending and banking
businesses, including our mortgage banking business. 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 corresponding retaliatory measures, and global
economic difficulties, may impact the stability of financial
markets and the global economy. In particular, Britain’s
withdrawal from the European Union and the final terms of its
exit following the existing transition period could increase
economic barriers between Britain and the European Union, limit
our ability to conduct business in the European Union, impose
additional costs on us, subject us to different laws, regulations
and/or regulatory authorities, or adversely impact our business,
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.
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 exit. 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 or
with the same effectiveness following the end of the transition
period for 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,
Wells Fargo & Company
103
Risk Factors (continued)
wealth management, and investment banking businesses. In
2019, 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 2019, 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. Moreover, a negative interest rate environment, in
which interest rates drop below zero, could reduce our net
interest margin and net interest income due to a likely decline in
the interest we could earn on loans and other earning assets,
while also likely requiring us to pay to maintain our deposits with
the FRB.
The interest we earn on our loans may be tied to U.S.-
denominated interest rates such as the federal funds rate while
the interest we pay on our debt may be based on international
rates such as LIBOR. If the federal funds rate were to fall without
a corresponding decrease in LIBOR, we might earn less on our
loans without any offsetting decrease in our funding costs. This
could lower our net interest margin and our net interest income.
We assess our interest rate risk by estimating the effect on
our earnings under various scenarios that differ based on
assumptions about the direction, magnitude and speed of
interest rate changes and the slope of the yield curve. We hedge
some of that interest rate risk with interest rate derivatives. We
also rely on the “natural hedge” that our mortgage loan
originations and servicing rights can provide.
We generally do not hedge all of our interest rate risk. There
is always the risk that changes in interest rates, 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. 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
104
Wells Fargo & Company
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.
Uncertainty about the future of the London Interbank Offered
Rate (LIBOR) may adversely affect our business, results of
operations, and financial condition. Due to uncertainty
surrounding the suitability and sustainability of LIBOR, central
banks and global regulators have called for financial market
participants to prepare for the discontinuation of LIBOR by the
end of 2021. We have a significant number of assets and
liabilities referenced to LIBOR and other interbank offered rates
such as commercial loans, adjustable-rate mortgage loans,
derivatives, debt securities, and long-term debt. When 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, 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.
This could impact the financial performance of previously
booked transactions, result in losses on financial instruments we
hold, require different hedging strategies or result in ineffective
or increased basis risk on existing hedges, impact the overall
interest rate environment and the availability or cost of floating-
rate funding, and affect our capital and liquidity planning and
management. In addition, the transition to using any new
benchmark rate or other financial metric may require changes to
existing transaction data, products, systems, models, operations,
and pricing processes, require substantial changes to existing
documentation and the renegotiation of a substantial volume of
previously booked transactions, and could result in significant
operational, systems, or other practical challenges, increased
compliance, legal and operational costs, heightened expectations
and scrutiny from regulators, reputational harm, or other adverse
consequences. Furthermore, the transition away from widely
used benchmark rates like LIBOR could result in customers or
other market participants challenging the determination of their
interest payments, disputing the interpretation or
implementation of contract “fallback” provisions and other
transition related changes, 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.
For additional information on the discontinuation of LIBOR
and the steps we are taking to address and mitigate the risks we
have identified, refer to the “Risk Management - Asset/Liability
Management - LIBOR Transition” section in this Report.
Effective liquidity management, which ensures that we can
meet customer loan requests, customer deposit maturities/
withdrawals and other cash commitments, including principal
and interest payments on our debt, efficiently under both
normal operating conditions and other unpredictable
circumstances of industry or financial market stress, is
essential for the operation of our business, and our financial
results and condition could be materially adversely affected if
we do not effectively manage our liquidity. Our liquidity is
essential for the operation of our business. We primarily rely on
bank deposits to be a low-cost and stable source of funding for
the loans we make and the operation of our business. Customer
deposits, which include noninterest-bearing deposits, interest-
bearing checking, savings certificates, certain market rate and
other savings, and certain non-U.S. 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
Wells Fargo & Company
105
Risk Factors (continued)
negatively affect our ability to access the capital markets; our
inability to sell or securitize loans or other assets; disruptions or
volatility in the repurchase market which also may increase our
short-term funding costs; 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 18 (Derivatives) to Financial
Statements in this Report.
We rely on dividends from our subsidiaries for liquidity, and
federal and state law, as well as certain contractual
arrangements, can limit those dividends. Wells Fargo &
Company, the parent holding company (the “Parent”), is a
separate and distinct legal entity from its subsidiaries. It receives
substantially all of its funding and liquidity from dividends and
other distributions from its subsidiaries. We generally use these
dividends and distributions, among other things, to pay
dividends on our common and preferred stock and interest and
principal on our debt. Federal and state laws limit the amount of
dividends and distributions that our bank and some of our
nonbank subsidiaries, including our broker-dealer subsidiaries,
may pay to the Parent. In addition, under a Support Agreement
dated June 28, 2017, as amended and restated on June 26, 2019,
among the Parent, WFC Holdings, LLC, an intermediate holding
company and subsidiary of the Parent (the “IHC”), Wells Fargo
Bank, N.A., Wells Fargo Securities, LLC, Wells Fargo Clearing
Services, LLC, and certain other direct and indirect subsidiaries of
the Parent designated as material entities for resolution planning
purposes or identified as related support entities in our
resolution plan, the IHC may be restricted from making dividend
payments to the Parent if certain liquidity and/or capital metrics
fall below defined triggers or if the Parent’s board of directors
authorizes it to file a case under the U.S. Bankruptcy Code. 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 2019 Form 10-K and to Note 3 (Cash,
Loan and Dividend Restrictions) and Note 29 (Regulatory and
Agency Capital Requirements) to Financial Statements in this
Report.
106
Wells Fargo & Company
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 they 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 continue to 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
non-U.S. 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, which, among other
things, imposes significant requirements and restrictions
impacting the financial services industry, became law. The Dodd-
Frank Act has resulted in significant rulemaking by federal
regulators, including the FRB, OCC, CFPB, FDIC, SEC and CFTC,
which may continue to impact our business, including the types
of products and services we can provide, the manner in which we
operate our businesses, and our compliance and risk
management activities. The Dodd-Frank Act, including the rules
implementing its provisions and the interpretation of those
rules, may continue to 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, the
CFPB’s rules, which primarily impact our consumer businesses,
may continue to increase our compliance costs and require
changes in our business practices, which could limit or negatively
affect the products and services that we offer our customers. 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.
Federal banking regulators, the SEC and the CFTC jointly
released a final rule to implement the Volcker Rule’s restrictions,
and have adopted amendments to the rule to streamline and
tailor the requirements for compliance.
In addition, the Dodd-Frank Act established a
comprehensive framework for regulating over-the-counter
derivatives and federal regulators, including the CFTC and SEC,
have adopted rules regulating swaps, security-based swaps,
derivatives activities, and other broker-dealer conduct and
activities. These rules may continue to negatively impact
customer demand for over-the-counter derivatives, impact our
ability to offer customers new derivatives or amendments to
existing derivatives, and increase our costs for engaging in swaps,
security-based swaps, and other derivatives activities. Moreover,
these rules may impact the manner in which we conduct business
with customers seeking investment advice and may affect
certain investment product offerings.
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 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
Wells Fargo & Company
107
Risk Factors (continued)
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.
In addition, we are subject to consent orders with certain of
our regulators, including a February 2018 consent order with the
FRB regarding the Board’s governance and oversight of the
Company, and the Company’s compliance and operational risk
management program. The consent order limits the Company’s
total consolidated assets to the level as of December 31, 2017,
until certain conditions are met. This limitation could adversely
affect our results of operations or financial condition. We are also
subject to April 2018 consent orders with the CFPB and OCC
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.
Under the April 2018 consent order with the OCC, Wells
Fargo Bank, N.A., remains subject to requirements that were
originally imposed in November 2016 to provide prior written
notice to, and obtain non-objection from, the OCC with respect
to changes in directors and senior executive officers, and remains
subject to certain regulatory limitations on post-termination
payments to certain individuals and employees.
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
February 2018 FRB consent order, the April 2018 CFPB and OCC
consent orders, and any other consent orders or regulatory
actions, as well as the implementation of their requirements,
may continue to increase the Company’s costs, require the
Company to reallocate resources away from growing its existing
businesses, and require the Company to undergo significant
changes to its business, products and services. For more
information on the February 2018 FRB consent order and the
April 2018 CFPB and OCC consent orders, refer to the
“Regulatory Matters” section in this Report.
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 ending the conservatorships of the GSEs
and reducing or eliminating over time the role of the GSEs in
buying mortgage loans or guaranteeing mortgage-backed
securities (MBS), as well as the implementation of reforms
relating to borrowers, lenders, and investors in the mortgage
market. Regulatory changes to limit certain products, phase in a
minimum down payment requirement for borrowers, tighten
underwriting standards, or change the loan types and MBS pools
included in the securitization process are also possible. Congress
also may consider legislation to reform the mortgage finance
market in an effort to assist borrowers experiencing difficulty
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 on the significant regulations and
regulatory oversight initiatives that have affected or may affect
our business, refer to the “Regulatory Matters” section in this
Report and the “Regulation and Supervision” section in our 2019
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 submitted a
resolution plan, also known as a “living will,” that is designed to
facilitate our rapid and orderly resolution in the event of material
financial distress or failure. There can be no assurance that the
FRB or FDIC will respond favorably to the Company’s resolution
plans. If the FRB and/or FDIC determine 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 and/or FDIC ultimately determine that we
have been unable to remedy any deficiencies, they could require
us to divest certain assets or operations. On December 17, 2019,
the FRB and FDIC announced that the Company’s 2019
resolution plan did not have any deficiencies, but they identified
a specific shortcoming that would need to be addressed.
In addition to our resolution plans, 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. Our insured national bank subsidiary, Wells
Fargo Bank, N.A. (the “Bank”), must also prepare and submit to
the OCC a recovery plan. If either 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 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.
The strategy described in our most recent resolution plan is
a single point of entry strategy, in which the Parent would likely
108
Wells Fargo & Company
be the only material legal entity to enter resolution proceedings.
However, we are not obligated to maintain a single point of entry
strategy, and the strategy described in our resolution plan is 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. 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.
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,
on June 28, 2017, the Parent entered into a support agreement,
as amended and restated on June 26, 2019 (the “Support
Agreement”), with WFC Holdings, LLC, an intermediate holding
company and subsidiary of the Parent (the “IHC”), the Bank,
Wells Fargo Securities, LLC (“WFS”), Wells Fargo Clearing
Services, LLC (“WFCS”), and certain other direct and indirect
subsidiaries of the Parent designated as material entities for
resolution planning purposes (the “Covered Entities”) or
identified as related support entities in our resolution plan.
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,
WFS, WFCS, and the Covered Entities pursuant to 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, or if the Parent’s board of directors authorizes it
to file a case under the U.S. Bankruptcy Code, the subordinated
notes would be forgiven, the committed line of credit would
terminate, and the IHC’s ability to pay dividends to the Parent
would be restricted, any of 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.
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 single point of entry strategy or using a multiple point of
entry strategy, in which the Parent and one or more of its
subsidiaries would each undergo separate resolution
proceedings. Furthermore, in a single point of entry or multiple
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.
For more information, refer to the “Regulatory Matters -
‘Living Will’ Requirements and Related Matters” section in this
Report.
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 rules issued by federal
banking regulators to implement Basel III capital requirements
for U.S. banking organizations. These capital rules, among other
things, establish required minimum ratios relating capital to
different categories of assets and exposures. Federal banking
regulators have also finalized rules to impose a supplementary
leverage ratio on large BHCs like Wells Fargo and our insured
depository institutions. The FRB has also 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).
Similarly, federal banking regulators have issued a final rule that
implements a liquidity coverage ratio.
In addition, 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
Wells Fargo & Company
109
Risk Factors (continued)
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
continue to 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,”
“Risk Management – Asset/Liability Management – Liquidity and
Funding – Liquidity Standards,” and “Regulatory Matters”
sections in this Report and the “Regulation and Supervision”
section in our 2019 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, including its target range for the federal
funds rate or actions taken to increase or decrease the size of its
balance sheet, 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
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,
disease pandemics, or political or social matters, also can
influence recognition of credit losses in our loan portfolios and
impact our allowance for credit losses.
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,
2019, 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,
changes in consumer behavior or other market conditions, such
as in response to climate change and other environmental and
sustainability concerns, may adversely affect borrowers in certain
industries or sectors, which may increase our credit risk and
reduce the demand by these borrowers for our products and
services. Moreover, 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.
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
110
Wells Fargo & Company
result in materially higher credit losses and have a material
adverse effect on our financial results and condition.
Challenges and/or changes in non-U.S. economic conditions
may increase our non-U.S. credit risk. Our non-U.S. loan exposure
represented approximately 8% of our total consolidated
outstanding loans and 4% of our total assets at December 31,
2019. Economic difficulties in non-U.S. 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 non-U.S. operations.
Due to regulatory requirements, we must clear certain
derivative transactions through central counterparty
clearinghouses (CCPs), which results in credit exposure to these
CCPs. Similarly, because we are a member of various CCPs, we
may be required to pay a portion of any losses incurred by the
CCP in the event that one or more members of the CCP defaults
on its obligations. In addition, we are exposed to the risk of non-
performance by our clients for which we clear transactions
through CCPs to the extent such non-performance is not
sufficiently covered by available collateral.
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.
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 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. Similarly, we may not be
able to timely recover critical business processes or operations
that have been disrupted, which may further increase any
associated costs and consequences of such disruptions. Although
we have business continuity plans and other safeguards in place
to help provide operational resiliency, 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. Although applications and related workloads were
systematically re-routed to back-up data centers throughout the
day, certain of our services, including our online and mobile
banking systems, certain mortgage origination systems, and
certain ATM functions, experienced disruptions that delayed
service to our customers.
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.
Wells Fargo & Company
111
Risk Factors (continued)
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 continue to 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 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 continue to 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
112
Wells Fargo & Company
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, or if a team member fails to comply with applicable
policies and procedures or inappropriately circumvents controls.
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.
Furthermore, certain of our models are subject to regulatory
review and approval, and any failure to meet regulatory
standards or expectations could result in fines, penalties,
restrictions on our ability to engage in certain business activities,
or other adverse consequences, and any required modifications
or changes to these models can impact our capital ratios and
requirements and result in increased operational and compliance
costs. 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
remedy sought and granted, could materially adversely affect our
results of operations and financial condition. We may continue to
incur additional costs and expenses in order to address and
defend these pending legal proceedings and government
investigations, and we may continue to 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.
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 past practices involving
certain automobile collateral protection insurance policies and
certain issues related to the unused portion of guaranteed
automobile protection waiver or insurance agreements. 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 “– Other Customer Remediation
Activities” sections and Note 17 (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 non-U.S. 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 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. 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 non-U.S. countries and designated
nationals of those countries. OFAC may impose penalties or
restrictions on certain activities for inadvertent or unintentional
Wells Fargo & Company
113
Risk Factors (continued)
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.
Reputational harm, including as a result of our actual or alleged
conduct or public opinion of the financial services industry
generally, could adversely affect our business, results of
operations, and financial condition. 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 reputation and 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, 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 public opinion of the Company specifically or large
financial institutions generally will not harm our reputation and
adversely affect our business, results of operations, and financial
condition.
Risks related to legal actions. Wells Fargo and some of its
subsidiaries are involved in judicial, regulatory, governmental,
arbitration, and other proceedings or investigations concerning
matters arising from the conduct of our business activities, and
many of those proceedings and investigations expose Wells
Fargo to potential financial loss. 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 17 (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, which we initially measure
and carry 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
114
Wells Fargo & Company
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 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 the 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. In order to meet customer needs, we also
originate loans that do not conform to either the GSEs 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 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 retain nonconforming loans on our balance
sheet, whether due to regulatory, business or other reasons, our
ability to originate new nonconforming loans may be reduced,
thereby reducing the interest income we could earn from these
loans. Similarly, if the GSEs or 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 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 (FHFA) acting as conservator. While the FHFA
has stated that it intends to end the conservatorship, we cannot
predict if, when or precisely 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 any changes to the GSE’s
structure, capital requirements, or market presence, 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,” “Critical Accounting Policies – Valuation of
Residential Mortgage Servicing Rights” and “Critical Accounting
Policies - Fair Value of Financial Instruments” 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. 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.
Wells Fargo & Company
115
Risk Factors (continued)
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 certain foreclosure obligations or, if
applicable, considering alternatives to foreclosure such as loan
modifications or short-sales, as well as certain servicing
obligations for properties that fall within a flood zone. If we fail
to satisfy our servicing obligations, we may face a number of
consequences, including termination as servicer or master
servicer, requirements to indemnify the securitization trustee
against losses from any failure by us to perform our servicing
obligations, and/or contractual obligations to repurchase a
mortgage loan or reimburse investors for credit losses, any of
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. Our net servicing income and the fair
value of our MSRs may be negatively affected to the extent our
servicing costs increase because of higher foreclosure or other
servicing related costs. We may be subject to fines and other
sanctions imposed by federal or state regulators as a result of
actual or perceived deficiencies in our mortgage servicing
practices, including with respect to our foreclosure practices or
our servicing of flood zone properties. Any of these actions may
harm our reputation, negatively affect our residential mortgage
origination or servicing business, or result in material fines,
penalties, equitable remedies, or other enforcement actions.
For more information, refer to the “Risk Management –
Credit Risk Management – Liability for Mortgage Loan
Repurchase Losses” and “– Risks Relating to Servicing Activities,”
and “Critical Accounting Policies – Valuation of Residential
Mortgage Servicing Rights” sections and Note 16 (Guarantees,
Pledged Assets and Collateral, and Other Commitments) and
Note 17 (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 and preferences, 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 and preferences. 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
116
Wells Fargo & Company
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, on
January 1, 2020, we adopted Accounting Standards Update
2016-13 – Financial Instruments-Credit Losses (Topic 326), which
replaced the previous “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.
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, including information on our adoption
of CECL, refer to the “Current Accounting Developments”
section in this Report.
Our financial statements are based in part on assumptions and
estimates which, if wrong, could cause unexpected losses in
the future, and our financial statements depend on our
internal controls over financial reporting. Pursuant to U.S.
GAAP, we are required to use certain assumptions and estimates
in preparing our financial statements, including in determining
credit loss reserves, reserves for mortgage repurchases, reserves
related to litigation and the fair value of certain assets and
liabilities, among other items. Several of our accounting policies
are critical because they require management to make difficult,
subjective and complex judgments about matters that are
inherently uncertain and because it is likely that materially
different amounts would be reported under different conditions
or using different assumptions. For a description of these
policies, refer to the “Critical Accounting Policies” section in this
Report. If assumptions or estimates underlying our financial
statements are incorrect, we may experience material losses.
Certain of our financial instruments, including derivative
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 or manage change effectively, our
competitive standing and results of operations could suffer.
We are subject to rapid changes in technology, regulation, and
product innovation, face intense competition for customers,
sources of revenue, capital, services, qualified team members,
and other essential business resources, and are subject to
heightened regulatory expectations particularly with respect to
compliance and risk management. In order to meet these
challenges, we may undertake business plans or strategies
related to, among other things, our organizational structure, our
compliance and risk management framework, our expenses and
efficiency, the types of products and services we offer, the types
of businesses we engage in, 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, require significant financial,
technological, management and other resources, and may divert
management attention and resources away from other areas of
the Company, 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 or manage change effectively, our competitive
position, reputation, prospects for growth, and results of
operations may be adversely affected.
In addition, we regularly explore opportunities to expand 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
Wells Fargo & Company
117
Risk Factors (continued)
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. Similarly, from time to time, we may decide to divest
certain businesses or assets. Difficulties in executing a
divestiture may cause us not to realize any expected cost savings
or other benefits from the divestiture, or may result in higher
than expected losses of team members or harm our ability to
retain customers.
* * *
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 2020 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.
118
Wells Fargo & Company
Controls and Procedures
Disclosure Controls and Procedures
The Company’s management evaluated the effectiveness, as of December 31, 2019, 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, 2019.
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
2019 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, 2019,
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, 2019, the Company’s internal
control over financial reporting was effective.
KPMG LLP, the independent registered public accounting firm that audited the Company’s financial statements included in this
Annual Report, issued an audit report on the Company’s internal control over financial reporting. KPMG’s audit report appears on the
following page.
Wells Fargo & Company
119
Report of Independent Registered Public Accounting Firm
To 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,
2019, 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, 2019, 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, 2019 and 2018, 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, 2019, and
the related notes (collectively, the consolidated financial statements), and our report dated February 26, 2020 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 26, 2020
120
Wells Fargo & Company
Financial Statements
Wells Fargo & Company and Subsidiaries
Consolidated Statement of Income
(in millions, except per share amounts)
Interest income
Debt securities
Mortgage loans held for sale
Loans held for sale
Loans
Equity securities
Other interest income
Total interest income
Interest expense
Deposits
Short-term borrowings
Long-term debt
Other interest expense
Total interest expense
Net interest income
Provision for credit losses
Net interest income after provision for credit losses
Noninterest income
Service charges on deposit accounts
Trust and investment fees
Card fees
Other fees
Mortgage banking
Insurance
Net gains from trading activities
Net gains on debt securities (1)
Net gains from equity securities (2)
Lease income
Other
Total noninterest income
Noninterest expense
Salaries
Commission and incentive compensation
Employee benefits
Technology and 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,
2019
2018
2017
$
14,955
14,406
12,946
813
79
44,146
962
5,128
66,083
8,635
2,316
7,350
551
18,852
47,231
2,687
44,544
4,798
14,072
4,016
3,084
2,715
378
993
140
2,843
1,612
3,181
37,832
18,382
10,828
5,874
2,763
2,945
108
526
16,752
58,178
24,198
4,157
20,041
492
19,549
1,611
17,938
4.08
4.05
4,393.1
4,425.4
$
$
$
777
140
43,974
992
4,358
64,647
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
786
50
41,388
799
2,940
58,909
3,013
758
5,157
424
9,352
49,557
2,528
47,029
5,111
14,495
3,960
3,557
4,350
1,049
542
479
1,779
1,907
1,603
36,413
38,832
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
4.14
4.10
4,964.6
5,017.3
(1)
(2)
Total other-than-temporary impairment (OTTI) losses were $64 million, $17 million and $205 million for the years ended December 31, 2019, 2018 and 2017, respectively. Of total OTTI, losses of
$63 million, $28 million and $262 million were recognized in earnings, and losses (reversal of losses) of $1 million, $(11) million and $(57) million were recognized as non-credit-related OTTI in other
comprehensive income for the years ended December 31, 2019, 2018 and 2017, respectively.
Includes OTTI losses of $245 million, $352 million and $344 million for the years ended December 31, 2019, 2018 and 2017, respectively.
The accompanying notes are an integral part of these statements.
Wells Fargo & Company
121
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 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
2019
$
19,549
Year ended December 31,
2018
22,393
2017
22,183
5,439
122
(4,493)
248
(24)
299
(40)
133
73
6,002
(1,458)
4,544
—
4,544
24,093
492
$
24,585
(532)
294
(434)
253
(156)
(4,820)
1,144
(3,676)
(2)
(3,674)
18,719
481
19,200
2,719
(737)
(540)
(543)
49
153
96
1,197
(434)
763
(62)
825
23,008
215
23,223
(1)
The year ended December 31, 2017, includes net unrealized gains (losses) arising during the period from equity securities of $81 million and reclassification of net (gains) losses to net income related
to equity securities of $(456) million. In connection with our adoption in first quarter 2018 of Accounting Standards Update (ASU) 2016-01, the years ended December 31, 2018, and December 31,
2019, reflect 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.
122
Wells Fargo & Company
Wells Fargo & Company and Subsidiaries
Consolidated Balance Sheet
(in millions, except shares)
Assets
Cash and due from banks
Interest-earning deposits with banks
Total cash, cash equivalents, and restricted cash
Federal funds sold and securities purchased under resale agreements
Debt securities:
Trading, at fair value
Available-for-sale, at fair value
Held-to-maturity, at cost (fair value $156,860 and $142,115)
Mortgage loans held for sale (includes $16,606 and $11,771 carried at fair value) (1)
Loans held for sale (includes $972 and $1,469 carried at fair value) (1)
Loans (includes $171 and $244 carried at fair value) (1)
Allowance for loan losses
Net loans
Mortgage servicing rights:
Measured at fair value
Amortized
Premises and equipment, net
Goodwill
Derivative assets
Equity securities (includes $41,936 and $29,556 carried at fair value) (1)
Other assets
Total assets (2)
Liabilities
Noninterest-bearing deposits
Interest-bearing deposits
Total deposits
Short-term borrowings
Derivative liabilities
Accrued expenses and other liabilities
Long-term debt
Total liabilities (3)
Equity
Wells Fargo stockholders’ equity:
Preferred stock
Common stock – $1-2/3 par value, authorized 9,000,000,000 shares; issued 5,481,811,474 shares
Additional paid-in capital
Retained earnings
Cumulative other comprehensive income (loss)
Treasury stock – 1,347,385,537 shares and 900,557,866 shares
Unearned ESOP shares
Total Wells Fargo stockholders’ equity
Noncontrolling interests
Total equity
Total liabilities and equity
$
$
$
Dec 31,
2019
21,757
119,493
141,250
102,140
79,733
263,459
153,933
23,342
977
962,265
(9,551)
952,714
11,517
1,430
9,309
26,390
14,203
68,241
78,917
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
1,927,555
1,895,883
344,496
978,130
1,322,626
104,512
9,079
75,163
228,191
349,534
936,636
1,286,170
105,787
8,499
69,317
229,044
1,739,571
1,698,817
21,549
9,136
61,049
166,697
(1,311)
(68,831)
(1,143)
187,146
838
187,984
23,214
9,136
60,685
158,163
(6,336)
(47,194)
(1,502)
196,166
900
197,066
$
1,927,555
1,895,883
Parenthetical amounts represent assets and liabilities that we are required to carry at fair value or have elected the fair value option.
(1)
(2) Our consolidated assets at December 31, 2019 and 2018, 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, $16 million and $139 million; Interest-bearing deposits with banks, $284 million and $8 million; Debt securities, $540 million and $562 million; Net loans, $13.2 billion and
$13.6 billion; Derivative assets, $1 million and $0 million; Equity securities, $118 million and $85 million; Other assets, $239 million and $227 million; and Total assets, $14.4 billion and $14.6 billion,
respectively. Prior period balances have been conformed to current period presentation.
(3) Our consolidated liabilities at December 31, 2019 and 2018, include the following VIE liabilities for which the VIE creditors do not have recourse to Wells Fargo: Short-term borrowings, $401 million
and $493 million; Derivative liabilities, $3 million and $0 million; Accrued expenses and other liabilities, $235 million and $199 million; Long-term debt, $587 million and $816 million; and Total
liabilities, $1.2 billion and $1.5 billion, respectively. Prior period balances have been conformed to current period presentation.
The accompanying notes are an integral part of these statements.
Wells Fargo & Company
123
Wells Fargo & Company and Subsidiaries
Consolidated Statement of Changes in Equity
(in millions, except shares)
Balance December 31, 2016
Cumulative effect from change in hedge accounting (1)
Balance January 1, 2017
Net income
Other comprehensive income (loss), net of tax
Noncontrolling interests
Common stock issued
Common stock repurchased
Preferred stock issued to ESOP
Preferred stock released by ESOP
Preferred stock 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, 2017
Cumulative effect from change in accounting policies (2)
Balance January 1, 2018
Adoption of accounting standard related to certain tax effects stranded in accumulated
other comprehensive income (loss)(3)
Net income
Other comprehensive income (loss), net of tax
Noncontrolling interests
Common stock issued
Common stock repurchased
Preferred stock redeemed (4)
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
Preferred stock
Common stock
Shares
Amount
Shares
Amount
11,532,712 $
24,551
5,016,109,326 $
9,136
11,532,712
24,551
5,016,109,326
9,136
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
11,677,235 $
25,358
4,891,616,628 $
9,136
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)
(2)
(3)
(4)
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.
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.
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 third quarter 2018.
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.
(continued on following pages)
124
Wells Fargo & Company
Additional
paid-in
capital
60,234
60,234
—
(133)
750
31
(35)
97
(133)
(13)
50
875
(830)
659
60,893
Retained
earnings
133,075
(381)
132,694
22,183
(277)
(7,708)
(1,629)
12,569
145,263
94
60,893
145,357
Cumulative
other
comprehensive
income (loss)
(3,137)
168
(2,969)
825
825
(2,144)
(118)
(2,262)
(400)
(3,674)
400
22,393
(321)
(155)
(7,955)
(1,556)
7
(76)
—
43
(70)
6
(325)
—
66
1,041
(900)
(208)
60,685
Wells Fargo stockholders’ equity
Unearned
ESOP
shares
Total
Wells Fargo
stockholders’
equity
(1,565)
199,581
Treasury
stock
(22,713)
(22,713)
(1,565)
2,758
(10,658)
736
(981)
868
(15)
(7,179)
(29,892)
(113)
(1,678)
(213)
199,368
22,183
825
—
2,348
(9,908)
—
833
—
(133)
677
(7,658)
(1,629)
875
(845)
7,568
206,936
(24)
Noncontrolling
interests
916
916
277
(62)
12
227
1,143
Total
equity
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
(24)
(29,892)
(1,678)
206,912
1,143
208,055
2,073
(20,633)
1,243
(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)
(10,746)
196,166
483
(2)
(724)
(243)
900
—
22,876
(3,676)
(717)
1,676
(20,633)
(2,150)
—
1,249
—
(325)
—
(7,889)
(1,556)
1,041
(885)
(10,989)
197,066
12,806
158,163
(4,074)
(6,336)
15
(17,302)
(47,194)
176
(1,502)
Wells Fargo & Company
125
(continued from previous pages)
Wells Fargo & Company and Subsidiaries
Consolidated Statement of Changes in Equity
(in millions, except shares)
Balance December 31, 2018
Cumulative effect from change in accounting policies (1)
Balance January 1, 2019
Net income
Other comprehensive income (loss), net of tax
Noncontrolling interests
Common stock issued
Common stock repurchased
Preferred stock redeemed (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
Stock incentive compensation expense
Net change in deferred compensation and related plans
Net change
Balance December 31, 2019
Preferred stock
Common stock
Shares
Amount
Shares
Amount
9,377,216
$
23,214
4,581,253,608
$
9,136
9,377,216
23,214
4,581,253,608
9,136
48,771,064
(502,418,179)
(1,550,000)
(1,330)
—
—
(335,047)
(335)
6,819,444
—
—
(1,885,047)
(1,665)
(446,827,671)
—
7,492,169
$
21,549
4,134,425,937
$
9,136
(1)
(2)
Effective January 1, 2019, we adopted ASU 2016-02 – Leases (Topic 842) and subsequent related Updates, ASU 2017-08 – Receivables – Nonrefundable Fees and Other Costs (Subtopic 310-20):
Premium Amortization on Purchased Callable Debt Securities. See Note 1 (Summary of Significant Accounting Policies) in this Report for more information.
Represents the impact of the partial redemption of preferred stock, series K, in third quarter 2019.
The accompanying notes are an integral part of these statements.
126
Wells Fargo & Company
Cumulative
other
comprehensive
income (loss)
(6,336)
481
(5,855)
4,544
Retained
earnings
158,163
(492)
157,671
19,549
(382)
(220)
(8,530)
(1,391)
Additional
paid-in
capital
60,685
60,685
—
9
—
—
(24)
(16)
—
—
86
1,234
(925)
364
61,049
Wells Fargo stockholders’ equity
Unearned
ESOP
shares
Total
Wells Fargo
stockholders’
equity
Noncontrolling
interests
Total
equity
(1,502)
196,166
900
197,066
Treasury
stock
(47,194)
(47,194)
(1,502)
196,155
(11)
2,530
(24,533)
351
—
359
900
492
—
(554)
(62)
838
(11)
197,055
20,041
4,544
(554)
2,157
(24,533)
(1,550)
—
335
—
—
—
(8,444)
(1,391)
1,234
(910)
(9,071)
187,984
19,549
4,544
—
2,157
(24,533)
(1,550)
—
335
—
—
—
(8,444)
(1,391)
1,234
(910)
(9,009)
187,146
9,026
166,697
4,544
(1,311)
15
(21,637)
(68,831)
359
(1,143)
Wells Fargo & Company
127
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
Stock-based compensation
Originations and purchases of mortgage loans held for sale
Proceeds from sales of and paydowns on mortgage loans held for sale
Net change in:
Debt and equity securities, held for trading
Loans held for sale
Deferred income taxes
Derivative assets and liabilities
Other assets
Other accrued expenses and liabilities
Net cash provided by operating activities
Cash flows from investing activities:
Net change in:
Federal funds sold and securities purchased under resale agreements
Available-for-sale debt securities:
Proceeds from sales
Prepayments and maturities
Purchases
Held-to-maturity securities:
Paydowns and maturities
Purchases
Equity securities, not held for trading:
Proceeds from sales and capital returns
Purchases
Loans:
Loans originated by banking subsidiaries, net of principal collected
Proceeds from sales (including participations) of loans held for investment
Purchases (including participations) of loans
Principal collected on nonbank entities’ loans
Loans originated by nonbank entities
Proceeds from sales of foreclosed assets and short sales
Other, net (1)
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 used by financing activities
Net change in cash, cash equivalents, and restricted cash
Cash, cash equivalents, and restricted cash at beginning of year
Cash, cash equivalents, and restricted cash at end of year
Supplemental cash flow disclosures:
Cash paid for interest
Cash paid for income taxes
Year ended December 31,
2019
2018
2017
$
20,041
22,876
22,460
2,687
3,702
7,075
(5,500)
2,274
(158,673)
112,718
22,066
788
(3,246)
(2,665)
3,034
2,429
6,730
(21,933)
9,386
46,542
(57,015)
13,684
(8,649)
6,143
(6,865)
(23,698)
12,038
(2,033)
3,912
(5,274)
2,666
1,465
(29,631)
36,137
(1,275)
53,381
(60,996)
—
(1,550)
(1,391)
380
(302)
(24,533)
(8,198)
(513)
(276)
(9,136)
(32,037)
173,287
141,250
18,834
7,557
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
(1,184)
(21,497)
7,320
36,725
(60,067)
10,934
—
6,242
(6,433)
(18,619)
16,294
(2,088)
6,791
(6,482)
3,592
(779)
(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
14,366
1,977
42,067
45,688
(103,656)
10,673
—
5,451
(3,735)
317
10,439
(3,702)
7,448
(6,814)
5,198
(1,029)
(13,152)
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
9,103
6,592
$
$
(1)
Prior periods have been revised to conform to the current period presentation.
The accompanying notes are an integral part of these statements. See Note 1 (Summary of Significant Accounting Policies) for noncash activities.
128
Wells Fargo & Company
Notes to Financial Statements
See the Glossary of Acronyms at the end of this Report for terms used throughout the Financial Statements and related Notes.
Note 1: Summary of Significant Accounting Policies
Wells Fargo & Company is a diversified financial services
company. We provide banking, investment and mortgage
products and services, as well as consumer and commercial
finance, through banking locations and offices, the internet and
other distribution channels to individuals, businesses and
institutions in all 50 states, the District of Columbia, and in
countries outside the U.S. When we refer to “Wells Fargo,” “the
Company,” “we,” “our” or “us,” we mean Wells Fargo & Company
and Subsidiaries (consolidated). Wells Fargo & Company (the
Parent) is a financial holding company and a bank holding
company.
Our accounting and reporting policies conform with U.S.
generally accepted accounting principles (GAAP) and practices in
the financial services industry. To prepare the financial
statements in conformity with GAAP, management must make
estimates based on assumptions about future economic and
market conditions (for example, unemployment, market liquidity,
real estate prices, etc.) that affect the reported amounts of
assets and liabilities at the date of the financial statements,
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 10 (Securitizations and Variable Interest Entities) and
Note 11 (Mortgage Banking Activities));
valuations of financial instruments (Note 18 (Derivatives)
and Note 19 (Fair Values of Assets and Liabilities));
liabilities for contingent litigation losses (Note 17 (Legal
Actions)); and
income taxes (Note 24 (Income Taxes)).
•
•
•
•
Actual results could differ from those estimates.
Accounting Standards Adopted in 2019
In 2019, we adopted the following new accounting guidance:
•
Accounting Standards 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 2017-08 – Receivables – Nonrefundable Fees and
Other Costs (Subtopic 310-20): Premium Amortization on
Purchased Callable Debt Securities
ASU 2016-02 – Leases (Topic 842) and subsequent related
Updates, including early adoption of ASU 2019-01 – Leases
(Topic 842): Codification Improvements
•
•
ASU 2018-16 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 London Interbank Offered Rate (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 is applied prospectively for qualifying new or re-
designated hedging relationships entered into on or after
adoption date.
We adopted the guidance in first quarter 2019. The Update
has not had an impact as we have not designated SOFR OIS as a
benchmark interest rate in any hedging relationships.
ASU 2017-08 changes the interest income recognition model for
purchased callable debt securities carried at a premium, as the
premium will be amortized to the earliest call date rather than to
the contractual maturity date. Accounting for purchased callable
debt securities held at a discount does not change, as the
discount will continue to accrete to the contractual maturity
date. The Update impacted our investments in purchased callable
debt securities classified as available-for-sale (AFS) and held-to-
maturity (HTM), which predominantly consist of debt securities
of U.S. states and political subdivisions.
We adopted the Update in first quarter 2019 and recorded a
cumulative-effect adjustment as of January 1, 2019, that
decreased total stockholders’ equity by $111 million. Retained
earnings was reduced by $592 million which reflects both the
incremental premium amortization under the new guidance from
the acquisition date of our impacted AFS and HTM debt
securities through the date of adoption and the fact that the
incremental premium amortization is not deductible for federal
income tax purposes. Other comprehensive income (OCI) was
increased by $481 million which reflects the corresponding
adjustment to the adoption date unrealized gain or loss of
impacted AFS debt securities. Going forward, interest income
recognized prior to the call date will be reduced because the
premium will be amortized over a shorter period.
ASU 2016-02 modifies the guidance used by lessors and lessees
to account for leasing transactions. For our transition to the new
guidance, we elected several available practical expedients,
including to not reassess the classification of our existing leases,
any initial direct costs associated with our leases, or whether any
existing contracts are or contain leases. In addition, we elected
not to provide a comparative presentation for 2018 and 2017
financial statements.
We adopted the Update in first quarter 2019 and recorded a
cumulative-effect adjustment that increased retained earnings
by $100 million related to deferred gains on our prior sale-
leaseback transactions. We also recognized operating lease right-
of-use (ROU) assets and liabilities, substantially all of which
relate to our leasing of real estate as a lessee, of $4.9 billion and
$5.6 billion, respectively.
Wells Fargo & Company
129
Note 1: Summary of Significant Accounting Policies (continued)
Table 1.1 summarizes financial assets and liabilities by form
and measurement accounting model.
Table 1.1: Accounting Model for Financial Assets and Financial Liabilities
Balance sheet caption
Measurement model(s)
Financial statement Note reference
Cash and due from banks
Interest-earning deposits with banks
Amortized cost
Amortized cost
Note 3: Cash, Loan and Dividend Restrictions
Note 3: Cash, Loan and Dividend Restrictions
Federal funds sold and securities purchased under resale Amortized cost
N/A
agreements
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
FV-NI (1)
FV-OCI (2)
Note 4: Trading Activities
Note 19: Fair Values of Assets and Liabilities
Note 5: Available-for-Sale and Held-to-Maturity Debt Securities
Note 19: 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)
Note 19: Fair Values of Assets and Liabilities
Note 19: Fair Values of Assets and Liabilities
Note 6: Loans and Allowance for Credit Losses
Note 19: Fair Values of Assets and Liabilities
Note 4: Trading Activities
Note 18: Derivatives
Note 19: Fair Values of Assets and Liabilities
Note 4: Trading Activities
Note 8: Equity Securities
Note 19: Fair Values of Assets and Liabilities
Note 4: Trading Activities
Note 8: Equity Securities
Note 19: Fair Values of Assets and Liabilities
Amortized cost (5)
Note 9: Premises, Equipment, and Other Assets
Amortized cost
Amortized cost
Note 13: Deposits
Note 14: Short-Term Borrowings
Accrued expenses and other liabilities
Amortized cost (6)
Note 4: Trading Activities
Note 7: Leasing Activity
Note 19: Fair Values of Assets and Liabilities
Long-term debt
Amortized cost
Note 15: Long-Term Debt
FV-NI represents the fair value through net income accounting model.
FV-OCI represents the fair value through other comprehensive income accounting model.
LOCOM represents the lower of cost or fair value accounting model.
(1)
(2)
(3)
(4) MA represents the measurement alternative accounting model.
(5) Other assets are generally measured at amortized cost, except for bank-owned life insurance which is measured at cash surrender value.
(6)
Accrued expenses and other liabilities are generally measured at amortized cost, except for trading short-sale liabilities which are measured at FV-NI.
Consolidation
Our consolidated financial statements include the accounts of
the Parent and our subsidiaries in which we have a controlling
financial interest. When our consolidated subsidiaries follow
specialized industry accounting, that accounting is retained in
consolidation.
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 (collectively
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, which is when we have both the power to
direct the activities that most significantly impact the VIE and a
variable interest that could potentially be significant to the VIE.
To determine whether or not a variable interest we hold could
potentially be significant to the VIE, we consider both qualitative
and quantitative factors regarding the nature, size and form of
our involvement with the VIE. We assess whether or not we are
the primary beneficiary of a VIE on an 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.
130
Wells Fargo & Company
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. Trading assets and liabilities include debt securities,
equity securities, loans, derivatives and short sales, which are
reported within the balance sheet based on the accounting
classification 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, as well as
short positions, 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
earnings where the fair value changes and related interest
income and expense of the positions are recorded.
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) the 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 earnings where the fair value
changes and related interest income and expense of the
positions are recorded.
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
Investments in debt securities for which the Company does not
have the positive intent and ability to hold to maturity are
classified as AFS. AFS debt securities are measured at fair value
with unrealized gains and losses reported in cumulative OCI, net
of applicable income taxes.
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. We
recognize OTTI in earnings as a reduction to the amortized cost
of the security. OTTI related to AFS debt securities is classified as
net gains (losses) from debt securities within noninterest
income.
We recognize OTTI for an AFS debt security that has a
decline in fair value below amortized cost 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, an OTTI has occurred. In
performing an assessment of the cash flows expected to be
collected, we consider all relevant information, including:
•
the length of time and the extent to which the fair value has
been less than the amortized cost basis;
the historical and implied volatility of the fair value of the
security;
the cause of the price decline, such as the general level of
interest rates or adverse conditions specifically related to
the security, an industry or a geographic area;
the issuer’s financial condition, near-term prospects and
ability to service the debt;
the payment structure of the debt security and the
likelihood of the issuer being able to make payments that
increase in the future;
for asset-backed securities, the credit performance of the
underlying collateral, including delinquency rates, level of
non-performing assets, cumulative losses to date, collateral
value and the remaining credit enhancement compared with
expected credit losses;
any change in rating agencies’ credit ratings 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, OTTI is recognized in earnings equal to the
entire difference between the amortized cost basis and fair value
of the security. For a 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,
OTTI 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 less any OTTI
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
Wells Fargo & Company
131
Note 1: Summary of Significant Accounting Policies (continued)
effective interest method, except for purchased callable debt
securities carried at a premium. For purchased callable debt
securities carried at a premium, the premium is amortized into
interest income to the earliest call date using the effective
interest method. As principal repayments are received on
securities (e.g., 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 Investments in debt
securities for which the Company has the positive intent and
ability to hold to maturity are classified as HTM. HTM debt
securities are measured at historical cost adjusted for
amortization of premiums and accretion of discounts under the
same methods described for AFS debt securities. We recognize
OTTI when there is a decline in fair value below amortized cost
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.
OTTI related to HTM debt securities is classified as net gains
(losses) from debt securities within noninterest income. 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 cumulative OCI balance is amortized into
earnings over the same period as the unamortized premiums and
discounts 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
from AFS to HTM.
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 as well as the collateral pledged
and received. Additional collateral is pledged or returned to
maintain the appropriate collateral position for the transactions.
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 in the securitization or
whole loan market. We have elected the fair value option for
substantially all residential MLHFS (see Note 19 (Fair Values of
Assets and Liabilities)). The remaining residential MLHFS are held
at the lower of cost or fair value (LOCOM) and are measured on
an aggregate portfolio basis. Commercial MLHFS are held at
LOCOM and are measured on an individual loan basis.
Loans held for sale (LHFS) include commercial loans
originated for sale and purchased 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. LHFS are measured on an individual loan
basis.
Gains and losses on MLHFS are generally recorded in
mortgage banking noninterest income. Gains and losses on LHFS
used in trading activities are recognized in net gains from trading
activities. Gains and losses on LHFS not used in trading activities
are recognized in other noninterest income. Direct loan
origination costs and fees for MLHFS and LHFS under the fair
value option are recognized in earnings at origination. For
MLHFS and LHFS recorded at LOCOM, loan costs and fees are
deferred at origination and are recognized in earnings 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 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. Purchased credit-
impaired (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 effective interest method.
Loan commitment fees are generally deferred and amortized
into noninterest income on a straight-line basis over the
commitment period.
Loans also include financing leases where we are the lessor.
See the “Leasing Activity” section in this Note for our accounting
policy for leases.
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 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.
•
•
•
132
Wells Fargo & Company
Credit card loans are not placed on nonaccrual status, but are
generally fully charged off when the loan reaches 180 days past
due.
PCI loans are written down at acquisition to fair value using
an estimate of cash flows deemed to be collectible and an
accretable yield is established. Accordingly, such loans are not
classified as nonaccrual because they continue to earn interest
from accretable yield, independent of performance in accordance
of their contractual terms, and we expect to fully collect the new
carrying values of such loans (that is, the new cost basis arising
out of purchase accounting).
When we place a loan on nonaccrual status, we reverse the
accrued unpaid interest receivable against interest income and
suspend amortization of any net deferred fees. If the ultimate
collectability of the recorded loan balance is in doubt on a
nonaccrual loan, the cost recovery method is used and cash
collected is applied to first reduce the carrying value of the loan.
Otherwise, interest income may be recognized to the extent cash
is received. Generally, we return a loan to accrual status when all
delinquent interest and principal become current under the
terms of the loan agreement and collectability of remaining
principal and interest is no longer doubtful.
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.
•
•
•
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:
•
•
•
•
•
Real estate 1-4 family mortgages – We generally charge
down to net realizable value when the loan is 180 days past
due.
Automobile loans – We generally fully charge off when the
loan is 120 days past due.
Credit card loans – We generally fully charge off when the
loan is 180 days past due.
Unsecured loans (closed end) – We generally fully charge off
when the loan is 120 days past due.
Unsecured loans (open end) – We generally fully charge off
when the loan is 180 days past due.
• Other secured loans – We generally fully or partially charge
down to net realizable value when the loan is 120 days past
due.
IMPAIRED LOANS We consider a loan to be impaired when, based
on current information and events, we determine that we will not
be able to collect all amounts due according to the loan contract,
including scheduled interest payments. This evaluation is
generally based on delinquency information, an assessment of
the borrower’s financial condition and the adequacy of collateral,
if any. Our impaired loans predominantly include loans on
nonaccrual status in the commercial portfolio segment and loans
modified in a TDR, whether on accrual or nonaccrual status.
When we identify a loan as impaired, we generally measure
the impairment, if any, based on the difference between the
recorded investment in the loan (net of previous charge-offs,
deferred loan fees or costs and unamortized premium or
discount) and the present value of expected future cash flows,
discounted at the loan’s pre-modification 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 pre-modification 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 interest 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
Wells Fargo & Company
133
Note 1: Summary of Significant Accounting Policies (continued)
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 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 The allowance for credit losses
(ACL) 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 ACL that assesses the losses inherent
in our portfolio and related unfunded credit commitments. We
develop and document our ACL methodology at the portfolio
segment level – commercial loan portfolio and consumer loan
portfolio. While we attribute portions of the ACL to our
respective commercial and consumer portfolio segments, the
entire ACL is available to absorb credit losses inherent in the
total loan portfolio and unfunded credit commitments.
Our process involves procedures to appropriately consider
the unique risk characteristics of our commercial and consumer
loan portfolio segments. For each portfolio segment, losses are
estimated collectively for groups of loans with similar
characteristics, individually or pooled for impaired loans or, for
PCI loans, based on the changes in cash flows expected to be
collected.
Our ACL amounts 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 ACL 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 ACL
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.
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 ACL 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 ACL. This imprecision considers
economic environmental factors, modeling assumptions and
performance, process risk, and other subjective factors, including
industry trends and emerging risk assessments.
134
Wells Fargo & Company
Leasing Activity
AS LESSOR We lease equipment to our customers under
financing or operating leases. Financing leases are presented in
loans and are recorded at the discounted amounts of lease
payments receivable plus the estimated residual value of the
leased asset. Leveraged leases, which are a form of financing
leases, are reduced by related non-recourse debt from third-
party investors. Lease payments receivable reflect contractual
lease payments adjusted for renewal or termination options that
we believe the customer is reasonably certain to exercise. The
residual value reflects our best estimate of the expected sales
price for the equipment at lease termination based on sales
history adjusted for recent trends in the expected exit markets.
Many of our leases allow the customer to extend the lease at
prevailing market terms or purchase the asset for fair value at
lease termination.
Our allowance for loan losses for financing leases considers
both the collectability of the lease payments receivable as well as
the estimated residual value of the leased asset. We typically
purchase residual value insurance on our financing leases so that
our risk of loss at lease termination will be less than 10% of the
initial value of the lease. In addition, we have several channels for
re-leasing or marketing those assets.
In connection with a lease, we may finance the customer’s
purchase of other products or services from the equipment
vendor and allocate the contract consideration between the use
of the asset and the purchase of those products or services
based on information obtained from the vendor. Amounts
allocated to financing of vendor products or services are
reported in loans as commercial and industrial loans, rather than
as lease financing.
Our primary income from financing leases is interest income
recognized using the effective interest method. Variable lease
revenues, such as reimbursement for property taxes associated
with the leased asset, are included in lease income within
noninterest income.
Operating lease assets are presented in other assets, net of
accumulated depreciation. Periodic depreciation expense is
recorded on a straight-line basis to the estimated residual value
over the estimated useful life of the leased asset. On a periodic
basis, operating lease assets are reviewed for impairment and
impairment loss is recognized if the carrying amount of
operating lease assets exceeds fair value and is not recoverable.
The carrying amount of leased assets is deemed 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. Depreciation of
leased assets and impairment loss are presented in operating
leases expense within other noninterest expense.
Operating lease rental income for leased assets is
recognized in lease income within noninterest income on a
straight-line basis over the lease term. Variable revenues on
operating leases include reimbursements of costs, including
property taxes, which fluctuate over time, as well as rental
revenue based on usage. For leases of railcars, revenue for
maintenance services provided under the lease is recognized in
lease income.
We elected to exclude from revenues and expenses any sales
tax incurred on lease payments which are reimbursed by the
lessee. Substantially all of our leased assets are protected against
casualty loss through third-party insurance.
AS LESSEE We enter into lease agreements to obtain the right to
use assets for our business operations, substantially all of which
are real estate. Lease liabilities and ROU assets are recognized
when we enter into operating or financing leases and represent
our obligations and rights to use these assets over the period of
the leases and may be re-measured for certain modifications,
resolution of certain contingencies involving variable
consideration, or our exercise of options (renewal, extension, or
termination) under the lease.
Operating lease liabilities include fixed and in-substance
fixed payments for the contractual duration of the lease,
adjusted for renewals or terminations which were considered
probable of exercise when measured. The lease payments are
discounted using a rate determined when the lease is recognized.
As we typically do not know the discount rate implicit in the
lease, we estimate a discount rate that we believe approximates
a collateralized borrowing rate for the estimated duration of the
lease. The discount rate is updated when re-measurement events
occur. The related operating lease ROU assets may differ from
operating lease liabilities due to initial direct costs, deferred or
prepaid lease payments and lease incentives.
We present operating lease liabilities in accrued expenses
and other liabilities and the related operating lease ROU assets in
other assets. The amortization of operating lease ROU assets
and the accretion of operating lease liabilities are reported
together as fixed lease expense and are included in net
occupancy expense within noninterest expense. The fixed lease
expense is recognized on a straight-line basis over the life of the
lease.
Some of our operating leases include variable lease
payments which are periodic adjustments of our payments for
the use of the asset based on changes in factors such as
consumer price indices, fair market value rents, tax rates
imposed by taxing authorities, or lessor cost of insurance. To the
extent not included in operating lease liabilities and operating
lease ROU assets, these variable lease payments are recognized
as incurred in net occupancy expense within noninterest expense.
For substantially all of our leased assets, we account for
consideration paid under the contract for maintenance or other
services as lease payments. In addition, for certain asset classes,
we have elected to exclude leases with original terms of less than
one year from the operating lease ROU assets and lease
liabilities. The related short-term lease expense is included in net
occupancy expense.
Finance lease (formerly capital lease) liabilities are presented
in long-term debt and the associated finance ROU assets are
presented in premises and equipment.
Securitizations and Beneficial Interests
Securitizations are transactions in which financial assets are sold
to a Special Purpose Entity (SPE), which then issues beneficial
interests in the form of senior and subordinated interests
collateralized by the transferred financial assets. In some cases,
we may obtain beneficial interests issued by the SPE.
Additionally, from time to time, we may re-securitize certain
financial 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 or mortgage servicing rights) and
all liabilities incurred. We record a gain or loss in noninterest
income for the difference between assets obtained (net of
liabilities incurred) and the carrying amount of the assets sold.
Interests obtained from, and liabilities incurred in, securitizations
with off-balance sheet entities may include debt and equity
securities, loans, MSRs, derivative assets and liabilities, other
Wells Fargo & Company
135
Note 1: Summary of Significant Accounting Policies (continued)
assets, and other obligations such as liabilities for mortgage
repurchase losses or long-term debt and are accounted for as
described within this Note.
Mortgage Servicing Rights
We recognize the rights to service mortgage loans for others, or
mortgage servicing rights (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 10 (Securitizations and Variable Interest
Entities), Note 11 (Mortgage Banking Activities) and Note 19
(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. We 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.
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,
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 customer relationship intangible assets on an
accelerated basis over useful lives not exceeding 10 years. We
review intangible assets 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
categorize the derivative as either an accounting hedge,
economic hedge or part of our customer accommodation trading
and other portfolio.
Accounting hedges are either fair value or cash flow hedges.
Fair value hedges represent the hedge of the fair value of a
recognized asset or liability or an unrecognized firm
commitment, including hedges of foreign currency exposure.
Cash flow hedges represent the hedge of a forecasted
transaction or the variability of cash flows to be paid or received
related to a recognized asset or liability.
Economic hedges and customer accommodation trading
and other derivatives do not qualify for, or we have elected not to
apply, hedge accounting. Economic hedges are derivatives we use
to manage interest rate, foreign currency and certain other risks
associated with our non-trading activities. Customer
accommodation trading and other derivatives primarily
represents derivatives related to our trading business activities.
We report changes in the fair values of these derivatives in
noninterest income.
FAIR VALUE HEDGES We record changes in the fair value of the
derivative in 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 earnings. 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
•
•
136
Wells Fargo & Company
periodic cash flow settlements are reflected in net interest
income.
The entire derivative gain or loss is included in the
assessment of hedge effectiveness for all fair value hedge
relationships, except for hedges of foreign-currency
denominated AFS debt securities and long-term debt liabilities
hedged with cross-currency swaps. The change in fair value of
these swaps attributable to cross-currency basis spread changes
is excluded from the assessment of hedge effectiveness. The
initial fair value of the excluded component is amortized to net
interest income and the difference between changes in fair value
of the excluded component and the amount recorded in earnings
is recorded in OCI.
CASH FLOW HEDGES 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 earnings in the
same period(s) that the hedged transaction affects earnings and
in the same income statement category as the hedged item. For
cash flow hedges of interest rate risk associated with floating-
rate commercial loans and long-term debt, these amounts are
reflected in net interest income. For cash flow hedges of foreign
currency risk associated with fixed-rate long-term debt, these
amounts are reflected in net interest income. The entire gain or
loss on these derivatives is included in the assessment of hedge
effectiveness.
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 a 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.
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. The 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. For example, for financial
debt instruments such as AFS debt securities, loans or long-term
debt, these amounts are amortized into net interest income over
the remaining life of the asset or liability similar to other
amortized cost basis adjustments. If the hedged item is
derecognized, the accumulated amounts reported in OCI are
immediately reclassified to net interest 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 earnings at which point the related OCI amount is
reclassified to net interest 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
noninterest 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 host
contract, (2) if the financial instrument that embodies both the
embedded derivative and the host contract is not measured at
fair value with changes in fair value reported in earnings, and (3)
if a separate instrument with the same terms as the embedded
instrument would meet the definition of a derivative. If the
embedded derivative meets all of these conditions, we separate
it from the hybrid 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 noninterest income and
reported within the balance sheet as a derivative asset or liability.
The accounting for the remaining host contract is the same as
other assets and liabilities of a similar type and reported within
the balance sheet based upon the accounting classification of the
instrument.
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
Wells Fargo & Company
137
Note 1: Summary of Significant Accounting Policies (continued)
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. We
incorporate adjustments to reflect counterparty credit risk
(credit valuation adjustments (CVA)) in determining the fair
value of our derivatives. CVA, which considers the effects of
enforceable master netting agreements and collateral
arrangements, reflects market-based views of the credit quality
of each counterparty. We estimate CVA based on observed credit
spreads in the credit default swap market and indices indicative
of the credit quality of the counterparties to our derivatives.
Cash collateral exchanged related to our interest rate
derivatives, and certain commodity and equity derivatives, with
centrally cleared counterparties is recorded as a reduction of the
derivative fair value asset and liability balances, as opposed to
separate non-derivative receivables or payables. This cash
collateral, also referred to as variation margin, is exchanged
based upon derivative fair value changes, typically on a one-day
lag. For additional information on our derivatives and hedging
activities, see Note 18 (Derivatives).
Equity Securities
Equity securities exclude investments that represent a
controlling interest in the investee. 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 net gains
(losses) on equity securities within noninterest income. Realized
and unrealized gains and losses from marketable equity
securities related to our trading activity are recognized in net
gains from trading activities. The remaining marketable equity
securities realized and unrealized gains and losses are recognized
in net gains from equity securities. Dividend income from
marketable equity securities is recognized in interest income.
Nonmarketable equity securities do not have readily
determinable fair values. 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 noninterest income;
Equity method: This method is applied when we have the
ability to exert significant influence over the investee. These
securities are carried at cost and adjusted for our share of
the investee’s earnings or losses, less any dividends received
and/or 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 amortized cost
less any impairments. 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 initially carried at amortized cost and are remeasured to
fair value as of the date of an orderly observable transaction
of the same or similar security of the same issuer. These
securities are also adjusted for any impairments.
Equity method adjustments for our share of the investee’s
earnings or losses are recognized in other noninterest income. All
other realized and unrealized gains and losses, including
impairment losses, from nonmarketable equity securities are
recognized in net gains from equity securities. Dividends from
equity method securities are recognized as a reduction of the
investment carrying value. Dividend income from all other
nonmarketable equity securities is recognized in interest income.
Our review for impairment for equity method, cost method
and measurement alternative securities 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.
Pension Accounting
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. We also sponsor nonqualified defined benefit plans
that provide supplemental defined benefit pension benefits to
certain eligible employees. 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, 2019, is 19 years. See Note 23 (Employee
Benefits and Other Expenses) for additional information on our
pension accounting.
138
Wells Fargo & Company
Income Taxes
We file consolidated and separate company U.S. federal income
tax returns, non-U.S. 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. 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.
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 basis of
assets and liabilities, and enacted changes in tax rates and laws
are recognized in the period in which they occur. Deferred tax
assets are recognized subject to management’s judgment that
realization is more likely than not.
See Note 24 (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 21 (Common Stock and Stock Plans). Our
Long-Term Incentive Compensation Plan provides for awards of
incentive and nonqualified stock options, stock appreciation
rights, restricted shares, restricted share rights (RSRs),
performance share awards (PSAs) and stock awards without
restrictions. 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 recognized in commission and
incentive compensation in our income statement normally over
the vesting period of the award; awards with graded vesting are
expensed on a straight-line method. Awards to team members
who are retirement eligible at the grant date are subject to
immediate expensing upon grant. Awards to team members who
become retirement eligible before the final vesting date are
expensed between the grant date and the date the team
member becomes retirement eligible. Except for retirement and
other limited circumstances, RSRs are canceled when
employment ends.
Beginning in 2013, certain RSRs and all PSAs granted
include discretionary conditions that can result in forfeiture and
are measured at fair value initially and subsequently until the
discretionary conditions end. 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. The total expense that will be recognized on these
awards cannot be finalized until the determination of the awards
that will vest.
Earnings Per Common Share
We compute earnings per common share by dividing net income
applicable to common stock (net income less dividends on
preferred stock and the excess of consideration transferred over
carrying value of preferred stock redeemed, if any) by the
average number of common shares outstanding during the
period. We compute diluted earnings per common share using
net income applicable to common stock and adding the effect of
common stock equivalents (e.g., stock options, restricted share
rights, convertible debentures and warrants) that are dilutive to
the average number of common shares outstanding during the
period.
Fair Value of Assets and Liabilities
Fair value is defined as 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. Fair
value is based on the exit price notion while maximizing the use
of observable inputs and minimizing the use of unobservable
inputs.
We measure our assets and liabilities at fair value when we
are required to record them at fair value, when we have elected
the fair value option, and to fulfill fair value disclosure
requirements. Assets and liabilities are recorded at fair value on a
recurring or nonrecurring basis. Assets and liabilities that are
recorded at fair value on a recurring basis require a fair value
measurement at each reporting period. Those that are recorded
at fair value on a nonrecurring basis are adjusted to fair value
only as required through the application of an accounting
method such as LOCOM, the measurement alternative, or write-
downs of individual assets. Measurements of fair value prioritize
observable inputs, where available.
We classify our assets and liabilities measured at fair value
based upon a three-level hierarchy that assigns the highest
priority to unadjusted quoted prices in active markets and the
lowest priority to unobservable inputs. The three levels are as
follows:
•
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.
•
•
For valuations that use several inputs, the determination of
whether that measurement is Level 2 or Level 3 is based on the
significance of the unobservable inputs to the entire fair value
measurement. See Note 19 (Fair Values of Assets and Liabilities)
for a more detailed discussion of the valuation methodologies
that we apply to our assets and liabilities.
Wells Fargo & Company
139
Note 1: Summary of Significant Accounting Policies (continued)
Share Repurchases
From time to time we may enter into written repurchase plans
pursuant to Rule 10b5-1 of the Securities Exchange Act of 1934,
private forward repurchase contracts, or a combination of the
two to complement our open-market common stock repurchase
strategies. The stock repurchase transactions allow us to manage
our share repurchases in a manner consistent with our capital
plans submitted annually under the Comprehensive Capital
Analysis and Review (CCAR) and to provide an economic benefit
to the Company.
Under a Rule 10b5-1 repurchase plan, payments and receipt
of repurchased shares settle on the same day. Shares
repurchased reduce the total number of outstanding shares of
common stock upon the settlement of each trade under the
plan. During 2019 and 2018, we repurchased approximately
204 million and 12 million shares of our common stock,
respectively, under Rule 10b5-1 repurchase plans. We had no
shares repurchased under a Rule 10b5-1 repurchase plan during
2017.
We had no shares repurchased under private forward
repurchase contracts in 2019. During 2018 and 2017, we
repurchased approximately 82 million and 89 million shares of
Table 1.2: Supplemental Cash Flow Information
our common stock, respectively, under these contracts. We had
no unsettled private forward repurchase contracts at
December 31, 2019, December 31, 2018, or December 31,
2017. Under private forward repurchase contract transactions,
our payments to counterparties are recognized 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 contemplate a
fixed dollar amount available per quarter for share repurchases
pursuant to the Board of Governors of the Federal Reserve
System (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 contract.
Supplemental Cash Flow Information
Significant noncash activities are presented in Table 1.2.
(in millions)
Trading debt securities retained from securitization of MLHFS
$
Transfers from loans to MLHFS
Transfers from available-for-sale debt securities to held-to-maturity debt securities
Operating lease ROU assets acquired with operating lease liabilities (1)
2019
40,650
6,330
13,833
5,804
Year ended December 31,
2018
37,265
5,366
16,479
—
2017
52,435
5,500
50,405
—
(1)
The year ended December 31, 2019, balance includes $4.9 billion from adoption of ASU 2016-02 – Leases (Topic 842) and $904 million attributable to new leases and changes from modified leases.
Subsequent Events
We have evaluated the effects of events that have occurred
subsequent to December 31, 2019, and, except as disclosed in
Note 17 (Legal Actions), Note 20 (Preferred Stock) and Note 27
(Operating Segments), there have been no material events that
would require recognition in our 2019 consolidated financial
statements or disclosure in the Notes to the consolidated
financial statements.
140
Wells Fargo & Company
Note 2: Business Combinations
There were no acquisitions during 2019 or 2018. As of
December 31, 2019, we had no pending acquisitions.
During 2019, we completed the sale of our Institutional
Retirement and Trust (IRT) business in July and the sale of our
Eastdil Secured (Eastdil) business in October, recognizing pre-tax
gains within other noninterest income of $1.1 billion and
$362 million, respectively.
For the IRT business, we will continue to administer client
assets at the direction of the buyer for up to 24 months from the
closing date pursuant to a transition services agreement. The
buyer will receive post-closing revenue from the client assets and
will pay us a fee for certain costs that we incur to administer the
client assets during the transition period. The transition services
fee will be recognized as other noninterest income, and the
expenses we incur will be recognized in the same manner as they
were prior to the close of the sale. Transition period revenue is
expected to approximate transition period expenses and is
subject to downward adjustment as client assets transition to
the buyer’s platform. No IRT client assets were transitioned to
the buyer’s platform as of December 31, 2019. At December 31,
2019, we had assets under management (AUM) and assets under
administration (AUA) associated with the IRT business of
$21 billion and $915 billion, respectively.
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.
Wells Fargo & Company
141
Note 3: Cash, Loan and Dividend Restrictions
Cash and cash equivalents may be restricted as to usage or
withdrawal. 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,
2019
Average required reserve balance for FRB (1)
$
11,374
Reserve balance for non-U.S. central banks
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
460
733
300
Dec 31,
2018
12,428
517
1,135
147
(1)
FRB required reserve balance represents average for the years ended December 31, 2019,
and December 31, 2018.
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 ACL
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 29 (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 have a state-chartered subsidiary bank that is subject to
state regulations that limit dividends. Under these provisions and
regulatory limitations, our national and state-chartered
subsidiary banks could have declared additional dividends of
$5.4 billion at December 31, 2019, 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, as amended and restated on June 26, 2019, among
Wells Fargo & Company, the parent holding company (the
“Parent”), WFC Holdings, LLC, an intermediate holding company
and subsidiary of the Parent (the “IHC”), Wells Fargo Bank, N.A.,
Wells Fargo Securities, LLC, Wells Fargo Clearing Services, LLC,
and certain other direct and indirect subsidiaries of the Parent
designated as material entities for resolution planning purposes
or identified as related support entities in our resolution plan, the
IHC may be restricted from making dividend payments to the
Parent if certain liquidity and/or capital metrics fall below defined
triggers, or if the Parent’s board of directors authorizes it to file a
case under the U.S. Bankruptcy Code. Based on retained earnings
at December 31, 2019, our nonbank subsidiaries could have
declared additional dividends of $25.9 billion at December 31,
2019, without obtaining prior regulatory 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
repurchase or redemption of common or perpetual preferred
stock as well as to raise the per share quarterly dividend from its
current level of $0.51 per share as declared by the Company’s
Board of Directors (Board) on January 28, 2020, payable on
March 1, 2020.
142
Wells Fargo & Company
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 Assets 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,
2019
Dec 31,
2018
$
$
79,733
27,440
972
34,825
(21,463)
13,362
121,507
17,430
33,861
(26,074)
7,787
25,217
69,989
19,449
1,469
29,216
(19,807)
9,409
100,316
19,720
28,717
(21,178)
7,539
27,259
(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. Net interest income also includes dividend income on
trading securities and dividend expense on trading securities we
have sold, but not yet purchased.
Table 4.2: Net Interest Income and Net Gains (Losses) on Trading Activities
Year ended December 31,
(in millions)
Interest income:
Debt securities
Equity securities
Loans held for sale
Total interest income
Less: Interest expense
Net interest income
Net gains (losses) from trading activities (1):
Debt securities
Equity securities
Loans held for sale
Derivatives (2)
Total net gains from trading activities
Total trading-related net interest and noninterest income
2019
3,130
579
78
3,787
525
3,262
1,053
4,795
12
(4,867)
993
4,255
$
$
2018
2,831
587
62
3,480
587
2,893
(824)
(4,240)
(1)
5,667
602
3,495
2017
2,313
515
38
2,866
416
2,450
125
3,394
45
(3,022)
542
2,992
(1)
(2)
Represents realized gains (losses) from our trading activities and unrealized gains (losses) due to changes in fair value of our trading positions.
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.
Wells Fargo & Company
143
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).
Table 5.1: Amortized Cost and Fair Value
(in millions)
December 31, 2019
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
Other (2)
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 (3)
Other debt securities
Total held-to-maturity debt securities
Total (4)
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
Other (2)
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 (3)
Other debt securities
Total held-to-maturity debt securities
Total (4)
Amortized cost
Gross
unrealized gains
Gross
unrealized losses
Fair value
$
$
$
$
14,948
39,381
160,318
814
3,899
165,031
6,343
29,693
4,664
260,060
45,541
13,486
94,869
37
153,933
413,993
13,451
48,994
155,974
2,638
4,207
162,819
6,230
35,581
5,396
272,471
44,751
6,286
93,685
66
144,788
417,259
13
992
2,299
14
41
2,354
252
125
50
3,786
617
286
2,093
—
2,996
6,782
3
716
369
142
40
551
131
158
100
1,659
4
30
112
—
146
1,805
(1)
(36)
(164)
(1)
(6)
(171)
(32)
(123)
(24)
(387)
(19)
(13)
(37)
—
(69)
(456)
(106)
(446)
(3,140)
(5)
(22)
(3,167)
(90)
(396)
(13)
(4,218)
(415)
(116)
(2,288)
—
(2,819)
(7,037)
14,960
40,337
162,453
827
3,934
167,214
6,563
29,695
4,690
263,459
46,139
13,759
96,925
37
156,860
420,319
13,348
49,264
153,203
2,775
4,225
160,203
6,271
35,343
5,483
269,912
44,340
6,200
91,509
66
142,115
412,027
(1)
Includes investments in tax-exempt preferred debt securities issued by investment funds or trusts that predominantly invest in tax-exempt municipal securities. The amortized cost and fair value of
these types of securities was $5.8 billion each at December 31, 2019, and $6.3 billion each at December 31, 2018.
Largely includes asset-backed securities collateralized by student loans.
Predominantly consists of federal agency mortgage-backed securities at both December 31, 2019, and December 31, 2018.
(2)
(3)
(4) We held debt securities from Federal National Mortgage Association (FNMA) and Federal Home Loan Mortgage Corporation (FHLMC) that each exceeded 10% of shareholders’ equity, with an
amortized cost of $112.1 billion and $89.9 billion and a fair value of $114.0 billion and $91.4 billion at December 31, 2019, and an amortized cost of $99.0 billion and $95.0 billion and a fair value of
$97.6 billion and $93.0 billion at December 31, 2018, respectively.
144
Wells Fargo & Company
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, 2019
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
Total held-to-maturity debt securities
Total
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
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
Total held-to-maturity debt securities
Less than 12 months
12 months or more
Total
Gross
unrealized
losses
Fair value
Gross
unrealized
losses
Fair value
Gross
unrealized
losses
Fair value
$
$
$
—
(10)
(50)
(1)
(3)
(54)
(9)
(13)
(12)
(98)
(19)
(9)
(35)
(63)
—
2,776
16,807
149
998
17,954
303
5,070
1,587
27,690
989
613
5,825
7,427
(1)
(26)
(114)
—
(3)
(117)
(23)
(110)
(12)
(289)
—
(4)
(2)
(6)
2,423
2,418
10,641
—
244
10,885
216
16,789
492
33,223
—
57
31
88
(1)
(36)
(164)
(1)
(6)
(171)
(32)
(123)
(24)
(387)
(19)
(13)
(37)
(69)
2,423
5,194
27,448
149
1,242
28,839
519
21,859
2,079
60,913
989
670
5,856
7,515
(161)
35,117
(295)
33,311
(456)
68,428
(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)
(26)
(8)
(6)
(3,620)
(412)
(112)
(2,283)
(2,807)
112,252
69
79
112,400
298
553
159
128,631
41,083
3,992
77,741
122,816
(3,140)
(5)
(22)
(3,167)
123,231
467
2,051
125,749
(90)
2,263
(396)
(13)
(4,218)
28,859
978
183,314
(415)
(116)
(2,288)
(2,819)
41,978
4,590
82,376
128,944
Total
$
(610)
60,811
(6,427)
251,447
(7,037)
312,258
Wells Fargo & Company
145
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.
146
Wells Fargo & Company
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 $7 million and $2.2 billion,
respectively, at December 31, 2019, and $20 million and
$5.2 billion, respectively, at December 31, 2018. 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
(in millions)
December 31, 2019
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
Total held-to-maturity debt securities
Total
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
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
Total held-to-maturity debt securities
Total
Investment grade
Non-investment grade
Gross
unrealized losses
Fair value
Gross
unrealized losses
Fair value
$
$
$
$
(1)
(32)
(164)
(1)
(3)
(168)
(3)
(123)
(13)
(340)
(19)
(13)
(25)
(57)
(397)
(106)
(425)
2,423
5,019
27,448
149
1,158
28,755
155
21,859
1,499
59,710
989
670
5,428
7,087
66,797
6,702
18,447
(3,140)
123,231
(2)
(20)
(3,162)
(17)
(396)
(7)
(4,113)
(415)
(116)
(2,278)
(2,809)
(6,922)
295
1,999
125,525
791
28,859
726
181,050
41,978
4,590
81,977
128,545
309,595
—
(4)
—
—
(3)
(3)
(29)
—
(11)
(47)
—
—
(12)
(12)
(59)
—
(21)
—
(3)
(2)
(5)
(73)
—
(6)
(105)
—
—
(10)
(10)
(115)
—
175
—
—
84
84
364
—
580
1,203
—
—
428
428
1,631
—
316
—
172
52
224
1,472
—
252
2,264
—
—
399
399
2,663
Wells Fargo & Company
147
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: Available-for-Sale Debt Securities – Fair Value by Contractual Maturity
(in millions)
December 31, 2019
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
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
14,960
40,337
162,453
827
3,934
167,214
6,563
29,695
4,690
1.96% $
4.82
3.43
2.78
3.44
3.43
4.83
3.33
2.57
9,980
2,687
1.88% $
2.91
4,674
3,208
2.12% $
46
1.83% $
260
3.31
4,245
3.21
30,197
2.25%
5.38
—
—
—
—
460
—
35
—
—
—
—
5.37
—
4.16
152
—
31
183
2,251
—
687
3.40
—
4.03
3.51
4.93
—
3.15
1,326
—
235
1,561
3,070
12,137
1,408
2.52
—
3.22
2.62
4.64
3.43
1.80
160,975
827
3,668
165,470
782
17,558
2,560
3.44
2.78
3.45
3.43
4.98
3.27
2.81
$
263,459
3.57% $
13,162
2.22% $
11,003
3.12% $
22,467
3.39% $ 216,827
3.69%
(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.
Table 5.5 shows the amortized cost and weighted-average
yields of held-to-maturity debt securities by contractual
maturity.
Table 5.5: Held-to-Maturity Debt Securities – Amortized Cost by Contractual Maturity
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
(in millions)
December 31, 2019
Held-to-maturity debt securities (1):
Amortized cost:
Securities of U.S. Treasury and federal agencies
$
45,541
2.12% $
1,296
1.75% $ 42,242
2.13% $
1,244
2.00% $
759
2.33%
Securities of U.S. states and political subdivisions
Federal agency and other mortgage-backed securities
Other debt securities
13,486
94,869
37
4.89
3.08
3.18
—
—
—
—
—
—
87
15
—
5.95
3.10
—
1,866
—
37
4.80
—
3.18
11,533
94,854
—
4.90
3.08
—
Total held-to-maturity debt securities at amortized
cost
$ 153,933
2.95% $
1,296
1.75% $ 42,344
2.14% $
3,147
3.68% $ 107,146
3.27%
(1) Weighted-average yields displayed by maturity bucket are weighted based on amortized cost and predominantly represent contractual coupon rates.
148
Wells Fargo & Company
Table 5.6 shows the fair value of held-to-maturity debt
securities by contractual maturity.
Table 5.6: Held-to-Maturity Debt Securities – Fair Value by Contractual Maturity
(in millions)
December 31, 2019
Held-to-maturity debt securities:
Fair value:
Total
amount
Within
one year
Amount
After one year
through five years
After five years
through ten years
Amount
Amount
After ten years
Amount
Remaining contractual maturity
Securities of U.S. Treasury and federal agencies
$
Securities of U.S. states and political subdivisions
Federal agency and other mortgage-backed securities
Other debt securities
46,139
13,759
96,925
37
1,301
42,830
—
—
—
87
15
—
Total held-to-maturity debt securities at fair value
$
156,860
1,301
42,932
1,268
1,940
—
37
3,245
740
11,732
96,910
—
109,382
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
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, 2019, 2018 or 2017.
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
$
Year ended December 31,
2019
2018
2017
$
227
(24)
(63)
$
140
155
(19)
(28)
108
948
(207)
(262)
479
Year ended December 31,
2019
2018
2017
$
33
—
17
13
—
63
2
4
18
—
4
28
150
11
80
21
—
262
Wells Fargo & Company
149
Note 5: Available-for-Sale and Held-to-Maturity Debt Securities (continued)
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
Other debt securities
Total changes to OCI for non-credit-related OTTI
Total OTTI losses recorded on debt securities
Year ended December 31,
2019
2018
2017
$
27
36
63
(1)
(1)
2
1
1
$
64
27
1
28
(2)
2
(11)
—
(11)
17
119
143
262
(5)
(1)
(51)
—
(57)
205
(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.
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. We have not
recognized OTTI on held-to-maturity debt securities we still
own. Recognized credit loss represents the difference between
the present value of expected future cash flows discounted using
the security’s current effective interest rate and the amortized
cost basis of the security prior to considering credit loss.
Table 5.10: Rollforward of OTTI Credit Loss
(in millions)
Credit loss recognized, beginning of year
Additions:
For securities with initial credit impairments
For securities with previous credit impairments
Total additions
Reductions:
For securities sold, matured, or intended/required to be sold
For recoveries of previous credit impairments (1)
Total reductions
Credit loss recognized, end of year
Year ended December 31,
2019
$
562
2018
742
2017
1,043
6
21
27
(390)
—
(390)
$
199
1
26
27
(204)
(3)
(207)
562
9
110
119
(414)
(6)
(420)
742
(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.
150
Wells Fargo & Company
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
unearned income, net deferred loan fees or costs, and
unamortized discounts and premiums. These amounts were less
than 1% of our total loans outstanding at December 31, 2019,
and December 31, 2018.
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 non-U.S. loans are reported by respective class of
financing receivable in the table above. Substantially all of our
non-U.S. loan portfolio is commercial loans. Table 6.2 presents
total non-U.S. commercial loans outstanding by class of financing
receivable.
Table 6.2: Non-U.S. Commercial Loans Outstanding
2019
2018
2017
2016
2015
December 31,
$
354,125
121,824
19,939
19,831
515,719
350,199
121,014
22,496
19,696
333,125
126,599
24,279
19,385
330,840
132,491
23,916
19,289
299,892
122,160
22,164
12,367
513,405
503,388
506,536
456,583
293,847
285,065
284,054
275,579
273,869
29,509
41,013
47,873
34,304
446,546
$
962,265
34,398
39,025
45,069
36,148
439,705
953,110
39,713
37,976
53,371
38,268
453,382
956,770
46,237
36,700
62,286
40,266
461,068
967,604
53,004
34,039
59,966
39,098
459,976
916,559
(in millions)
Non-U.S. commercial loans:
Commercial and industrial
Real estate mortgage
Real estate construction
Lease financing
2019
2018
2017
2016
2015
December 31,
$
70,494
62,564
60,106
7,004
1,434
1,220
6,731
1,011
1,159
8,033
655
1,126
55,396
8,541
375
972
49,049
8,350
444
274
Total non-U.S. commercial loans
$
80,152
71,465
69,920
65,284
58,117
Wells Fargo & Company
151
Note 6: Loans and Allowance for Credit Losses (continued)
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.
Commercial and industrial loans and lease financing to borrowers
in the financial institutions except banks industry represented
12% and 11% of total loans at December 31, 2019 and 2018,
respectively. At December 31, 2019 and 2018, we did not have
concentrations representing 10% or more of our total loan
portfolio in the commercial real estate (CRE) portfolios (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 13% and 12% of
total loans at December 31, 2019 and 2018, respectively, 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 mortgage loans include
an interest-only feature as part of the loan terms. These interest-
only loans were approximately 3% and 4% of total loans at
December 31, 2019 and 2018, respectively. 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 with a majority of the
portfolio 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, 2019, these option payment loans
were less than 1% of total loans.
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, 2019, our lines of credit portfolio had an
outstanding balance of $37.9 billion, of which $9.1 billion, or
24%, is in its amortization period, another $1.6 billion, or 4%, of
our total outstanding balance, will reach their end of draw period
during 2020 through 2021, $11.1 billion, or 29%, during 2022
through 2024, and $16.1 billion, or 43%, will convert in
subsequent years. This portfolio had unfunded credit
commitments of $58.9 billion at December 31, 2019. 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, 2019, $399 million, or 4%, of
outstanding lines of credit that are in their amortization period
were 30 or more days past due, compared with $488 million, or
2%, for lines in their draw period. We have considered this
increased inherent risk in our ACL 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. The table excludes PCI
loans, loans for which we have elected the fair value option, and
government insured/guaranteed real estate 1-4 family first
mortgage loans because their loan activity normally does not
impact the ACL.
(in millions)
Purchases
Sales
Transfers to MLHFS/LHFS
$
Commercial
Consumer
2,028
(1,797)
(123)
3,126
(530)
(1,889)
Year ended December 31,
2019
Total
5,154
(2,327)
(2,012)
Commercial
Consumer
2,065
(1,905)
(617)
16
(261)
(1,995)
2018
Total
2,081
(2,166)
(2,612)
152
Wells Fargo & Company
Commitments to Lend
A commitment to lend is a legally binding agreement to lend 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. The
unfunded amount of these temporary advance arrangements
totaled approximately $75.4 billion at December 31, 2019.
We issue commercial letters of credit to assist customers in
purchasing goods or services, typically for international trade. At
December 31, 2019 and 2018, we had $862 million and
$919 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 16 (Guarantees,
Pledged Assets and Collateral, and Other Commitments) for
additional information on standby letters of credit.
When we enter into 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 not funded. 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:
Commercial and industrial
Real estate mortgage
Real estate construction
Total commercial
Consumer:
Dec 31,
2019
Dec 31,
2018
$ 346,991
330,492
8,206
17,729
6,984
16,400
372,926
353,876
Real estate 1-4 family first mortgage
Real estate 1-4 family junior lien mortgage
Credit card
Other revolving credit and installment
Total consumer
34,391
36,916
114,933
25,898
212,138
Total unfunded credit commitments
$ 585,064
29,736
37,719
109,840
27,530
204,825
558,701
Wells Fargo & Company
153
Note 6: Loans and Allowance for Credit Losses (continued)
Allowance for Credit Losses
Table 6.5 presents the ACL, which consists of the allowance for
loan losses and the allowance for unfunded credit commitments.
Table 6.5: Allowance for Credit Losses
(in millions)
Balance, beginning of year
Provision for credit losses
Interest income on certain impaired loans (1)
Loan charge-offs:
Commercial:
Commercial and industrial
Real estate mortgage
Real estate construction
Lease financing
Total commercial
Consumer:
Real estate 1-4 family first mortgage
Real estate 1-4 family junior lien mortgage
Credit card
Automobile
Other revolving credit and installment
Total consumer
Total loan charge-offs
Loan recoveries:
Commercial:
Commercial and industrial
Real estate mortgage
Real estate construction
Lease financing
Total commercial
Consumer:
Real estate 1-4 family first mortgage
Real estate 1-4 family junior lien mortgage
Credit card
Automobile
Other revolving credit and installment
Total consumer
Total loan recoveries
Net loan charge-offs
Other
Balance, end of year
Components:
Allowance for loan losses
Allowance for unfunded credit commitments
Allowance for credit losses
Net loan charge-offs as a percentage of average total loans
Allowance for loan losses as a percentage of total loans
Allowance for credit losses as a percentage of total loans
2019
$
10,707
2,687
(147)
(802)
(38)
(1)
(70)
(911)
(129)
(118)
(1,714)
(647)
(674)
(3,282)
(4,193)
195
32
13
19
259
179
184
344
341
124
Year ended December 31,
2018
11,960
1,744
(166)
(727)
(42)
—
(70)
(839)
(179)
(179)
(1,599)
(947)
(685)
(3,589)
(4,428)
304
70
13
23
410
267
219
307
363
118
2017
12,540
2,528
(186)
(789)
(38)
—
(45)
(872)
(240)
(279)
(1,481)
(1,002)
(713)
(3,715)
(4,587)
297
82
30
17
426
288
266
239
319
121
2016
12,512
3,770
(205)
(1,419)
(27)
(1)
(41)
(1,488)
(452)
(495)
(1,259)
(845)
(708)
(3,759)
(5,247)
263
116
38
11
428
373
266
207
325
128
2015
13,169
2,442
(198)
(734)
(59)
(4)
(14)
(811)
(507)
(635)
(1,116)
(742)
(643)
(3,643)
(4,454)
252
127
37
8
424
245
259
175
325
134
1,172
1,431
(2,762)
(29)
1,274
1,684
1,233
1,659
1,299
1,727
1,138
1,562
(2,744)
(2,928)
(3,520)
(2,892)
(87)
6
(17)
(9)
$
10,456
10,707
11,960
12,540
12,512
$
9,551
905
$
10,456
0.29%
0.99
1.09
9,775
932
10,707
0.29
1.03
1.12
11,004
956
11,960
0.31
1.15
1.25
11,419
1,121
12,540
0.37
1.18
1.30
11,545
967
12,512
0.33
1.26
1.37
(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.
154
Wells Fargo & Company
Table 6.6 summarizes the activity in the ACL by our
commercial and consumer portfolio segments.
Table 6.6: Allowance for Credit Losses Activity by Portfolio Segment
(in millions)
Balance, beginning of year
Provision for credit losses
Interest income on certain impaired loans
Loan charge-offs
Loan recoveries
Net loan charge-offs
Other
Balance, end of year
Commercial
Consumer
$
6,417
518
(46)
(911)
259
(652)
8
4,290
2,169
(101)
(3,282)
1,172
(2,110)
(37)
Year ended December 31,
2019
Total
10,707
2,687
(147)
(4,193)
1,431
(2,762)
(29)
Commercial
Consumer
6,632
281
(47)
(839)
410
(429)
(20)
5,328
1,463
(119)
(3,589)
1,274
(2,315)
(67)
2018
Total
11,960
1,744
(166)
(4,428)
1,684
(2,744)
(87)
$
6,245
4,211
10,456
6,417
4,290
10,707
Table 6.7 disaggregates our ACL and recorded investment in
loans by impairment methodology.
Table 6.7: Allowance for Credit Losses by Impairment Methodology
(in millions)
December 31, 2019
Collectively evaluated (1)
Individually evaluated (2)
PCI (3)
Total
December 31, 2018
Collectively evaluated (1)
Individually evaluated (2)
PCI (3)
Total
Allowance for credit losses
Recorded investment in loans
Commercial
Consumer
Total
Commercial
Consumer
Total
$
$
$
$
5,778
3,364
467
—
847
—
9,142
1,314
—
512,586
436,081
948,667
3,133
—
9,897
568
13,030
568
6,245
4,211
10,456
515,719
446,546
962,265
5,903
514
—
3,361
929
—
9,264
1,443
—
510,180
421,574
931,754
3,221
4
13,126
5,005
16,347
5,009
6,417
4,290
10,707
513,405
439,705
953,110
(1)
(2)
(3)
Represents non-impaired loans evaluated collectively for impairment.
Represents impaired loans evaluated individually for impairment.
Represents the allowance for loan losses and related loan carrying value 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 ACL. 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, 2019. 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.
Wells Fargo & Company
155
Note 6: Loans and Allowance for Credit Losses (continued)
Table 6.8: Commercial Loans by Risk Category
(in millions)
December 31, 2019
By risk category:
Pass
Criticized
Total commercial loans (excluding PCI)
Total commercial PCI loans (carrying value)
$
338,740
15,385
354,125
—
118,054
3,770
121,824
—
Total commercial loans
$
354,125
121,824
December 31, 2018
By risk category:
Pass
Criticized
Total commercial loans (excluding PCI)
Total commercial PCI loans (carrying value)
$
335,412
14,783
350,195
4
116,514
4,500
121,014
—
Total commercial loans
$
350,199
121,014
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
Commercial and
industrial
Real estate
mortgage
Real estate
construction
Lease financing
Total
19,752
187
19,939
—
19,939
22,207
289
22,496
—
22,496
18,655
1,176
19,831
—
19,831
18,671
1,025
19,696
—
19,696
495,201
20,518
515,719
—
515,719
492,804
20,597
513,401
4
513,405
(in millions)
December 31, 2019
By delinquency status:
Commercial and
industrial
Real estate
mortgage
Real estate
construction
Lease financing
Total
Current-29 days past due (DPD) and still accruing
$
352,110
120,967
19,845
19,484
512,406
30-89 DPD and still accruing
90+ DPD and still accruing
Nonaccrual loans
Total commercial loans (excluding PCI)
Total commercial PCI loans (carrying value)
423
47
1,545
253
31
573
354,125
121,824
—
—
Total commercial loans
$
354,125
121,824
53
—
41
19,939
—
19,939
252
—
95
19,831
—
19,831
981
78
2,254
515,719
—
515,719
December 31, 2018
By delinquency status:
Current-29 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
Total commercial loans (excluding PCI)
Total commercial PCI loans (carrying value)
508
43
1,486
207
51
580
350,195
121,014
4
—
Total commercial loans
$
350,199
121,014
53
—
32
22,496
—
22,496
163
—
90
19,696
—
19,696
931
94
2,188
513,401
4
513,405
156
Wells Fargo & Company
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 ACL for the consumer portfolio
segment.
Table 6.10: Consumer Loans by Delinquency Status
Many of our loss estimation techniques used for the ACL
rely on delinquency-based models; therefore, delinquency is an
important indicator of credit quality and the establishment of
our ACL. Table 6.10 provides the outstanding balances of our
consumer portfolio by delinquency status.
(in millions)
December 31, 2019
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
$
279,722
28,870
39,935
46,650
33,981
429,158
1,136
404
197
160
503
10,999
171
216
115
69
71
155
—
—
311
221
202
343
1
—
—
882
263
77
1
—
—
—
140
81
74
18
10
—
—
2,685
1,084
619
593
669
10,999
171
Total consumer loans (excluding PCI)
293,292
29,496
41,013
47,873
34,304
445,978
Total consumer PCI loans (carrying value) (2)
555
13
—
—
—
568
Total consumer loans
$
293,847
29,509
41,013
47,873
34,304
446,546
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
Total consumer loans (excluding PCI)
Total consumer PCI loans (carrying value) (2)
$
263,881
33,644
38,008
1,411
549
257
225
822
12,688
244
280,077
4,988
247
126
74
77
213
—
—
292
212
192
320
1
—
—
43,604
1,040
314
109
2
—
—
—
35,794
414,931
140
87
80
27
20
—
—
3,130
1,288
712
651
1,056
12,688
244
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
(1)
(2)
Represents loans whose repayments are predominantly insured by the Federal Housing Administration (FHA) or guaranteed by the Department of Veterans Affairs (VA). Loans insured/guaranteed by
the FHA/VA and 90+ DPD totaled $6.4 billion at December 31, 2019, compared with $7.7 billion at December 31, 2018.
26% of the adjusted unpaid principal balance for consumer PCI loans are 30+ DPD at December 31, 2019, compared with 18% at December 31, 2018.
Of the $1.9 billion of consumer loans not government
insured/guaranteed that are 90 days or more past due at
December 31, 2019, $855 million was accruing, compared with
$2.4 billion past due and $885 million accruing at December 31,
2018.
Wells Fargo & Company
157
Note 6: Loans and Allowance for Credit Losses (continued)
Table 6.11 provides a breakdown of our consumer portfolio
by FICO. Substantially all 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 $9.1 billion at
December 31, 2019, and $8.9 billion at December 31, 2018.
Real estate 1-4
family first
mortgage
Real estate
1-4 family junior
lien mortgage
Credit card
Automobile
Other revolving
credit and
installment
Table 6.11: Consumer Loans by FICO
(in millions)
December 31, 2019
By FICO:
< 600
600-639
640-679
680-719
720-759
760-799
800+
No FICO available
FICO not required
Government insured/guaranteed loans (1)
Total consumer loans (excluding PCI)
Total consumer PCI loans (carrying value) (2)
$
3,264
2,392
5,068
12,844
27,879
61,559
165,460
3,656
—
11,170
293,292
555
Total consumer loans
$
293,847
December 31, 2018
By FICO:
< 600
600-639
640-679
680-719
720-759
760-799
800+
No FICO available
FICO not required
Government insured/guaranteed loans (1)
Total consumer loans (excluding PCI)
Total consumer PCI loans (carrying value) (2)
$
4,273
2,974
5,810
13,568
27,258
57,193
151,465
4,604
—
12,932
280,077
4,988
Total consumer loans
$
285,065
1,164
782
1,499
3,192
4,407
5,483
11,851
1,118
—
—
29,496
13
29,509
1,454
994
1,898
3,908
5,323
6,315
13,190
1,299
—
—
34,381
17
34,398
3,373
2,853
6,626
9,732
8,376
5,648
4,037
368
—
—
41,013
—
41,013
3,292
2,777
6,464
9,445
7,949
5,227
3,794
77
—
—
39,025
—
39,025
6,041
4,230
6,324
7,871
7,839
7,624
7,900
44
—
—
47,873
—
47,873
7,071
4,431
6,225
7,354
6,853
5,947
7,099
89
—
—
45,069
—
45,069
Total
14,546
10,927
21,247
36,851
52,598
85,229
196,833
7,502
9,075
11,170
704
670
1,730
3,212
4,097
4,915
7,585
2,316
9,075
—
34,304
445,978
—
568
34,304
446,546
697
725
1,822
3,384
4,395
5,322
8,411
2,507
8,885
—
36,148
—
36,148
16,787
11,901
22,219
37,659
51,778
80,004
183,959
8,576
8,885
12,932
434,700
5,005
439,705
(1)
(2)
Represents loans whose repayments are predominantly insured by the FHA or guaranteed by the VA.
41% of the adjusted unpaid principal balance for consumer PCI loans have FICO scores less than 680 and 19% where no FICO is available to us at December 31, 2019, compared with 45% and 15%,
respectively, at December 31, 2018.
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 mortgage loan
portfolios. We consider the trends in residential real estate
markets as we monitor credit risk and establish our ACL. 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.
158
Wells Fargo & Company
Table 6.12: Consumer Loans by LTV/CLTV
(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)
Total consumer loans (excluding PCI)
Total consumer PCI loans (carrying value) (3)
December 31, 2019
December 31, 2018
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
$
151,478
114,795
13,867
860
338
784
11,170
293,292
555
Total
166,081
124,458
17,441
1,838
674
1,126
11,170
14,603
9,663
3,574
978
336
342
—
29,496
322,788
13
568
Total
163,419
115,660
17,246
2,807
1,062
1,332
12,932
15,753
11,183
4,874
1,596
578
397
—
34,381
314,458
17
5,005
34,398
319,463
147,666
104,477
12,372
1,211
484
935
12,932
280,077
4,988
285,065
Total consumer loans
$
293,847
29,509
323,356
(1)
(2)
(3)
Reflects total loan balances with LTV/CLTV amounts in excess of 100%. In the event of default, the loss content would generally be limited to only the amount in excess of 100% LTV/CLTV.
Represents loans whose repayments are predominantly insured by the FHA or guaranteed by the VA.
9% of the adjusted unpaid principal balance for consumer PCI loans have LTV/CLTV amounts greater than 80% at December 31, 2019, compared with 10% at December 31, 2018.
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 $3.5 billion and
$4.6 billion at December 31, 2019 and 2018, respectively, which
included $2.8 billion and $3.2 billion, respectively, of loans that
are government insured/guaranteed. Under the Consumer
Financial Protection Bureau guidelines, we do not commence the
foreclosure process on real estate 1-4 family mortgage 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.
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:
Commercial and industrial
Real estate mortgage
Real estate construction
Lease financing
Total commercial
Consumer:
Dec 31,
2019
Dec 31,
2018
$
1,545
573
41
95
1,486
580
32
90
2,254
2,188
Real estate 1-4 family first mortgage
2,150
3,183
Real estate 1-4 family junior lien mortgage
Automobile
Other revolving credit and installment
Total consumer
Total nonaccrual loans
(excluding PCI)
796
106
40
945
130
50
3,092
4,308
$
5,346
6,496
Wells Fargo & Company
159
Note 6: Loans and Allowance for Credit Losses (continued)
LOANS 90 DAYS OR MORE PAST DUE AND STILL ACCRUING Certain
loans 90 days or more past due 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
$102 million at December 31, 2019, and $370 million at
December 31, 2018, are not included in these past due and still
accruing loans even when they are 90 days or more contractually
past due. PCI loans are considered to be accruing because they
continue to earn interest from accretable yield, independent of
performance in accordance with their contractual terms.
Table 6.14 shows non-PCI loans 90 days or more past due
and still accruing by class for loans not government insured/
guaranteed.
Table 6.14: Loans 90 Days or More Past Due and Still Accruing
$
$
$
(in millions)
Total (excluding PCI):
Less: FHA insured/VA guaranteed (1)
Total, not government insured/
guaranteed
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
Dec 31,
2019
7,285
6,352
Dec 31,
2018
8,704
7,725
933
979
47
31
78
112
32
546
78
87
855
43
51
94
124
32
513
114
102
885
979
Total, not government insured/
guaranteed
$
933
(1)
Represents loans whose repayments are predominantly insured by the FHA or guaranteed
by the VA.
160
Wells Fargo & Company
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.
Impaired loans generally have estimated losses which are
included in the ACL. We do have impaired loans with no ACL
when the loss content has been previously recognized through
charge-offs, such as collateral dependent loans, or when loans
are currently performing in accordance with their terms and no
loss has been estimated. Impaired loans exclude PCI loans and
loans that have been fully charged off or otherwise have zero
recorded investment. Table 6.15 includes trial modifications that
totaled $115 million at December 31, 2019, and $149 million at
December 31, 2018.
For additional information on our impaired loans and ACL,
see Note 1 (Summary of Significant Accounting Policies).
Table 6.15: Impaired Loans Summary
(in millions)
December 31, 2019
Commercial:
Commercial and industrial
Real estate mortgage
Real estate construction
Lease financing
Total commercial
Consumer:
Real estate 1-4 family first mortgage (1)
Real estate 1-4 family junior lien mortgage
Credit card
Automobile
Other revolving credit and installment
Total consumer (2)
Total impaired loans (excluding PCI)
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)
Recorded investment
Unpaid
principal
balance
Impaired loans
Impaired loans
with related
allowance for
credit losses
Related
allowance for
credit losses
$
$
$
$
2,792
1,137
81
131
4,141
8,107
1,586
520
138
178
10,529
14,670
3,057
1,228
74
146
4,505
12,309
1,886
449
153
162
14,959
19,464
2,003
1,903
974
51
105
803
41
105
3,133
2,852
7,674
1,451
520
81
171
9,897
13,030
2,030
1,032
47
112
3,221
10,738
1,694
449
89
156
13,126
16,347
4,433
925
520
42
155
6,075
8,927
1,730
1,009
46
112
2,897
4,420
1,133
449
43
136
6,181
9,078
311
110
11
35
467
437
144
209
8
49
847
1,314
319
154
9
32
514
525
183
172
8
41
929
1,443
(1)
(2)
Impaired loans includes reduction of $1.7 billion reclassified to MLHFS during 2019.
Includes the recorded investment of $1.2 billion and $1.3 billion at December 31, 2019 and 2018, respectively, of government insured/guaranteed loans that are predominantly insured by the FHA or
guaranteed by the VA and generally do not have an ACL. Impaired loans may also have limited, if any, ACL when the recorded investment of the loan approximates estimated net realizable value as a
result of charge-offs prior to a TDR modification.
Wells Fargo & Company
161
Note 6: Loans and Allowance for Credit Losses (continued)
Commitments to lend additional funds on loans whose
terms have been modified in a TDR amounted to $500 million
and $513 million at December 31, 2019 and 2018, 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:
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 impaired loans (excluding PCI)
$
Interest income:
Cash basis of accounting
Other (1)
Total interest income
Average
recorded
investment
2019
Recognized
interest
income
Average
recorded
investment
2018
Recognized
interest
income
Year ended December 31,
Average
recorded
investment
2017
Recognized
interest
income
2,287
1,193
60
125
3,665
11,522
1,804
407
86
142
13,961
17,626
2,150
1,067
52
93
3,362
9,031
1,586
488
84
162
11,351
14,713
$
$
129
59
6
1
195
506
99
64
12
13
694
889
241
648
889
173
89
7
1
270
664
116
50
11
10
851
1,121
338
783
1,121
3,241
1,328
66
105
4,740
13,326
2,041
323
86
117
15,893
20,633
118
91
14
1
224
730
121
36
11
8
906
1,130
299
831
1,130
(1)
Includes interest recognized on accruing TDRs, interest recognized related to certain impaired loans which have an ACL 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 are paid
off or written-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
$11.8 billion and $15.5 billion at December 31, 2019 and 2018,
respectively. The majority of the decline in consumer TDRs was
due to a reclassification of $1.7 billion in real estate 1-4 family
first mortgage TDR loans to MLHFS. 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.
162
Wells Fargo & Company
Table 6.17: TDR Modifications
(in millions)
Year ended December 31, 2019
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, 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
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)
$
$
$
$
$
$
13
—
13
—
26
110
5
—
8
1
—
124
150
13
—
—
—
13
209
7
—
13
—
—
229
242
24
5
—
—
29
231
25
—
2
—
—
258
287
90
38
1
—
129
13
37
376
9
51
—
486
615
29
44
—
—
73
26
41
336
16
49
—
468
541
45
59
1
—
105
140
82
257
15
47
—
541
646
1,286
417
32
2
1,737
868
82
—
51
7
13
1,021
2,758
2,310
375
25
63
2,773
1,042
113
—
55
12
8
1,230
4,003
2,912
507
26
37
3,482
1,389
455
46
2
1,892
991
124
376
68
59
13
1,631
3,523
2,352
419
25
63
2,859
1,277
161
336
84
61
8
1,927
4,786
2,981
571
27
37
3,616
1,035
1,406
81
—
67
8
(28)
1,163
4,645
188
257
84
55
(28)
1,962
5,578
104
—
—
—
104
2
3
—
29
—
—
34
0.40% $
0.69
1.00
—
0.49
2.04
2.35
12.91
4.86
8.07
—
10.19
138
8.33% $
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% $
90
38
1
—
129
68
39
376
9
52
—
544
673
29
44
—
—
73
119
45
336
16
49
—
565
638
45
59
1
—
105
257
93
257
15
47
—
669
774
(1)
(2)
Amounts represent the recorded investment in loans after recognizing the effects of the TDR, if any. TDRs may have multiple types of concessions, but are presented only once in the first
modification type based on the order presented in the table above. The reported amounts include loans remodified of $1.1 billion, $1.9 billion and $2.1 billion, for the years ended December 31,
2019, 2018 and 2017, respectively.
Principal modifications include principal forgiveness at the time of the modification, contingent principal forgiveness granted over the life of the loan based on borrower performance, and principal
that has been legally separated and deferred to the end of the loan, with a zero percent contractual interest rate.
(3) Other concessions include loans discharged in bankruptcy, loan renewals, term extensions and other interest and noninterest adjustments, but exclude modifications that also forgive principal and/or
(4)
(5)
(6)
reduce the contractual interest rate.
Charge-offs include write-downs of the investment in the loan in the period it is contractually modified. The amount of charge-off will differ from the modification terms if the loan has been charged
down prior to the modification based on our policies. In addition, there may be cases where we have a charge-off/down with no legal principal modification. Modifications resulted in deferring or
legally forgiving principal (actual or contingent) of $24 million, $28 million and $32 million for the years ended December 31, 2019, 2018 and 2017, respectively.
Recorded investment related to interest rate reduction reflects the effect of reduced interest rates on loans with an interest rate concession as one of their concession types, which includes loans
reported as a principal primary modification type that also have an interest rate concession.
Trial modifications are granted a delay in payments due under the original terms during the trial payment period. However, these loans continue to advance through delinquency status and accrue
interest according to their original terms. Any subsequent permanent modification generally includes interest rate related concessions; however, the exact concession type and resulting financial
effect are usually not known until the loan is permanently modified. Trial modifications for the period are presented net of previously reported trial modifications that became permanent in the
current period.
Wells Fargo & Company
163
Note 6: Loans and Allowance for Credit Losses (continued)
Table 6.18 summarizes permanent modification TDRs that
have defaulted in the current period within 12 months of their
permanent modification date. We are reporting these defaulted
TDRs based on a payment default definition of 90 days past due
for the commercial portfolio segment and 60 days past due for
the consumer portfolio segment.
Recorded investment of defaults
Year ended December 31,
2019
2018
2017
$
$
111
48
17
—
176
41
13
88
12
8
162
338
198
76
36
—
310
60
14
79
14
6
173
483
173
61
4
1
239
114
19
74
15
5
227
466
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
Table 6.19 presents PCI loans net of any remaining purchase
accounting adjustments. Total consumer loans are
predominantly Pick-a-Pay loans (real estate 1-4 family
mortgage).
Table 6.19: PCI Loans
(in millions)
Total commercial
Total consumer
Total PCI loans (carrying value)
Total PCI loans (unpaid principal balance)
Dec 31,
2019
—
568
568
990
$
$
$
Dec 31,
2018
4
5,005
5,009
7,348
For the years ended December 31, 2019 and 2018, we sold
$4.0 billion and $6.2 billion of PCI loans, respectively, that
resulted in gains within other noninterest income of $1.6 billion
and $2.4 billion, respectively.
164
Wells Fargo & Company
Note 7: Leasing Activity
The information below provides a summary of our leasing
activities as a lessor and lessee.
Table 7.3 presents future lease payments owed by our
lessees.
As a Lessor
Table 7.1 presents the composition of our leasing revenue and
Table 7.2 provides the components of our investment in lease
financing.
Table 7.1: Leasing Revenue
(in millions)
Interest income on lease financing
Other lease revenues:
Variable revenues on lease financing
Fixed revenues on operating leases
Variable revenues on operating leases
Other lease-related revenues (1)
Lease income
Total leasing revenue
Year ended
December 31, 2019
$
869
96
1,393
66
57
1,612
2,481
$
Table 7.3: Maturities of Lease Receivables
(in millions)
2020
2021
2022
2023
2024
Thereafter
December 31, 2019
Direct financing
and sales- type
leases
Operating
leases
$
5,953
4,997
2,951
1,634
862
1,717
883
614
434
298
199
447
Total lease receivables
$
18,114
2,875
As a Lessee
Substantially all of our leases are operating leases. Table 7.4
presents balances for our operating leases.
(1)
Predominantly includes net gains on disposition of assets leased under operating leases or
lease financings.
Table 7.4: Operating Lease Right of Use (ROU) Assets and Lease
Liabilities
Table 7.2: Investment in Lease Financing
(in millions)
Lease receivables
Residual asset values
Unearned income
Lease financing
Dec 31, 2019
$
18,114
4,208
(2,491)
$
19,831
(in millions)
ROU assets
Lease liabilities
Dec 31, 2019
$
4,724
5,297
Table 7.5 provides the composition of our lease costs, which
are predominantly included in net occupancy expense.
Our net investment in financing and sales-type leases
includes $1.9 billion of leveraged leases at December 31, 2019.
As shown in Table 9.2, included in Note 9 (Premises,
Equipment and Other Assets), we had $8.2 billion in operating
lease assets at December 31, 2019, which was net of $3.1 billion
of accumulated depreciation. Depreciation expense for the
operating lease assets was $848 million in 2019.
Table 7.5: Lease Costs
(in millions)
Fixed lease expense - operating leases
Variable lease expense
Other (1)
Total lease costs
Year ended
December 31, 2019
$
$
1,212
314
(68)
1,458
(1)
Predominantly includes gains recognized from sale leaseback transactions and sublease
rental income.
Net operating lease rental expense was $1.3 billion for the
years 2018 and 2017 and is predominantly included in net
occupancy expense.
Wells Fargo & Company
165
Note 7: Leasing Activity (continued)
Tables Table 7.6 and 7.7 provide the future lease payments
under operating leases as of December 31, 2018, and
December 31, 2019, respectively. Table 7.7 also includes
information on the remaining average lease term and discount
rate.
Table 7.6: Lease Payments on Operating Leases Prior to Adoption of
ASU 2016-02 – Leases
(in millions)
December 31, 2018
2019
2020
2021
2022
2023
Thereafter
Total lease payments
$
$
1,174
1,056
880
713
577
1,654
6,054
Table 7.7: Lease Payments on Operating Leases Subsequent to
Adoption of ASU 2016-02 – Leases
(in millions, except for weighted averages)
December 31, 2019
2020
2021
2022
2023
2024
Thereafter
Total lease payments
Less: imputed interest
Total operating lease liabilities
Weighted average remaining lease term (in years)
Weighted average discount rate
$
$
1,006
1,045
897
750
597
1,672
5,967
670
5,297
7.1
3.1%
Our operating leases predominantly expire within the next
15 years, with the longest lease expiring in 2105. We do not
include renewal or termination options in the establishment of
the lease term when we are not reasonably certain that we will
exercise them. As of December 31, 2019, we had additional
operating leases commitments of $159 million, predominantly
for real estate, which leases had not yet commenced. These
leases are expected to commence during 2020 and have lease
terms of 2 years to 17 years.
166
Wells Fargo & Company
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,
2019
Dec 31,
2018
Marketable equity securities
$ 27,440
19,449
Not held for trading:
Fair value:
Marketable equity securities (1)
Nonmarketable equity securities
6,481
8,015
4,513
5,594
Total equity securities at fair value
14,496
10,107
Equity method:
Low-income housing tax credit invest
ments
11,343
10,999
Private equity
Tax-advantaged renewable energy
New market tax credit and other
3,459
3,811
387
3,832
3,073
311
Total equity method
19,000
18,215
Other:
Federal Reserve Bank stock and other
at cost (2)
Private equity (3)
4,790
2,515
Total equity securities not held for trading
40,801
Total equity securities
$ 68,241
5,643
1,734
35,699
55,148
(1)
(2)
(3)
Includes $3.8 billion and $3.2 billion at December 31, 2019 and 2018, respectively, related
to securities held as economic hedges of our deferred compensation plan obligations.
Includes $4.8 billion and $5.6 billion at December 31, 2019 and 2018, respectively, related
to investments in Federal Reserve Bank and Federal Home Loan Bank stock.
Represents nonmarketable equity securities accounted for under the measurement
alternative.
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).
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 account for certain 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 $1.3 billion for 2019
and $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
2019, 2018 and 2017, which included tax credits recorded to
income taxes of $1.2 billion for 2019 and 2018, and $1.1 billion
for 2017. We are periodically required to provide additional
financial support during the investment period. A liability is
recognized for unfunded commitments that are both legally
binding and probable of funding. These commitments are
predominantly funded within three years of initial investment.
Our liability for unfunded commitments was $4.3 billion and
$3.9 billion at December 31, 2019 and 2018, respectively. This
liability for unfunded commitments 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.
Wells Fargo & Company
167
Note 8: Equity Securities (continued)
Realized Gains and Losses Not Held for Trading
Table 8.2 provides a summary of the net gains and losses for
equity securities not held for trading. 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 Not Held for Trading
(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
Net gains (losses) from nonmarketable equity securities not carried at fair value:
Impairment write-downs
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
Net losses from economic hedge derivatives (1)
Year ended December 31,
2019
2018
2017
$
1,067
2,413
3,480
(245)
567
1,161
—
1,483
(2,120)
(389)
709
320
(352)
418
1,504
33
1,603
(408)
1,515
967
1,557
2,524
(339)
—
980
97
738
(1,483)
1,779
Total net gains from equity securities not held for trading
$
2,843
(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: Net Gains (Losses) from Measurement Alternative Equity Securities
(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
Table 8.4 presents cumulative carrying value adjustments to
nonmarketable equity securities accounted for under the
measurement alternative that were still held as of December 31,
2019 and 2018.
Table 8.4: Measurement Alternative Cumulative Gains (Losses)
(in millions)
Cumulative gains (losses):
Gross unrealized gains due to observable price changes
Gross unrealized losses due to observable price changes
Impairment write-downs
$
$
$
Year ended December 31,
2019
584
(17)
(116)
163
614
2018
443
(25)
(33)
274
659
Year ended December 31,
2019
973
(42)
(134)
2018
415
(25)
(33)
168
Wells Fargo & Company
Note 9: Premises, Equipment and Other Assets
Table 9.1: Premises and Equipment
Table 9.2 presents the components of other assets.
Dec 31, 2019
Dec 31, 2018
Table 9.2: Other Assets
(in millions)
Land
Buildings
Furniture and equipment
Leasehold improvements
Finance lease ROU assets
$
1,857
9,499
7,189
2,597
33
1,757
8,974
6,896
2,387
75
Total premises and equipment
21,175
20,089
Less: Accumulated depreciation and
amortization
Net book value, premises and
equipment
11,866
11,169
Foreclosed assets:
$
9,309
8,920
Depreciation and amortization expense for premises and
equipment was $1.4 billion, $1.3 billion and $1.2 billion in 2019,
2018 and 2017, respectively.
Dispositions of premises and equipment resulted in net
gains of $82 million, $32 million and $128 million in 2019, 2018
and 2017, respectively, included in other noninterest expense.
(in millions)
Corporate/bank-owned life insurance
Accounts receivable (1)
Interest receivable
Customer relationship and other amortized
intangibles
Dec 31,
2019
$ 20,070
29,137
5,586
Dec 31,
2018
19,751
34,281
6,084
423
545
Residential real estate:
Government insured/guaranteed (1)
Non-government insured/guaranteed
Other
Operating lease assets (lessor)
Operating lease ROU assets (lessee) (2)
Due from customers on acceptances
Other
50
172
81
8,221
4,724
253
10,200
Total other assets
$ 78,917
88
229
134
9,036
—
258
9,444
79,850
(1)
Certain government-guaranteed residential real estate mortgage loans upon foreclosure
are included in Accounts receivable. For more information, see Note 1 (Summary of
Significant Accounting Policies).
(2) We recognized operating lease right of use (ROU) assets effective January 1, 2019, in
connection with the adoption of ASU 2016-02 – Leases. For more information, see Note 1
(Summary of Significant Accounting Policies).
Wells Fargo & Company
169
Note 10: 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. SPEs are often formed
in connection with securitization transactions in which assets are
transferred to an SPE. The SPE may alter the risk profile of the
asset by entering into derivative transactions or obtaining credit
support, and issues various forms of interests in those assets to
investors. In a securitization transaction where we transferred
assets from our balance sheet, we typically receive cash and
sometimes other interests in an SPE as proceeds for the assets
we transfer. 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 whose total equity 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 consistent with their investment
in the entity. A VIE is consolidated by its primary beneficiary
which is 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.
Secured borrowings are transactions involving transfers of
our financial assets to unconsolidated third parties that are
accounted for as financings with the assets pledged as collateral.
Accordingly, the transferred assets remain recognized on our
balance sheet. See also Repurchase and Securities Lending
Agreements in Note 16 (Guarantees, Pledged Assets and
Collateral, and Other Commitments) for additional transactions
accounted for as secured borrowings.
170
Wells Fargo & Company
Table 10.1 provides the classifications of assets and
liabilities in our balance sheet for our transactions with VIEs.
Table 10.1: Balance Sheet Transactions with VIEs
(in millions)
December 31, 2019
Cash and due from banks
Interest-earning deposits with banks
Debt securities (1):
Trading debt securities
Available-for-sale debt securities
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, 2018
Cash and due from banks
Interest-earning deposits with banks
Debt securities (1):
Trading debt securities
Available-for-sale debt securities
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 (2)
Transfers
that we account
for as secured
borrowings (2)
$
$
$
—
—
792
1,696
791
2,127
11,884
142
11,401
1,268
30,101
—
1
189
4,817
5,007
—
25,094
—
—
2,110
2,686
510
2,657
14,761
53
11,041
—
33,818
—
26
231
5,094
5,351
—
$
28,467
16
284
339
201
—
13,170
—
1
118
239
14,368
401
3
235
587
1,226
43
13,099
139
8
245
317
—
13,564
—
—
85
227
14,585
493
—
199
816
1,508
34
13,043
—
—
—
—
—
80
—
—
—
—
80
—
—
—
79
79
—
1
—
—
—
—
—
94
—
—
—
—
94
—
—
—
93
93
—
1
Total
16
284
1,131
1,897
791
15,377
11,884
143
11,519
1,507
44,549
401
4
424
5,483
6,312
43
38,194
139
8
2,355
3,003
510
16,315
14,761
53
11,126
227
48,497
493
26
430
6,003
6,952
34
41,511
(1)
(2)
Excludes certain debt securities related to loans serviced for the Federal National Mortgage Association (FNMA), Federal Home Loan Mortgage Corporation (FHLMC) and Government National
Mortgage Association (GNMA).
Certain structures included in transfers that we account for as secured borrowings at December 31, 2018 were presented in VIEs that we consolidate to conform with the current period
presentation.
Wells Fargo & Company
171
Note 10: Securitizations and Variable Interest Entities (continued)
Transactions with Unconsolidated VIEs
Our transactions with unconsolidated VIEs include
predominantly securitizations of residential and commercial
mortgage loans and investments in tax credit structures. We
have various forms of involvement with VIEs, including servicing,
holding senior or subordinated interests, and entering into
liquidity arrangements and 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.
Table 10.2 provides a summary of our exposure to
unconsolidated VIEs with which we have significant continuing
involvement but for which we are not the primary beneficiary.
We include transactions where we were the sponsor or
servicer and also have other significant forms of continuing
Table 10.2: Unconsolidated VIEs
involvement. Sponsorship includes transactions where we solely
or materially participated in the initial design or structuring of
the VIE or marketed the transaction to investors. We consider
investments in securities, loans, guarantees, liquidity
agreements, commitments and certain derivatives to be other
forms of continuing involvement that may be significant. We also
include transactions where we transferred assets to a VIE,
account for the transfer as a sale, and service the VIE collateral or
have other forms of continuing involvement that may be
significant (as described above). We exclude certain transactions
with unconsolidated VIEs when our continuing involvement is
temporary in nature or insignificant in size. We also exclude
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, 2019
Residential mortgage loan securitizations:
Conforming (2)
Other/nonconforming
Commercial mortgage loan securitizations
Tax credit structures
Other asset-based finance structures
Other
Total
Residential mortgage loan securitizations:
Conforming (2)
Other/nonconforming
Commercial mortgage loan securitizations
Tax credit structures
Other asset-based finance structures
Other
Total
(continued on following page)
Total
VIE
assets
Debt and
equity
interests (1)
Servicing assets
and advances
Derivatives
Carrying value – asset (liability)
Debt,
guarantees and
other
commitments
Net assets
$
1,098,103
5,178
169,736
39,091
1,355
1,167
1,528
6
2,239
12,826
157
51
11,931
152
1,069
—
—
—
—
—
80
—
61
—
(683)
—
(43)
(4,260)
(20)
—
12,776
158
3,345
8,566
198
51
$
1,314,630
16,807
13,152
141
(5,006)
25,094
Maximum exposure to loss
Debt and
equity
interests (1)
Servicing assets
and advances
Derivatives
Guarantees and
other
commitments
Total
exposure
$
972
6
2,239
12,826
157
51
11,931
152
1,069
—
—
—
—
—
80
—
63
—
937
—
11,667
1,701
91
157
13,840
158
15,055
14,527
311
208
$
16,251
13,152
143
14,553
44,099
172
Wells Fargo & Company
(continued from previous page)
(in millions)
December 31, 2018
Residential mortgage loan securitizations:
Conforming (2)
Other/nonconforming
Commercial mortgage loan securitizations
Tax credit structures
Other asset-based finance structures
Other
Total
Residential mortgage loan securitizations:
Conforming (2)
Other/nonconforming
Commercial mortgage loan securitizations
Tax credit structures
Other asset-based finance structures
Other
Total
Total
VIE
assets
Debt and
equity
interests (1)
Servicing
assets
Derivatives
Carrying value - asset (liability)
Debt,
guarantees
and other
commitments
Net assets
$ 1,172,833
10,596
153,350
35,185
1,520
1,318
3,601
453
2,409
12,087
271
183
13,811
57
893
—
—
—
$ 1,374,802
19,004
14,761
—
—
(22)
—
49
—
27
(1,395)
16,017
—
(40)
(3,870)
(20)
—
510
3,240
8,217
300
183
(5,325)
28,467
Maximum exposure to loss
Debt and
equity
interests (1)
Servicing
assets
Derivatives
Guarantees
and other
commitments
Total
exposure
$
2,377
453
2,409
12,087
271
183
13,811
57
893
—
—
—
$
17,780
14,761
—
—
28
—
50
—
78
1,183
—
11,563
1,420
91
158
17,371
510
14,893
13,507
412
341
14,415
47,034
(1)
(2)
Includes total equity interests of $11.4 billion and $11.0 billion at December 31, 2019 and 2018, 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.
Carrying values include assets and related liabilities of $556 million and $1.2 billion at December 31, 2019 and 2018, respectively, related to certain unexercised unconditional repurchase options.
These amounts represent the carrying value of the loans and associated debt that would be payable if the option was exercised to repurchase eligible loans from GNMA loan securitizations. These
amounts are excluded from maximum exposure to loss as we are not obligated to exercise the options.
In Table 10.2, “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” is determined
as the carrying value of our investment in the VIEs excluding the
unconditional repurchase options that have not been exercised,
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 disclosure is not an indication of expected loss.
RESIDENTIAL MORTGAGE LOAN SECURITIZATIONS 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. 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 include conforming and nonconforming
securitizations.
Conforming residential mortgage loan securitizations are
those that are guaranteed by the government-sponsored
entities (GSEs), such as FNMA and FHLMC, and GNMA. We do
not consolidate these securitizations because the GSEs or GNMA
hold the power over the VIEs.
The loans sold to the VIEs in nonconforming residential
mortgage loan securitizations are those that do not qualify for a
GSE guarantee and are not GNMA guaranteed mortgage
securitizations of FHA-insured or VA-guaranteed mortgages. We
may hold variable interests issued by the VIEs, including senior
securities. The nonconforming residential mortgage loan
securitizations included in the table are not consolidated because
we do not hold any variable interests, or hold variable interests
that we do not consider potentially significant, or we are not the
primary servicer for a majority of the VIE assets.
Guarantees and other commitments 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.
Wells Fargo & Company
173
Note 10: Securitizations and Variable Interest Entities (continued)
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. In commercial mortgage loan
securitizations, the most significant decisions impacting the
performance of the VIE are generally made by the special
servicer and the primary and master servicer do not have power
over the VIE. We do not consolidate the commercial mortgage
loan securitizations included in the disclosure because we do not
have power over the majority of the SPE’s assets or we do not
have a variable interest that could potentially be significant to
the VIE.
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. The projects are typically managed by
project sponsors who have the power over the VIE’s assets. 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 because we are
not the project sponsors.
OTHER ASSET-BASED FINANCE STRUCTURES We engage in various
forms of structured finance arrangements with other VIEs,
including collateralized loan obligations (CLOs), collateralized
debt obligations, and other securitizations collateralized by asset
classes other than mortgages. Collateral may include asset-
Table 10.3: Transfers With Continuing Involvement
backed securities, automobile and other transportation loans and
leases, student loans and general corporate credit. Generally, a
third party sponsors the VIE and also selects and manages the
assets. We may participate in structuring or marketing the
arrangements, provide financing to the VIE, service one or more
of the underlying VIE assets, or enter into derivatives with the
VIEs and receive fees for those services. We are not the primary
beneficiary of these structures because we neither select nor
manage the assets of the VIE.
Loan Sales and Securitization Activity
We periodically transfer consumer and commercial 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.
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 10.3 presents information about transfers during the
period of assets to unconsolidated VIEs or third-party investors
for which we recorded the transfers as sales and have continuing
involvement with the transferred assets. In connection with
these transfers, we recorded servicing assets, securities, and a
liability for repurchase losses which reflects management’s
estimate of probable losses related to various representations
and warranties for the loans transferred. Each of these interests
are initially measured at fair value. Servicing rights are classified
as Level 3 measurements, and securities are initially
predominantly classified as Level 2.
Sales with continuing involvement include securitizations of
conforming residential mortgages that are sold to the GSEs or
GNMA. Substantially all transfers to these entities resulted in no
gain or loss because the loans were already measured at fair
value on a recurring basis.
(in millions)
Net gains (losses) on sale
Asset balances sold
Servicing rights recognized
Securities recognized
Liability for repurchase losses recognized
Year ended December 31,
2019
2018
2017
Residential
mortgages
Commercial
mortgages
Residential
mortgages
Commercial
mortgages
Residential
mortgages
Commercial
mortgages
$
89
170,384
1,896
2,747
18
330
18,191
161
51
—
(10)
177,805
1,903
5,030
17
280
17,882
158
81
—
342
213,562
2,122
1,414
24
359
16,696
166
65
—
174
Wells Fargo & Company
Table 10.4 presents the key weighted-average assumptions
we used to measure residential MSRs at the date of
securitization.
Table 10.4: Residential Mortgage Servicing Rights
Prepayment speed (1)
Discount rate
Cost to service ($ per loan) (2)
Residential mortgage servicing rights
Year ended December 31,
2019
12.8%
7.5
101
$
2018
10.6
7.4
128
2017
11.5
7.0
132
(1)
(2)
The prepayment speed assumption for residential MSRs 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 due to changes in model assumptions and the mix of modified government-guaranteed loans sold to
GNMA.
Table 10.5 presents the proceeds related to transfers
accounted for as sales in which we have continuing involvement
with the transferred financial assets as well as current period
cash flows from continuing involvement with previous transfers
accounted for as sales. Cash flows from other interests held
predominantly include principal and interest payments received
on retained bonds and excess cash flows received on interest-
only strips. Repurchases of assets represents cash paid to
repurchase loans from investors under representation and
warranty obligations or in connection with the exercise of
cleanup calls on securitizations. Loss reimbursements is cash paid
to reimburse investors for losses on individual loans that are
already liquidated. Government insured loans are delinquent
loans that we service and have exercised our option to purchase
out of GNMA pools. These loans are insured by the FHA or
guaranteed by the VA.
Table 10.5: Cash Inflows (Outflows) From Sales and Securitization Activity
(in millions)
Proceeds from securitizations and whole loan sales
Fees from servicing rights retained
Cash flows from other interests held
Repurchases of assets/loss reimbursements:
Non-agency securitizations and whole loan transactions
Government insured loans
Agency securitizations
Servicing advances, net of recoveries (1)
2019
$
186,615
3,149
468
(4,441)
(6,168)
(95)
187
Mortgage loans
Year ended December 31,
2018
193,721
3,337
698
(3)
(7,775)
(96)
154
2017
228,282
3,352
2,218
(12)
(8,600)
(92)
269
(1)
Cash flows from servicing advances includes principal and interest payments to investors required by servicing agreements.
Wells Fargo & Company
175
Note 10: Securitizations and Variable Interest Entities (continued)
Retained Interests from Unconsolidated VIEs
Table 10.6 provides key economic assumptions and the
sensitivity of the current fair value of residential MSRs, and other
interests held related to unconsolidated VIEs, to immediate
adverse changes in those assumptions. Amounts for residential
MSRs include purchased servicing rights as well as servicing
rights resulting from the transfer of loans. See Note 19 (Fair
Values of Assets and Liabilities) for additional information on key
economic assumptions for residential MSRs. “Other interests
held” were obtained when we securitized residential and
commercial mortgage loans. Residential mortgage-backed
securities retained in securitizations issued through GSEs or
GNMA are excluded from the table because these securities have
a remote risk of credit loss due to the GSE or government
guarantee. These securities also have economic characteristics
similar to GSE or GNMA 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.
Table 10.6: Retained Interests from Unconsolidated VIEs
Residential
mortgage
servicing
rights
$
11,517
5.3
Other int
erests held
C
ommercial
In
terest-only
strips
Su
bordinated
bonds
Senior bonds
2
3.1
909
7.3
352
5.5
($ in millions, except cost to service amounts)
Fair value of interests held at December 31, 2019
Expected weighted-average life (in years)
Key economic assumptions:
Prepayment speed assumption
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
11.9%
19.5
537
1,261
—
—
7.2%
12.8
$
$
464
889
102
253
632
—
—
$
16
3.6
4.0
53
103
3.1%
1
4
668
7.0
4.3
37
72
5.1%
2
5
2.9
16
32
—
—
—
309
5.7
3.7
14
28
—
—
—
Fair value of interests held at December 31, 2018
Expected weighted-average life (in years)
$
14,649
6.5
Key economic assumptions:
Prepayment speed assumption
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
$
$
9.9%
17.7
530
1,301
1
1
8.1%
14.5
615
1,176
106
316
787
—
1
$
176
Wells Fargo & Company
In addition to residential MSRs included in the previous
table, we have a small portfolio of commercial MSRs which are
carried at LOCOM with a fair value of $1.9 billion and $2.3 billion
at December 31, 2019 and 2018, respectively. Prepayment
assumptions do not significantly impact values of commercial
MSRs and commercial mortgage bonds as most commercial
loans include contractual restrictions on prepayment. Servicing
costs are not a driver of our MSR value as we are typically
primary or master servicer; the higher costs of servicing
delinquent and foreclosed loans is generally born by the special
servicer. 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, 2019 and 2018, results in a decrease in fair value
of $205 million and $320 million, respectively. See Note 11
(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
Table 10.7: Off-Balance Sheet Loans Sold or Securitized
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 10.7 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.
Total loans
December 31,
Delinquent loans and
foreclosed assets (1)
December 31,
Net charge-offs (3)
Year ended
December 31,
2019
2018
2019
2018
2019
2018
(in millions)
Commercial:
Real estate mortgage
Total commercial
Consumer:
Real estate 1-4 family first mortgage
Real estate 1-4 family junior lien mortgage
Total consumer
$
112,507
112,507
105,173
105,173
1,008,446
1,097,128
13
—
1,008,459
1,097,128
776
776
6,664
2
6,666
7,442
1,008
1,008
8,947
—
8,947
9,955
179
179
229
—
229
408
739
739
466
—
466
1,205
Total off-balance sheet sold or securitized loans (2)
$
1,120,966
1,202,301
(1)
(2)
(3)
Includes $492 million and $675 million of commercial foreclosed assets and $356 million and $582 million of consumer foreclosed assets at December 31, 2019 and 2018, respectively.
At December 31, 2019 and 2018, the table includes total loans of $1.0 trillion and $1.1 trillion, delinquent loans of $5.2 billion and $6.4 billion, and foreclosed assets of $251 million and $442 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.
Wells Fargo & Company
177
Note 10: Securitizations and Variable Interest Entities (continued)
Transactions with Consolidated VIEs and Secured
Borrowings
Table 10.8 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
Table 10.8: Transactions with Consolidated VIEs and Secured Borrowings
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.
Total VIE
assets
Assets
Liabilities
Noncontrolling
interests
Net assets
Carrying value
(in millions)
December 31, 2019
Secured borrowings:
Residential mortgage securitizations
Total secured borrowings
Consolidated VIEs:
Commercial and industrial loans and leases
Nonconforming residential mortgage loan securitizations
Commercial real estate loans
Municipal tender option bond securitizations
Other
Total consolidated VIEs
$
81
81
8,054
935
4,836
401
279
14,505
Total secured borrowings and consolidated VIEs
$
14,586
December 31, 2018
Secured borrowings:
Residential mortgage securitizations
Total secured borrowings
Consolidated VIEs:
Commercial and industrial loans and leases
Nonconforming residential mortgage loan securitizations
Commercial real estate loans
Municipal tender option bond securitizations (1)
Other
Total consolidated VIEs
$
95
95
8,215
1,947
3,957
627
169
14,915
Total secured borrowings and consolidated VIEs
$
15,010
80
80
8,042
809
4,836
402
279
14,368
14,448
94
94
8,204
1,732
3,957
523
169
14,585
14,679
(79)
(79)
(529)
(290)
—
(401)
(6)
(1,226)
(1,305)
(93)
(93)
(477)
(521)
—
(501)
(9)
(1,508)
(1,601)
—
—
(16)
—
—
—
(27)
(43)
(43)
—
—
(14)
—
—
—
(20)
(34)
(34)
1
1
7,497
519
4,836
1
246
13,099
13,100
1
1
7,713
1,211
3,957
22
140
13,043
13,044
(1) Municipal tender option bond securitizations were reported as secured borrowings at December 31, 2018. These structures were reported as consolidated VIEs at December 31, 2019 to conform
with our presentation of other transactions where we transfer assets to a consolidated VIE and use secured borrowing accounting.
178
Wells Fargo & Company
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.
COMMERCIAL AND INDUSTRIAL LOANS AND LEASES We securitize
dealer floor plan loans and leases in a revolving master trust
entity and retain the subordinated notes and residual equity
interests. At December 31, 2019 and 2018, total assets held by
the master trust were $6.5 billion and $6.7 billion, respectively,
and the outstanding senior notes were $300 million and
$299 million, respectively. As servicer and residual interest
holder, we control the key decisions of the trust. We also provide
the majority of debt and equity financing to an SPE that engages
in lending and leasing to specific vendors and service the
underlying collateral. We control the key decisions of the entity
and consolidate the entity as primary beneficiary.
NONCONFORMING RESIDENTIAL MORTGAGE LOAN
SECURITIZATIONS 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 we also hold variable interests that
we have determined to be significant. The nature of our variable
interests in these entities may include senior or subordinated
beneficial interests issued by the VIE, MSRs and recourse or
repurchase reserve liabilities.
COMMERCIAL REAL ESTATE LOANS We purchase local industrial
development bonds and credit enhancement from GSEs, which
bonds and credit enhancement are placed with a custodian who
issues beneficial interests. We own all of the beneficial interests
and may also service the underlying mortgages. Through our
ownership of the beneficial interests we control the key decisions
of the trust including the decision to invest in or divest of a bond
and whether to purchase or retain credit support.
MUNICIPAL TENDER OPTION BOND SECURITIZATIONS As part of
our normal investment portfolio activities, we consolidate
municipal bond trusts that hold highly rated, long-term, fixed-
rate municipal bonds, the majority of which are rated AA or
better. Our residual interests in these trusts generally allow us to
capture the economics of owning the securities outright, and
constructively make decisions that significantly impact the
economic performance of the municipal bond vehicle, primarily
by directing the sale of the municipal bonds owned by the
vehicle. We may also serve as remarketing agent or liquidity
provider for the trusts should the investors exercise their right to
tender the certificates at specified dates. If we cannot 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.
Other Transactions
In addition to the transactions included in the previous tables, we
have used wholly-owned trust preferred security VIEs to issue
debt securities or preferred equity exclusively to third-party
investors. As the sole assets of the VIEs are receivables from us,
we do not consolidate the VIEs even though we own all of the
voting equity shares of the VIEs, have fully guaranteed the
obligations of the VIEs, and may have the right to redeem the
third-party securities under certain circumstances. See Note 15
(Long-Term Debt) and Note 20 (Preferred Stock) for additional
information about trust preferred securities.
Certain money market funds are also excluded from the
previous tables because they are exempt from the consolidation
analysis. We voluntarily waived a portion of our management
fees for these money market funds to maintain a minimum level
of daily net investment income. The amount of fees waived in
2019, 2018 and 2017 was $40 million, $45 million, and
$53 million, respectively.
Wells Fargo & Company
179
Note 11: 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 11.1
presents the changes in MSRs measured using the fair value
method.
Table 11.1: 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 (7)
Total changes in fair value
Fair value, end of year
Year ended December 31,
2019
2018
2017
$
14,649
13,625
12,959
—
1,933
(286)
1,647
—
2,010
(71)
541
2,263
(23)
1,939
2,781
(2,406)
1,337
(103)
48
145
(356)
(2,569)
(2,210)
(4,779)
818
(830)
(365)
960
(1,875)
(915)
96
13
(132)
(126)
(1,989)
(2,115)
$
11,517
14,649
13,625
(1)
(2)
(3)
(4)
(5)
(6)
(7)
Includes impacts associated with exercising cleanup calls on securitizations as well as our right to repurchase delinquent loans from Government National Mortgage Association (GNMA) loan
securitization pools. Total reported MSRs may increase upon repurchase due to servicing liabilities associated with these delinquent GNMA loans.
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.
Reflects discount rate assumption change, excluding portion attributable to changes in mortgage interest rates.
Represents changes driven by other valuation model inputs or assumptions including prepayment speed estimation changes and other assumption updates. Prepayment speed estimation changes
are influenced by observed changes in borrower behavior and other external factors that occur independent of interest rate changes.
Represents the reduction in the MSR fair value for the cash flows expected to be collected during the period, net of income accreted due to the passage of time
Table 11.2 presents the changes in amortized MSRs.
Table 11.2: 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
$
$
$
2019
1,443
100
161
(274)
1,430
2,288
1,872
Year ended December 31,
2018
1,424
127
158
(266)
1,443
2,025
2,288
2017
1,406
115
166
(263)
1,424
1,956
2,025
(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.
180
Wells Fargo & Company
We present the components of our managed servicing
portfolio in Table 11.3 at unpaid principal balance for loans
serviced and subserviced for others and at book value for owned
loans serviced.
Table 11.3: Managed Servicing Portfolio
(in billions)
Residential mortgage servicing:
Serviced for others
Owned loans serviced (1)
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
(1)
Excludes loans serviced by third parties.
Table 11.4 presents the components of mortgage banking
noninterest income.
Table 11.4: Mortgage Banking Noninterest Income
(in millions)
Servicing income, net:
Servicing fees:
Dec 31,
2019
Dec 31,
2018
$
1,063
343
2
1,408
566
124
9
699
$
$
2,107
1,629
0.79%
1,164
334
4
1,502
543
121
9
673
2,175
1,707
0.94
Year ended December 31,
2019
2018
2017
Contractually specified servicing fees
$
3,388
3,613
3,603
Late charges
Ancillary fees
Unreimbursed direct servicing costs (1)
Net servicing fees
Changes in fair value of MSRs carried at fair value:
Due to changes in valuation model inputs or assumptions (2)
Changes due to collection/realization of expected cash flows over time (3)
Total changes in fair value of MSRs carried at fair value
Amortization
Net derivative gains (losses) from economic hedges (4)
Total servicing income, net
Net gains on mortgage loan origination/sales activities (5)
(A)
(B)
Total mortgage banking noninterest income
Market-related valuation changes to MSRs, net of hedge results (2)(4)
(A)+(B)
$
$
129
143
(403)
3,257
(2,569)
(2,210)
(4,779)
(274)
2,318
522
2,193
2,715
162
182
(331)
3,626
960
(1,875)
(915)
(266)
(1,072)
1,373
1,644
3,017
(251)
(112)
172
199
(582)
3,392
(126)
(1,989)
(2,115)
(263)
413
1,427
2,923
4,350
287
(1)
(2)
(3)
(4)
(5)
Includes costs associated with foreclosures, unreimbursed interest advances to investors, and other interest costs.
Refer to the analysis of changes in fair value MSRs presented in Table 11.1 in this Note for more detail.
Represents the reduction in the MSR fair value for the cash flows expected to be collected during the period, net of income accreted due to the passage of time.
Represents results from economic hedges used to hedge the risk of changes in fair value of MSRs. See Note 18 (Derivatives) for additional discussion and detail.
Includes net gains (losses) of $(141) million, $857 million and $35 million at December 31, 2019, 2018 and 2017, respectively, related to derivatives used as economic hedges of mortgage loans held
for sale and derivative loan commitments.
Wells Fargo & Company
181
Note 12: Intangible Assets
Table 12.1 presents the gross carrying value of intangible assets
and accumulated amortization.
Table 12.1: Intangible Assets
(in millions)
Amortized intangible assets (1):
MSRs (2)
Core deposit intangibles
Customer relationship and other intangibles
Total amortized intangible assets
Unamortized intangible assets:
MSRs (carried at fair value) (2)
Goodwill
Trademark
December 31, 2019
December 31, 2018
Gross carrying
value
Accumulated
amortization
Net carrying
value
Gross carrying
value
Accumulated
amortization
Net carrying
value
$
4,422
$
$
—
947
5,369
11,517
26,390
14
(2,992)
—
(524)
(3,516)
1,430
—
423
1,853
4,161
12,834
3,994
20,989
14,649
26,418
14
(2,718)
(12,834)
(3,449)
(19,001)
1,443
—
545
1,988
(1)
(2)
Balances are excluded commencing in the period following full amortization.
See Note 11 (Mortgage Banking Activities) for additional information on MSRs.
Table 12.2 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, 2019. Future amortization
expense may vary from these projections.
Table 12.2: Amortization Expense for Intangible Assets
(in millions)
Year ended December 31, 2019 (actual)
Estimate for year ended December 31,
2020
2021
2022
2023
2024
Amortized MSRs
Customer
relationship and
other intangibles
$
$
274
263
227
203
176
152
114
95
81
68
59
48
Total
388
358
308
271
235
200
Table 12.3 shows the allocation of goodwill to our reportable
operating segments.
Table 12.3: Goodwill
(in millions)
December 31, 2017 (1)
Reduction in goodwill related to divested businesses and foreign currency translation
December 31, 2018 (1)
Reduction in goodwill related to divested businesses and foreign currency translation
December 31, 2019 (1)
Community
Banking
Wholesale
Banking
Wealth and
Investment
Management
Consolidated
Company
$
$
$
16,849
(164)
16,685
—
16,685
8,455
(5)
8,450
(21)
8,429
1,283
—
1,283
(7)
1,276
26,587
(169)
26,418
(28)
26,390
(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, which closed in February 2018. At
December 31, 2019, and December 31, 2018, there was no Goodwill classified as held-for-sale in other assets.
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, 2019 and 2018. The fair
values exceeded the carrying amount of our respective reporting
units by approximately 6% to 425% at December 31, 2019. See
Note 27 (Operating Segments) for further information on
management reporting.
182
Wells Fargo & Company
Note 13: Deposits
Table 13.1 presents a summary of the time certificates of
deposit (CDs) and other time deposits issued by domestic and
non-U.S. offices.
The contractual maturities of the domestic time deposits
with a denomination of $100,000 or more are presented in Table
13.3.
Table 13.1: Time Certificates of Deposits and Other Time Deposits
Table 13.3: Contractual Maturities of Domestic Time Deposits
(in billions)
Total domestic and Non-U.S.
Domestic:
$100,000 or more
$250,000 or more
Non-U.S.
$100,000 or more
$250,000 or more
December 31,
(in millions)
December 31, 2019
2019
118.8
$
2018
130.6
43.7
34.6
4.0
4.0
42.5
37.1
4.6
4.6
Three months or less
After three months through six months
After six months through twelve months
After twelve months
Total
$
$
18,759
10,583
11,766
2,624
43,732
Demand deposit overdrafts of $542 million and $624 million
were included as loan balances at December 31, 2019 and 2018,
respectively.
Substantially all CDs and other time deposits issued by
domestic and non-U.S. offices were interest bearing. The
contractual maturities of these deposits are presented in Table
13.2.
Table 13.2: Contractual Maturities of CDs and Other Time Deposits
(in millions)
December 31, 2019
2020
2021
2022
2023
2024
Thereafter
Total
$
88,259
15,429
6,055
4,130
1,906
3,070
$
118,849
Wells Fargo & Company
183
Note 14: Short-Term Borrowings
Table 14.1 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 16 (Guarantees, Pledged Assets and Collateral, and Other
Commitments).
Table 14.1: Short-Term Borrowings
(in millions)
As of December 31,
Amount
2019
Rate
Amount
2018
Rate
Amount
2017
Rate
Federal funds purchased and securities sold under agreements to repurchase
$
92,403
1.54% $
92,430
2.65% $
88,684
1.30%
Commercial paper
Other short-term borrowings
Total
Year ended December 31,
Average daily balance
—
12,109
$
104,512
—
0.60
1.43
—
13,357
—
1.63
—
14,572
$
105,787
2.52
$
103,256
Federal funds purchased and securities sold under agreements to repurchase
$
102,888
2.11
$
90,348
1.78
$
82,507
Commercial paper
Other short-term borrowings
Total
Maximum month-end balance
—
12,449
$
115,337
—
1.20
2.01
—
13,919
—
0.79
16
16,399
$
104,267
1.65
$
98,922
Federal funds purchased and securities sold under agreements to repurchase (1) $
111,726
N/A
$
93,918
N/A $
91,604
Commercial paper (2)
Other short-term borrowings (3)
—
14,129
N/A
N/A
—
16,924
N/A
N/A
78
19,439
N/A- Not applicable
(1)
(2)
(3)
Highest month-end balance in each of the last three years was October 2019, November 2018 and November 2017.
There were no month-end balances in 2019 and 2018; highest month-end balance in 2017 was January.
Highest month-end balance in each of the last three years was February 2019, January 2018 and February 2017.
—
0.72
1.22
0.90
0.95
0.13
0.77
N/A
N/A
N/A
184
Wells Fargo & Company
Note 15: 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 18 (Derivatives)
for further information on qualifying hedge contracts.
Table 15.1: Long-Term Debt
Table 15.1 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, 2019. These interest
rates do not include the effects of any associated derivatives
designated in a hedge accounting relationship.
(in millions)
Wells Fargo & Company (Parent only)
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 - 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)
Floating-rate advances - FHLB
Structured notes (2)
Finance 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
Long-term debt issued by VIE - Floating rate
Mortgage notes and other debt (5)
Total long-term debt - Bank
(continued on following page)
Maturity date(s)
Stated interest rate(s)
2020-2047
2020-2048
2025-2030
0.38 - 6.75%
$
0.02-3.24%
2.41-3.58%
2023-2046
3.45-7.57%
2029-2036
2027
5.95-7.95%
2.50-3.00%
2020-2023
2020-2053
2021-2022
2020-2031
2020-2022
2.40-3.63%
1.64-2.55%
2.08-3.33%
3.83-7.50%
1.83-2.31%
2020-2029
1.69-17.78%
2023-2038
5.25-7.74%
2027
2.48-2.65%
2037
2020-2038
2020-2057
6.00%
2.38-4.62%
9.20%
December 31,
2019
2018
86,618
16,800
12,030
8,390
77,742
19,553
2,901
7,984
123,838
108,180
27,195
27,195
1,428
318
1,746
25,428
25,428
1,308
308
1,616
152,779
135,224
9,364
10,617
5,097
41
32,950
1,914
32
60,015
5,374
5,374
363
363
17
570
6,185
72,524
14,222
6,617
1,998
51
53,825
1,646
36
78,395
5,199
5,199
352
352
160
656
6,637
91,399
Wells Fargo & Company
185
Note 15: Long-Term Debt (continued)
(continued from previous page)
(in millions)
Other consolidated subsidiaries
Senior
Fixed-rate notes
Structured notes (2)
Finance leases
Total senior debt - Other consolidated subsidiaries
Mortgage notes and other
Total long-term debt - Other consolidated subsidiaries
Total long-term debt
Maturity date(s)
Stated interest rate(s)
December 31,
2019
2018
2021-2023
3.04-3.46%
2020
2026
3.71%
3.27%
1,352
1,503
1
2,856
32
2,888
2,383
6
—
2,389
32
2,421
$
228,191
229,044
(1)
(2)
(3)
(4)
(5)
Includes $66 million of outstanding zero coupon callable notes at December 31, 2019.
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 18 (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 $128 million and $131 million in 2019 and 2018, respectively, and debt issuance costs of $2 million in both 2019 and
2018, to effect a modification of Wells Fargo Bank, N.A., notes. These subordinated notes are carried at their par amount on the balance sheet of the Parent presented in Note 28 (Parent-Only
Financial Statements). In addition, Parent long-term debt presented in Note 28 also includes affiliate related issuance costs of $281 million and $278 million in 2019 and 2018, respectively.
Represents junior subordinated debentures held by unconsolidated wholly-owned trusts formed for the sole purpose of issuing trust preferred securities. See Note 10 (Securitizations and Variable
Interest Entities) for additional information.
Largely relates to unfunded commitments for LIHTC investments. For additional information, see Note 8 (Equity Securities).
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 $228.2 billion at
December 31, 2019, decreased $853 million from December 31,
2018. We issued $53.4 billion of long-term debt in 2019.
The aggregate carrying value of long-term debt that
matures (based on contractual payment dates) as of
December 31, 2019, in each of the following five years and
thereafter is presented in Table 15.2.
Table 15.2: Maturity of Long-Term Debt
(in millions)
Wells Fargo & Company (Parent Only)
Senior notes
Subordinated notes
Junior subordinated notes
2020
2021
2022
2023
2024
Thereafter
Total
December 31, 2019
$
13,429
18,163
18,091
11,104
9,387
—
—
—
—
—
—
3,653
—
737
—
53,664
22,805
1,746
123,838
27,195
1,746
Total long-term debt - Parent
13,429
18,163
18,091
14,757
10,124
78,215
152,779
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
23,415
27,865
5,585
—
—
—
—
2,658
1,138
26,073
29,003
144
—
144
1,761
—
1,761
—
—
633
6,218
93
—
93
2,884
1,071
—
224
4,179
435
—
435
6
—
—
157
163
118
—
118
260
4,303
363
1,962
6,888
305
32
337
60,015
5,374
363
6,772
72,524
2,856
32
2,888
Total long-term debt
$
39,646
48,927
24,402
19,371
10,405
85,440
228,191
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, 2019, we were in compliance with all the
covenants.
186
Wells Fargo & Company
Note 16: 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 options, recourse
obligations, and other types of similar arrangements. Table 16.1
shows carrying value, maximum exposure to loss on our
guarantees and the related non-investment grade amounts.
Table 16.1: Guarantees – Carrying Value and Maximum Exposure to Loss
(in millions)
December 31, 2019
Standby letters of credit
Direct pay letters of credit
Written options (1)
Loans and MLHFS sold with recourse (2)
Exchange and clearing house guarantees
Other guarantees and indemnifications (3)
Total guarantees
December 31, 2018
Standby letters of credit (4)
Direct pay letters of credit (4)
Written options (1)
Loans and MLHFS sold with recourse (2)
Exchange and clearing house guarantees (4)
Other guarantees and indemnifications (3), (4)
$
$
$
Carrying
value of
obligation
(asset)
Expires in one
year or less
Expires after
one year
through three
years
Expires after
three years
through five
years
Expires after
five years
36
—
(345)
52
—
1
11,569
1,861
17,088
114
—
785
4,460
3,815
10,869
576
—
1
2,812
824
2,341
1,356
—
3
467
105
273
10,050
4,817
809
Maximum exposure to loss
Non-
investment
grade
7,104
1,184
18,113
9,835
—
698
Total
19,308
6,605
30,571
12,096
4,817
1,598
(256)
31,417
19,721
7,336
16,521
74,995
36,934
40
—
(185)
54
—
1
10,947
3,689
17,243
104
—
889
4,649
3,248
10,502
653
—
1
2,872
526
3,066
1,207
—
3
461
36
400
10,163
2,922
1,081
18,929
7,499
31,211
12,127
2,922
1,974
7,017
1,010
21,732
9,079
—
753
Total guarantees
$
(90)
32,872
19,053
7,674
15,063
74,662
39,591
(1) Written options, which are in the form of derivatives, are also included in the derivative disclosures in Note 18 (Derivatives). Carrying value net asset position is a result of certain deferred premium
option trades.
Represent recourse provided, predominantly to the GSEs, on loans sold under various programs and arrangements.
Includes indemnifications provided to certain third-party clearing agents. Outstanding customer obligations under these arrangements were $80 million and $70 million with related collateral of
$696 million and $974 million at December 31, 2019 and 2018, respectively.
Prior period amounts have been revised to conform with the current period presentation.
(2)
(3)
(4)
“Maximum exposure to loss” and “Non-investment grade”
are required disclosures under GAAP. 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 16.1 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, or the allowance for
lending-related commitments, is more representative of our
exposure to loss.
Non-investment grade represents those guarantees on
which we have a higher risk of performance 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).
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. 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. Standby letters of credit are conditional lending
commitments 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. Total maximum exposure to loss
includes the portion of multipurpose lending facilities for which
we have issued standby letters of credit under the commitments.
We consider the credit risk in standby letters of credit and
commercial and similar letters of credit in determining the ACL.
DIRECT PAY LETTERS OF CREDIT We issue direct pay letters of
credit to serve as 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 consider the credit risk in direct pay letters of credit in
determining the ACL.
WRITTEN OPTIONS We enter into certain derivative contracts
that have the characteristics of a guarantee. These contracts
include written put options that give the counterparty the right
to sell to us an underlying instrument held by the counterparty at
Wells Fargo & Company
187
Note 16: Guarantees, Pledged Assets and Collateral, and Other Commitments (continued)
OTHER GUARANTEES AND INDEMNIFICATIONS We 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.
Under certain factoring arrangements, we may be required
to purchase trade receivables from third parties, if receivable
debtors default on their payment obligations.
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.
GUARANTEES OF SUBSIDIARIES In the normal course of business,
the Parent may provide counterparties with guarantees related
to its subsidiaries’ obligations. These obligations are included in
the Company’s consolidated balance sheets or are reflected as
off-balance sheet commitments, and therefore, the Parent has
not recognized a separate liability for these guarantees.
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 $1.6 billion and $5 million at December 31, 2019 and 2018,
respectively. These guarantees rank on parity with all of the
Parent’s other unsecured and unsubordinated indebtedness.
a specified price by a specified date. They also include certain
written options that require us to make a payment for increases
in fair value of assets held by the counterparty. These written
option contracts generally permit or require 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 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
options is based on future market conditions and is only
quantifiable at settlement. See Note 18 (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 16.1 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.
EXCHANGE AND CLEARING HOUSE GUARANTEES We are members
of several securities and derivatives exchanges and clearing
houses, both in the U.S. and in countries outside the U.S., 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 and of
the organization. Our obligations under the guarantees are
generally a pro-rata share based on either a fixed amount or a
multiple of the guarantee fund we are required to maintain with
these organizations. Some membership rules require members
to assume a pro-rata share of losses resulting from another
member’s default or from non-member default losses after
applying the guarantee fund. We have not recorded a liability for
these arrangements as of the dates presented in Table 16.1
because we believe the likelihood of loss is remote.
188
Wells Fargo & Company
Pledged Assets
Table 16.2 provides the carrying amount of on-balance sheet
pledged assets and the fair value of off-balance sheet pledged
assets.
TRADING RELATED ACTIVITY Our trading businesses may pledge
debt and equity securities in connection with securities sold
under agreements to repurchase (repurchase agreements) and
securities lending arrangements. Substantially all of the trading
activity pledged collateral is eligible to be repledged or sold by
the secured party. The collateral that we pledge related to our
trading activities may include our own collateral as well as
collateral that we have received from third parties and have the
right to repledge.
NON-TRADING RELATED ACTIVITY As part of our liquidity
management strategy, we may pledge loans, debt securities, and
other assets to secure trust and public deposits, borrowings and
letters of credit from the Federal Home Loan Bank (FHLB) and
FRB and for other purposes as required or permitted by law or
Table 16.2: Pledged Assets
(in millions)
Related to trading activities:
Debt securities
Equity securities
Total pledged assets related to trading activities (1)
Related to non-trading activities:
Debt securities and other
Mortgage loans held for sale (2)
Loans (2)
Total pledged assets related to non-trading activities
Total pledged assets
•
insurance statutory requirements. Substantially all of the non-
trading activity pledged collateral is not eligible to be repledged
or sold by the secured party.
Table 16.2 excludes:
Pledged assets of consolidated VIEs of $14.4 billion and
$14.6 billion at December 31, 2019 and 2018, respectively,
which can only be used to settle the liabilities of those
entities;
Assets pledged in transactions with VIEs accounted for as
secured borrowings of $80 million and $94 million at
December 31, 2019 and 2018, respectively; and
Pledged loans recorded on our balance sheet of $568 million
and $1.2 billion at December 31, 2019 and 2018,
respectively, representing certain delinquent loans that are
eligible for repurchase from GNMA loan securitizations.
•
•
See Note 10 (Securitizations and Variable Interest Entities) for
additional information on consolidated VIE assets and secured
borrowings.
Dec 31,
2019
$
106,105
6,204
112,309
65,047
2,266
406,106
473,419
585,728
$
Dec 31,
2018
96,616
9,695
106,311
62,438
7,439
446,455
516,332
622,643
(1)
(2)
Includes securities collateral received from third parties that we have repledged of $60.1 billion and $60.8 billion as of December 31, 2019 and 2018, respectively.
Prior period amounts have been revised to conform with the current period presentation.
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 16.3
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 16.3, we also
have balance sheet netting related to derivatives that is
disclosed in Note 18 (Derivatives).
Wells Fargo & Company
189
Note 16: Guarantees, Pledged Assets and Collateral, and Other Commitments (continued)
Table 16.3: 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,
2019
Dec 31,
2018
$
$
$
$
140,773
(19,180)
121,593
(120,786)
807
111,038
(19,180)
91,858
(91,709)
149
112,662
(15,258)
97,404
(96,734)
670
106,248
(15,258)
90,990
(90,798)
192
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
Represents recognized amount of resale and repurchase agreements with counterparties subject to enforceable MRAs that have been offset in the consolidated balance sheet.
Includes $102.1 billion and $80.1 billion, respectively, classified on our consolidated balance sheet in federal funds sold and securities purchased under resale agreements at December 31, 2019 and
2018. Also includes securities purchased under long-term resale agreements (generally one year or more) classified in loans, which totaled $19.5 billion and $17.3 billion, at December 31, 2019 and
2018, respectively.
Represents the fair value of collateral we have received under enforceable MRAs or MSLAs, limited in the table above to the amount of the recognized asset due from each counterparty. At
December 31, 2019 and 2018, we have received total collateral with a fair value of $150.9 billion and $123.1 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 $59.1 billion at December 31, 2019, and $60.8 billion at December 31, 2018.
Represents the amount of our exposure that is not collateralized and/or is not subject to an enforceable MRA or MSLA.
For additional information on underlying collateral and contractual maturities, see the “Repurchase and Securities Lending Agreements” section in this Note.
Amount is classified in short-term borrowings on our consolidated balance sheet.
Represents the fair value of collateral we have pledged, related to enforceable MRAs or MSLAs, limited in the table above to the amount of the recognized liability owed to each counterparty. At
December 31, 2019 and 2018, we have pledged total collateral with a fair value of $113.3 billion and $108.8 billion, respectively, substantially all of which may be sold or repledged by the
counterparty.
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 in
various ways. Most of our collateral consists of highly liquid
securities. In addition, we underwrite and monitor the financial
strength of our counterparties, monitor the fair value of
collateral pledged relative to contractually required repurchase
amounts, and monitor that our collateral is properly returned
through the clearing and settlement process in advance of our
cash repayment. Table 16.4 provides the gross amounts
recognized on the balance sheet (before the effects of
offsetting) of our liabilities for repurchase and securities lending
agreements disaggregated by underlying collateral type.
190
Wells Fargo & Company
Table 16.4: Gross Obligations by Underlying Collateral Type
(in millions)
Repurchase agreements:
Securities of U.S. Treasury and federal agencies
Securities of U.S. States and political subdivisions
Federal agency mortgage-backed securities
Non-agency mortgage-backed securities
Corporate debt securities
Asset-backed securities
Equity securities
Other
Total repurchases
Securities lending arrangements:
Securities of U.S. Treasury and federal agencies
Federal agency mortgage-backed securities
Corporate debt securities
Equity securities (1)
Other
Total securities lending
$
Dec 31,
2019
48,161
104
44,737
1,818
7,126
1,844
1,674
705
106,169
163
—
223
4,481
2
4,869
Dec 31,
2018
38,408
159
47,241
1,875
6,191
2,074
992
340
97,280
222
2
389
8,349
6
8,968
Total repurchases and securities lending
$
111,038
106,248
(1)
Equity securities are generally exchange traded and represent collateral received from third parties that has been repledged. We received the collateral through either margin lending agreements or
contemporaneous securities borrowing transactions with other counterparties.
Table 16.5 provides the contractual maturities of our gross
obligations under repurchase and securities lending agreements.
Table 16.5: Contractual Maturities of Gross Obligations
(in millions)
December 31, 2019
Repurchase agreements
Securities lending arrangements
Total repurchases and securities lending (1)
December 31, 2018
Repurchase agreements
Securities lending arrangements
Total repurchases and securities lending (1)
Overnight/
continuous
Up to 30 days
30-90 days
>90 days
$
$
$
$
79,793
4,724
84,517
86,574
8,669
95,243
17,681
—
17,681
3,244
—
3,244
4,825
145
4,970
2,153
299
2,452
3,870
—
3,870
5,309
—
5,309
Total gross
obligation
106,169
4,869
111,038
97,280
8,968
106,248
(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, 2019 and 2018, we
had commitments to purchase debt securities of $18 million and
$335 million, respectively, and commitments to purchase equity
securities of $2.7 billion and $2.5 billion, respectively.
As part of maintaining our memberships in certain clearing
organizations, we are required to stand ready to provide liquidity
to sustain market clearing activity in the event unforeseen
events occur or are deemed likely to occur. Certain of these
obligations are guarantees of other members’ performance and
accordingly are included in Table 16.1.
Also, we have commitments to purchase loans and securities
under resale agreements from certain counterparties, including
central clearing organizations. The amount of our unfunded
contractual commitments was $7.5 billion and $12.4 billion as of
December 31, 2019 and 2018, respectively.
Given the nature of these commitments, they are excluded
from Table 6.4 (Unfunded Credit Commitments) in Note 6
(Loans and Allowance for Credit Losses).
Wells Fargo & Company
191
Note 17: Legal Actions
Wells Fargo and certain of our subsidiaries are involved in a
number of judicial, regulatory, governmental, arbitration, and
other proceedings or investigations concerning matters arising
from the conduct of our business activities, and many of those
proceedings and investigations expose Wells Fargo to potential
financial loss. These proceedings and investigations 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 certain
mortgage interest rate lock extensions. The consent orders
192
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. The
Company has reached an agreement to resolve the multi-district
litigation pursuant to which the Company has agreed to pay,
consistent with its remediation obligations under the consent
orders, approximately $547 million in remediation to customers
with CPI policies placed between October 15, 2005, and
September 30, 2016. The settlement amount is not incremental
to the Company’s remediation obligations under the consent
orders, but instead encompasses those obligations, including
remediation payments to date. The settlement amount is
subject to change as the Company finalizes its remediation
activity under the consent orders. In addition, the Company has
agreed to contribute $1 million to a common fund for the class.
The district court granted final approval of the settlement on
November 21, 2019. 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. In addition, the Company is subject to a class action
lawsuit in the United States District Court for the Central District
of California alleging that customers are entitled to refunds
related to the unused portion of guaranteed automobile
protection (GAP) waiver or insurance agreements between the
customer and dealer and, by assignment, the lender. 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. The parties to the state court action have
entered into an agreement to resolve the action pursuant to
which the Company will pay plaintiffs’ attorneys’ fees and
undertake certain business and governance practices. The state
court granted final approval of the settlement on January 15,
2020. These and other issues related to the origination, servicing,
and 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
historical practices associated with 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.
FIDUCIARY AND CUSTODY ACCOUNT FEE CALCULATIONS Federal
government agencies are conducting formal or informal
Wells Fargo & Company
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 the Wealth and
Investment Management (WIM) operating segment. 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 activities in the
Company’s foreign exchange business, including whether
customers may have received pricing inconsistent with
commitments made to those customers. These matters are at
varying stages. The Company has responded, and continues to
respond, to requests from a number of the foregoing and has
discussed the potential resolution of some of the matters.
INTERCHANGE LITIGATION Plaintiffs representing a putative class
of merchants have filed putative class actions, and individual
merchants have filed individual actions, against Wells Fargo Bank,
N.A., Wells Fargo & Company, Wachovia Bank, N.A., and Wachovia
Corporation regarding the interchange fees associated with Visa
and MasterCard payment card transactions. Visa, MasterCard,
and several other banks and bank holding companies are also
named as defendants in these actions. These actions have been
consolidated in the United States District Court for the Eastern
District of New York. The amended and consolidated complaint
asserts claims against defendants based on alleged violations of
federal and state antitrust laws and seeks damages, as well as
injunctive relief. Plaintiff merchants allege that Visa, MasterCard,
and payment card issuing banks unlawfully colluded to set
interchange rates. Plaintiffs also allege that enforcement of
certain Visa and MasterCard rules and alleged tying and bundling
of services offered to merchants are anticompetitive. Wells
Fargo and Wachovia, along with other defendants and entities,
are parties to Loss and Judgment Sharing Agreements, which
provide that they, along with other entities, will share, based on a
formula, in any losses from the Interchange Litigation. On
July 13, 2012, Visa, MasterCard, and the financial institution
defendants, including Wells Fargo, signed a memorandum of
understanding with plaintiff merchants to resolve the
consolidated class action and reached a separate settlement in
principle of the consolidated individual actions. The settlement
payments to be made by all defendants in the consolidated class
and individual actions totaled approximately $6.6 billion before
reductions applicable to certain merchants opting out of the
settlement. The class settlement also provided for the
distribution to class merchants of 10 basis points of default
interchange across all credit rate categories for a period of eight
consecutive months. The district court granted final approval of
the settlement, which was appealed to the United States Court
of Appeals for the Second Circuit by settlement objector
merchants. Other merchants opted out of the settlement and
are pursuing several individual actions. On June 30, 2016, the
Second Circuit vacated the settlement agreement and reversed
and remanded the consolidated action to the United States
District Court for the Eastern District of New York for further
proceedings. On November 23, 2016, prior class counsel filed a
petition to the United States Supreme Court, seeking review of
the reversal of the settlement by the Second Circuit, and the
Supreme Court denied the petition on March 27, 2017. On
November 30, 2016, the district court appointed lead class
counsel for a damages class and an equitable relief class. 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 final approval of
the settlement on December 13, 2019, which was appealed to
the United States Court of Appeals for the Second Circuit by
settlement objector merchants. Several of the opt-out and direct
action litigations have been settled 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.
MOBILE DEPOSIT PATENT LITIGATION The Company is a defendant
in two separate cases brought by United Services Automobile
Association (USAA) in the United States District Court for the
Eastern District of Texas alleging claims of patent infringement
regarding mobile deposit capture technology patents held by
USAA. Trial in the first case commenced on October 30, 2019,
and resulted in a $200 million verdict against the Company. Trial
in the second case commenced on January 6, 2020, and resulted
in a $102.7 million verdict against the Company. The Company
has filed post-trial motions to, among other things, vacate the
verdicts, and USAA has filed post-trial motions seeking future
royalty payments and damages for willful infringement.
MORTGAGE LOAN MODIFICATION LITIGATION Plaintiffs
representing a putative class of mortgage borrowers have filed
separate putative class actions, Hernandez v. Wells Fargo, et al.,
Coordes v. Wells Fargo, et al., Ryder v. Wells Fargo, Liguori v.
Wells Fargo, and Dore v. Wells Fargo, against Wells Fargo Bank,
N.A., in the United States District Court for the Northern District
of California, the United States District Court for the District of
Washington, the United States District Court for the Southern
District of Ohio, the United States District Court for the
Southern District of New York, and the United States District
Court for the Western District of Pennsylvania, 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
Wells Fargo & Company
193
Note 17: Legal Actions (continued)
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. On
September 26, 2019, the district court entered an order granting
Wells Fargo’s motion and dismissed the claims of unnamed class
members in favor of arbitration. Plaintiffs appealed this decision
to the United States Court of Appeals for the Eleventh Circuit.
RETAIL SALES PRACTICES MATTERS A number of bodies or
entities, including (a) 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, (b) state attorneys
general, including the New York Attorney General, and (c)
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.
On February 21, 2020, the Company entered into an
agreement with the Department of Justice to resolve the
Department of Justice’s criminal investigation into the
Company’s retail sales practices, as well as a separate
agreement to resolve the Department of Justice’s civil
investigation. As part of the Department of Justice criminal
settlement, no charges will be filed against the Company
provided the Company abides by all the terms of the
agreement. The Department of Justice criminal settlement
also includes the Company’s agreement that the facts set
forth in the settlement document constitute sufficient facts
for the finding of criminal violations of statutes regarding
bank records and personal information. On February 21, 2020,
the Company also entered into an order to resolve the SEC’s
investigation arising out of the Company’s retail sales
practices. The SEC order contains a finding, to which the
Company consented, that the facts set forth include
violations of Section 10(b) of the Securities Exchange Act of
1934 and Rule 10b-5 thereunder. As part of the resolution of
the Department of Justice and SEC investigations, the
Company has agreed to make payments totaling $3.0 billion.
In addition, as part of the settlements and included in the
$3.0 billion amount, the Company has agreed to the creation
of a $500 million Fair Fund for the benefit of investors who
were harmed by the conduct covered in the SEC settlement.
In addition, a number of lawsuits have 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., pursuant to
which the Company will pay $142 million to resolve claims
regarding certain products or services provided without
authorization or consent for the time period May 1, 2002 to April
20, 2017. The district court issued an order 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 against, among others, current
and former directors and officers for their alleged involvement
with and failure to detect and prevent sales practices issues.
These actions are currently pending in the United States District
Court for the Northern District of California and California state
court as coordinated proceedings. An additional lawsuit, which
asserts similar claims and is pending in Delaware state court, has
been stayed. The parties have entered into settlement
agreements 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. The federal
court granted preliminary approval of the settlement for its
action and held a final approval hearing on August 1, 2019. The
194
Wells Fargo & Company
state court granted final approval of the settlement for its action
on January 15, 2020. Fourth, multiple employment litigation
matters have been brought against Wells Fargo, including (a) a
purported 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; this action has
been dismissed and is now on appeal; (b) a purported 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; this action has been dismissed, and we
have entered into a framework with plaintiffs’ counsel to address
individual claims that have been asserted; (c) various wage and
hour class actions brought in federal and state court in California,
New Jersey, and Pennsylvania on behalf of non-exempt branch
based team members alleging that sales pressure resulted in
uncompensated overtime; these actions have been settled; and
(d) 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 alleged that Wells Fargo
Bank, N.A., as trustee, caused losses to investors and asserted
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 sought money damages in an unspecified
amount, reimbursement of expenses, and equitable relief. In
December 2014 and December 2015, certain other investors
filed additional complaints alleging similar claims against
Wells Fargo Bank, N.A., in the Southern District of New York
(Related Federal Cases). In January 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 subsequent
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).
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). A complaint raising similar allegations to those in
the Federal Court Complaint was filed in May 2016 in New York
state court by IKB International and IKB Deutsche Industriebank
(IKB 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 sought, among other relief, declarations that the
Company 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 May 2019, the New York state court approved a
settlement agreement among the Institutional Investor
Plaintiffs and the Company pursuant to which, among other
terms, the Company paid $43 million to resolve the Federal
Court Complaint and the State Court Action. The settlement
also resolved the Third Party Claims and the Declaratory
Judgment Action. The settlement did not affect the Related
Federal Cases or the IKB Action, which remain pending.
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 April 2020.
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 $2.6 billion as of
December 31, 2019. 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.
Wells Fargo & Company
195
Note 18: 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
qualifying hedge accounting relationships (fair value or cash flow
hedges). Our remaining derivatives consist of economic hedges
that do not qualify for hedge accounting and derivatives held for
customer accommodation trading or other purposes.
Risk management derivatives
Our asset/liability management approach to interest rate,
foreign currency and certain other risks includes the use of
derivatives, which 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 significant 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 or foreign currency
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.
Customer accommodation trading
We also use 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
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.
We mention derivative instruments within several other
Notes in this Report. For more information on Derivatives, refer
to the following areas:
• Note 1 – Summary of Significant Accounting Policies
• Note 4 – Trading Activities
• Note 8 – Equity Securities
• Note 10 – Securitizations and Variable Interest Entities
• Note 11 – Mortgage Banking Activities
• Note 15 – Long-Term Debt
• Note 16 – Guarantees, Pledged Assets and Collateral, and
Other Commitments
• Note 19 – Fair Values of Assets and Liabilities
• Note 24 – Income Taxes
• Note 26 – Other Comprehensive Income
• Note 28 – Parent-Only Financial Statements
196
Wells Fargo & Company
Table 18.1 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.
Table 18.1: Notional or Contractual Amounts and Fair Values of Derivatives
(in millions)
Derivatives designated as hedging instruments
Interest rate contracts
Foreign exchange contracts
Total derivatives designated as qualifying hedging instruments
Derivatives not designated as hedging instruments
Economic hedges:
Interest rate contracts
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
Total
December 31, 2019
December 31, 2018
Notional or
Fair value
Notional or
Fair value
contractual
Derivative
Derivative
contractual
Derivative
Derivative
amount
assets
liabilities
amount
assets
liabilities
$
182,789
32,386
235,810
19,263
26,595
1,400
2,595
341
2,936
207
1,126
118
27
1,478
11,117,542
21,245
79,737
272,145
364,469
12,215
24,030
1,421
7,410
4,755
12
69
34,912
36,390
39,326
1,237
1,170
2,407
160
224
286
—
670
17,969
1,770
10,240
4,791
65
18
34,853
35,523
37,930
177,511
34,176
173,215
13,920
19,521
100
2,237
573
2,810
849
1,362
225
27
2,463
636
1,376
2,012
369
79
80
—
528
9,162,821
15,349
15,303
66,173
217,890
364,982
11,741
20,880
1,588
6,183
5,916
76
175
29,287
31,750
34,560
2,336
5,931
5,657
182
98
29,507
30,035
32,047
(25,123)
(28,851)
$
14,203
9,079
(23,790)
(23,548)
10,770
8,499
Wells Fargo & Company
197
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 18.2 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 OTC
markets include bilateral contractual arrangements that are not
cleared through a central clearing organization but are typically
subject to enforceable master netting arrangements. Other
derivative contracts that are settled through a central clearing
organization whether OTC or exchange-traded, are excluded
from that 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 16 (Guarantees, Pledged Assets and Collateral, and Other
Commitments).
Note 18: Derivatives (continued)
Table 18.2 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 $33.7 billion and
$33.5 billion of gross derivative assets and liabilities, respectively,
at December 31, 2019, and $30.9 billion and $28.4 billion,
respectively, at December 31, 2018, with counterparties subject
to enforceable master netting arrangements that are eligible for
balance sheet netting adjustments. The majority of these
amounts are interest rate contracts executed in over-the-
counter (OTC) markets. The remaining gross derivative assets
and liabilities of $5.6 billion and $4.4 billion, respectively, at
December 31, 2019, and $3.7 billion and $3.6 billion,
respectively, at December 31, 2018, 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. Cash collateral receivables and payables
that have not been offset against our derivatives were
$6.3 billion and $1.4 billion, respectively, at December 31, 2019,
and $4.8 billion and $1.4 billion, respectively, at December 31,
2018.
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.
198
Wells Fargo & Company
Table 18.2: Gross Fair Values of Derivative Assets and Liabilities
(in millions)
December 31, 2019
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
Total derivative liabilities
December 31, 2018
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
Gross amounts
recognized
Gross amounts
offset in
consolidated
balance sheet (1)
Net amounts in
consolidated
balance sheet
Gross amounts
not offset in
consolidated
balance sheet
(Disclosure-only
netting)
Net
amounts
Percent exchanged
in over-the-
counter market
$
24,047
(14,878)
1,421
8,536
5,214
12
96
(888)
(5,570)
(3,722)
(9)
(56)
9,169
533
2,966
1,492
3
40
(445)
(2)
(69)
(22)
—
(1)
8,724
531
2,897
1,470
3
39
$
$
$
$
$
$
39,326
(25,123)
14,203
(539)
13,664
19,366
1,770
10,464
6,247
65
18
(16,595)
(677)
(6,647)
(4,866)
(60)
(6)
37,930
(28,851)
18,435
(12,029)
1,588
7,545
6,714
76
202
(849)
(5,318)
(5,355)
(73)
(166)
2,771
1,093
3,817
1,381
5
12
9,079
6,406
739
2,227
1,359
3
36
(545)
(2)
(319)
(169)
(3)
—
2,226
1,091
3,498
1,212
2
12
(1,038)
8,041
(80)
(4)
(755)
(35)
—
(1)
6,326
735
1,472
1,324
3
35
34,560
(23,790)
10,770
(875)
9,895
16,308
(13,152)
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)
(8)
(110)
(188)
(2)
—
2,589
1,601
2,023
1,403
—
8
95%
80
65
100
84
97
94%
82
81
100
98
93
90%
57
78
100
12
78
92%
85
75
100
67
11
Total derivative liabilities
$
32,047
(23,548)
8,499
(875)
7,624
(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 related to derivative assets were $231 million and $353 million and debit valuation adjustments related to derivative
liabilities were $100 million and $152 million as of December 31, 2019 and 2018, respectively. Cash collateral totaled $2.9 billion and $6.8 billion, netted against derivative assets and liabilities,
respectively, at December 31, 2019, and $3.7 billion and $3.6 billion, respectively, at December 31, 2018.
Wells Fargo & Company
199
Note 18: Derivatives (continued)
Fair Value and Cash Flow Hedges
For fair value hedges, we use interest rate swaps to convert
certain of our fixed-rate long-term debt and time certificates of
deposit to floating rates to hedge our exposure to interest rate
risk. We also enter into cross-currency swaps, cross-currency
interest rate swaps and forward contracts to hedge our exposure
to foreign currency risk and interest rate risk associated with the
issuance of non-U.S. dollar denominated long-term debt. In
addition, we use interest rate swaps, cross-currency swaps,
cross-currency interest rate swaps and forward contracts to
hedge against changes in fair value of certain investments in
available-for-sale debt securities due to changes in interest
rates, foreign currency rates, or both. We also use interest rate
swaps to hedge against changes in fair value for certain
mortgage loans held for sale. 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 26 (Other
Comprehensive Income) for the amounts recognized in other
comprehensive income.
Table 18.3: Gains (Losses) Recognized on Fair Value Hedging Relationships
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 also
use cross-currency swaps to hedge variability in interest
payments on fixed-rate foreign currency-denominated long-
term debt due to changes in foreign exchange rates.
We estimate $221 million pre-tax of deferred net losses
related to cash flow hedges in OCI at December 31, 2019, will be
reclassified into net interest income during the next twelve
months. The deferred losses expected to be reclassified into net
interest income are predominantly related to discontinued
hedges of floating rate loans. For cash flow hedges as of
December 31, 2019, we are hedging our foreign currency
exposure to the variability of future cash flows for all forecasted
transactions for a maximum of 11 years.
Table 18.3 and Table 18.4 show the net gains (losses) related
to derivatives in fair value and cash flow hedging relationships,
respectively.
(in millions)
Year Ended December 31, 2019
Net interest income
Noninterest
income
Total
recorded
in net
income
Total
recorded
in OCI
Debt
securities
Mortgage
loans held
for sale Deposits
Long-
term debt
Derivative
gains
(losses)
Derivative
gains
(losses)
Other
Total amounts presented in the consolidated statement of income and
other comprehensive income
$ 14,955
813
(8,635)
(7,350)
3,181
N/A
275
Interest contracts
Amounts related to interest settlements on derivatives
Recognized on derivatives
Recognized on hedged items
Total gains (losses) (pre-tax) on interest rate contracts
Foreign exchange contracts
Amounts related to interest settlements on derivatives
Recognized on derivatives
Recognized on hedged items
Total gains (losses) (pre-tax) on foreign exchange contracts
Total gains (losses) (pre-tax) recognized on fair value hedges
$
(continued on following page)
—
(2,082)
2,096
14
35
(5)
6
36
50
2
1
(7)
(4)
—
—
—
—
(4)
58
463
169
5,001
(442)
(4,910)
79
—
—
—
—
79
260
(483)
308
(289)
(464)
(204)
—
—
—
—
—
(358)
350
(8)
(8)
229
3,383
(3,263)
349
(448)
(55)
67
(436)
(87)
—
—
(3)
(3)
(3)
200
Wells Fargo & Company
(continued from previous page)
(in millions)
Year ended December 31, 2018
Total amounts presented in the consolidated statement of income and other
comprehensive income
Interest contracts
Amounts related to interest settlements on derivatives
Recognized on derivatives
Recognized on hedged items
Total gains (losses) (pre-tax) on interest rate contracts
Foreign exchange contracts
Amounts related to interest settlements on derivatives
Recognized on derivatives
Recognized on hedged items
Total gains (losses) (pre-tax) on foreign exchange contracts
Net interest income
Noninterest
income
Total
recorded
in net
income
Total
recorded
in OCI
Debt
securities
Mortgage
loans held
for sale Deposits
Long-
term debt
Derivative
gains
(losses)
Derivative
gains
(losses)
Other
$ 14,406
777
(5,622)
(6,703)
2,473
N/A
(238)
(187)
845
(877)
(219)
33
7
(1)
39
(3)
15
(22)
(10)
—
—
—
—
(41)
27
(33)
(47)
—
—
—
—
292
(1,923)
1,843
212
(434)
135
(82)
(381)
(169)
—
—
—
—
—
61
(1,035)
910
(64)
(401)
—
—
(1,204)
(1,062)
(254)
1,114
1,031
(90)
(90)
(432)
(496)
(254)
(254)
Total gains (losses) (pre-tax) recognized on fair value hedges
$
(180)
(10)
(47)
Year ended December 31, 2017
Total amounts presented in the consolidated statement of income and other
comprehensive income
Interest contracts
$ 12,946
786
(3,013)
(5,157)
1,603
N/A
(1,083)
Amounts related to interest settlements on derivatives
Recognized on derivatives
Recognized on hedged items
(469)
(43)
(52)
(5)
(5)
(4)
Total gains (losses) (pre-tax) on interest rate contracts
(564)
(14)
Foreign exchange contracts
Amounts related to interest settlements on derivatives
Recognized on derivatives
Recognized on hedged items
Total gains (losses) (pre-tax) on foreign exchange contracts
14
13
(10)
17
—
—
—
—
Total gains (losses) (pre-tax) recognized on fair value hedges
$
(547)
(14)
36
(20)
36
52
—
—
—
—
52
1,286
(912)
938
1,312
(210)
(230)
255
(185)
1,127
—
—
—
—
—
3,118
847
(979)
917
785
(196)
2,901
(2,855)
(2,610)
263
263
95
880
—
—
(253)
(253)
(253)
Wells Fargo & Company
201
Note 18: Derivatives (continued)
Table 18.4: Gains (Losses) Recognized on Cash Flow Hedging Relationships
(in millions)
Year Ended December 31, 2019
Net interest income
Total
recorded in
net income
Total
recorded in
OCI
Loans
Long-term
debt
Derivative
gains (losses)
Derivative
gains (losses)
Total amounts presented in the consolidated statement of income and other comprehensive income
$
44,146
(7,350)
N/A
Interest rate contracts:
Realized gains (losses) (pre-tax) reclassified from OCI into net income
Net unrealized gains (losses) (pre-tax) recognized in OCI
Total gains (losses) (pre-tax) on interest rate contracts
Foreign exchange contracts:
Realized gains (losses) (pre-tax) reclassified from OCI into net income
Net unrealized gains (losses) (pre-tax) recognized in OCI
Total gains (losses) (pre-tax) on foreign exchange contracts
Total gains (losses) (pre-tax) recognized on cash flow hedges
Year ended December 31, 2018
Total amounts presented in the consolidated statement of income and other comprehensive income
Interest rate contracts:
Realized gains (losses) (pre-tax) reclassified from OCI into net income
Net unrealized gains (losses) (pre-tax) recognized in OCI
Total gains (losses) (pre-tax) on interest rate contracts
Foreign exchange contracts:
Realized gains (losses) (pre-tax) reclassified from OCI into net income
Net unrealized gains (losses) (pre-tax) recognized in OCI
Total gains (losses) (pre-tax) on foreign exchange contracts
$
$
(291)
N/A
(291)
—
N/A
—
(291)
1
N/A
1
(9)
N/A
(9)
(8)
(290)
N/A
(290)
(9)
N/A
(9)
(299)
275
290
—
290
9
(21)
(12)
278
43,974
(6,703)
N/A
(238)
(292)
N/A
(292)
—
N/A
—
1
N/A
1
(3)
N/A
(3)
(2)
(291)
N/A
(291)
(3)
N/A
(3)
(294)
291
(266)
25
3
(12)
(9)
16
Total gains (losses) (pre-tax) recognized on cash flow hedges
$
(292)
Year ended December 31, 2017
Total amounts presented in the consolidated statement of income and other comprehensive income
$
41,388
(5,157)
N/A
(1,083)
Interest rate contracts:
Realized gains (losses) (pre-tax) reclassified from OCI into net income
Net unrealized gains (losses) (pre-tax) recognized in OCI
Total gains (losses) (pre-tax) on interest rate contracts
Foreign exchange contracts:
Realized gains (losses) (pre-tax) reclassified from OCI into net income
Net unrealized gains (losses) (pre-tax) recognized in OCI
Total gains (losses) (pre-tax) on foreign exchange contracts
Total gains (losses) (pre-tax) recognized on cash flow hedges
$
551
N/A
551
—
N/A
—
551
(8)
N/A
(8)
—
N/A
—
(8)
543
N/A
543
—
N/A
—
543
(543)
(287)
(830)
—
—
—
(830)
202
Wells Fargo & Company
Table 18.5 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 18.5: Hedged Items in Fair Value Hedging Relationship
(in millions)
December 31, 2019
Available-for-sale debt securities (5)
Mortgage loans held for sale
Deposits
Long-term debt
December 31, 2018
Available-for-sale debt securities (5)
Mortgage loans held for sale
Deposits
Long-term debt
Hedged Items Currently Designated
Hedged Items No Longer Designated (1)
Carrying Amount of
Assets/(Liabilities) (2)(4)
Hedge Accounting
Basis Adjustment
Assets/(Liabilities) (3)
Carrying Amount of
Assets/(Liabilities) (4)
Hedge Accounting
Basis Adjustment
Assets/(Liabilities)
$
$
36,896
961
(43,716)
(127,423)
37,857
448
(56,535)
(104,341)
1,110
(12)
(324)
(5,827)
(157)
7
115
(742)
9,486
—
—
(25,750)
4,938
—
—
(25,539)
278
—
—
173
238
—
—
366
(1)
(2)
(3)
(4)
(5)
Represents hedged items no longer designated in qualifying fair value hedging relationships for which an associated basis adjustment exists at the balance sheet date.
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 $1.2 billion and for long-
term debt is $(5.2) billion as of December 31, 2019, and $1.6 billion for debt securities and $(6.3) billion for long-term debt as of December 31, 2018.
The balance includes $790 million and $109 million of debt securities and long-term debt cumulative basis adjustments as of December 31, 2019, respectively, and $1.4 billion and $66 million of
debt securities and long-term debt cumulative basis adjustments as of December 31, 2018, respectively, on terminated hedges whereby the hedged items have subsequently been re-designated
into existing hedges.
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.
Carrying amount represents the amortized cost.
Derivatives Not Designated as Hedging Instruments
Derivatives not designated as hedging instruments include
economic hedges and derivatives entered into for customer
accommodation trading purposes.
We use economic hedge derivatives to manage our exposure
to interest rate risk, equity price risk, foreign currency risk, and
credit risk. 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.
Mortgage Banking Activities
We use economic hedge derivatives in our mortgage banking
business to hedge the risk of changes in the fair value of (1)
certain residential MSRs measured at fair value, (2) residential
MLHFS, (3) derivative loan commitments, and (4) other interests
held. The types of derivatives used include swaps, swaptions,
constant maturity mortgages, forwards, Eurodollar and Treasury
futures and options contracts. Loan commitments for mortgage
loans that we intend to sell are considered derivatives.
Residential MSRs, derivative loan commitments, certain
residential MLHFS, and our economic hedge derivatives are
carried at fair value with changes in fair value included in
mortgage banking noninterest income. See Note 11 (Mortgage
Banking Activities) for additional information on this economic
hedging activity and mortgage banking income.
Customer Accommodation Trading and Other
For customer accommodation trading purposes, we use swaps,
futures, forwards, spots and options to assist our customers in
managing their own risks, including interest rate, commodity,
equity, foreign exchange, and credit contracts. 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 note is linked to an equity,
commodity or currency index, or basket of such indices. These
notes contain explicit terms that affect some or all of the cash
flows or the value of the note in a manner similar to a derivative
instrument and therefore are considered to contain an
“embedded” derivative instrument. The indices on which the
performance of the hybrid instrument is calculated are not
clearly and closely related to the host debt instrument. The
“embedded” derivative is separated from the host contract and
accounted for as a derivative. Additionally, we may invest in
hybrid instruments that contain embedded derivatives, such as
credit derivatives, that are not clearly and closely related to the
host contract. In such instances, we either elect fair value option
for the hybrid instrument or separate the embedded derivative
from the host contract and account for the host contract and
derivative separately.
Wells Fargo & Company
203
Note 18: Derivatives (continued)
Table 18.6 shows the net gains (losses), recognized by
income statement lines, related to derivatives not designated as
hedging instruments.
Table 18.6: Gains (Losses) on Derivatives Not Designated as Hedging Instruments
(in millions)
Year ended December 31, 2019
Net gains (losses) recognized on economic hedges
derivatives:
Interest contracts (1)
Equity contracts
Foreign exchange contracts
Credit contracts
Subtotal
Net gains (losses) recognized on customer
accommodation trading and other derivatives:
Interest contracts
Commodity contracts
Equity contracts
Foreign exchange contracts
Credit contracts
Subtotal
Net gains (losses) recognized related to derivatives not
designated as hedging instruments
$
(Continued on following page)
Mortgage banking
Net gains (losses) Net gains (losses)
from trading
activities
from equity
securities
Noninterest income
Other
Total
$
2,177
—
—
—
—
(2,120)
—
—
2,177
(2,120)
—
—
—
—
—
(95)
164
(4,863)
47
(120)
(4,867)
1
(2)
(77)
(5)
(83)
—
—
(484)
—
—
(484)
(567)
2,178
(2,122)
(77)
(5)
(26)
323
164
(5,347)
47
(120)
(4,933)
(4,959)
418
—
—
—
—
418
2,595
—
—
—
—
—
—
(2,120)
(4,867)
204
Wells Fargo & Company
(continued from previous page)
(in millions)
Year ended December 31, 2018
Net gains (losses) recognized on economic hedges
derivatives:
Interest contracts (1)
Equity contracts
Foreign exchange contracts
Credit contracts
Subtotal
Net gains (losses) recognized on customer
accommodation trading and other derivatives:
Interest contracts
Commodity contracts
Equity contracts
Foreign exchange contracts
Credit contracts
Subtotal
$
$
Net gains (losses) recognized related to derivatives
not designated as hedging instruments
Year ended December 31, 2017
Net gains (losses) recognized on economic hedges
derivatives:
Interest contracts (1)
Equity contracts
Foreign exchange contracts
Credit contracts
Subtotal
Net gains (losses) recognized on customer
accommodation trading and other derivatives:
Interest contracts
Commodity contracts
Equity contracts
Foreign exchange contracts
Credit contracts
Subtotal
Net gains (losses) recognized related to derivatives
not designated as hedging instruments
$
Mortgage banking
Net gains (losses)
from equity
securities
Net gains (losses)
from trading
activities
Noninterest income
Other
Total
$
(215)
—
—
—
(215)
(352)
—
—
—
—
(352)
(567)
448
—
—
—
448
614
—
—
—
—
614
1,062
—
(408)
—
—
(408)
—
—
—
—
—
—
(408)
—
(1,483)
—
—
(1,483)
—
—
—
—
—
—
(1,483)
—
—
—
—
—
446
83
4,499
638
1
5,667
5,667
—
—
—
—
—
160
178
(3,932)
638
(81)
(3,037)
(3,037)
(15)
4
669
—
658
—
—
(403)
—
—
(403)
255
(75)
17
(866)
5
(919)
—
—
1
—
—
1
(918)
(230)
(404)
669
—
35
94
83
4,096
638
1
4,912
4,947
373
(1,466)
(866)
5
(1,954)
774
178
(3,931)
638
(81)
(2,422)
(4,376)
(1) Mortgage banking amounts for the years ended December 31, 2019, 2018 and 2017, are comprised of gains (losses) of $2.3 billion, $(1.1) billion and $413 million, respectively, related to derivatives
used as economic hedges of MSRs measured at fair value offset by gains (losses) of $(141) million, $857 million and $35 million, respectively, related to derivatives used as economic hedges of
mortgage loans held for sale and derivative loan commitments.
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 18.7 provides details of sold and purchased credit
derivatives.
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 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
Wells Fargo & Company
205
Note 18: Derivatives (continued)
Table 18.7: Sold and Purchased Credit Derivatives
(in millions)
December 31, 2019
Credit default swaps on:
Corporate bonds
Structured products
Credit protection on:
Default swap index
Commercial mortgage-backed securities index
Asset-backed securities index
Other
Total credit derivatives
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
Total credit derivatives
Fair value
asset
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
$
$
$
$
8
—
1
3
—
—
12
38
—
37
1
—
—
76
1
25
—
26
8
5
65
59
62
1
49
9
2
2,855
74
2,542
322
41
6,381
12,215
2,037
133
3,618
389
42
5,522
182
11,741
707
69
120
67
41
5,738
6,742
441
128
582
109
42
5,327
6,629
1,885
63
550
296
41
—
2,835
1,374
121
1,998
363
42
—
3,898
970
11
2,447
2020 - 2029
111
2022 - 2047
1,992
8,105
2020 - 2029
26
—
6,381
9,380
50
1
2047 - 2058
2045 - 2046
11,881
2020 - 2049
22,595
663
12
1,460
2019 - 2027
113
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
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. Table 18.8
illustrates our exposure to such derivatives with credit-risk
contingent features, collateral we have posted, and the
additional collateral we would be required to post if the credit
rating of our debt was downgraded below investment grade.
Table 18.8: Credit-Risk Contingent Features
(in billions)
Dec 31,
2019
Dec 31,
2018
Net derivative liabilities with credit-risk
contingent features
$
Collateral posted
Additional collateral to be posted upon a below
investment grade credit rating (1)
10.4
9.1
1.3
7.4
5.6
1.8
(1) Any credit rating below investment grade requires us to post the maximum
amount of collateral
206
Wells Fargo & Company
Note 19: 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 19.2 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
19.11 in this Note. Table 19.17 includes estimates of fair value
for financial instruments that are not recorded at fair value.
FAIR VALUE HIERARCHY We classify our assets and liabilities
measured at fair value as either Level 1, Level 2 or Level 3 in the
fair value hierarchy. The highest priority (Level 1) is assigned to
valuations based on unadjusted quoted prices in active markets
and the lowest priority (Level 3) is assigned to valuations based
on significant unobservable inputs. See Note 1 (Summary of
Significant Accounting Policies) for a detailed description of 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.
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.
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 pricing services. These services
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 pricing services 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 pricing
service prices, considerations include the range and quality of
pricing service prices. Pricing service 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 third party pricing
service 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 AFS debt securities are recorded at fair value on a
recurring basis and HTM debt securities are recorded at
amortized cost. HTM debt securities are subject to impairment
and written down to fair value if 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. Where available, we use quoted prices in active
markets. When instruments are traded in secondary markets and
quoted market prices do not exist for such securities, we
predominantly use prices obtained from third-party pricing
services and, to a lesser extent, may use prices obtained from
independent broker-dealers (brokers), collectively vendor prices.
When vendor prices are deemed inappropriate by a trader
who has knowledge of a particular market, vendor prices may be
adjusted by weighting them with values from internal models.
We also use internal models when no vendor prices are available.
Internal models typically use discounted cash flow techniques or
pricing models that make adjustments to quoted market prices
for similar securities.
MORTGAGE LOANS HELD FOR SALE (MLHFS) We carry most of our
residential MLHFS portfolio at fair value on a recurring basis. We
carry our commercial MLHFS and certain residential MLHFS at
LOCOM which may be written down to fair value on a
nonrecurring basis. Fair value for both residential and commercial
mortgages is based on quoted market prices, where available, or
the prices for other mortgage whole loans with similar
characteristics. We may use securitization prices that are
adjusted for typical securitization activities including servicing
value, portfolio composition, market conditions and liquidity.
Where market pricing data is not available, we use a discounted
cash flow model to estimate fair value.
LOANS HELD FOR SALE (LHFS) 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 carried at LOCOM, which are
generally consumer loans, are subject to nonrecurring fair value
adjustments. Fair value is determined based on pending
transactions when available, or estimated using a discounted
cash flow model.
LOANS Although most loans are recorded at amortized cost,
reverse mortgages are recorded at fair value on a recurring basis
and are valued using a discounted cash flow model. In addition,
Wells Fargo & Company
207
Note 19: Fair Values of Assets and Liabilities (continued)
we record nonrecurring fair value adjustments to loans carried at
amortized cost to reflect partial write-downs that are based on
the observable market price of the loan or current appraised
value of the collateral.
We also provide fair value estimates 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 valuations include the use of available
market prices for our exchange-traded derivatives, such as
certain interest rate futures and option contracts. 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. The
classification of derivatives between Level 2 and Level 3 of the
fair value hierarchy can be particularly subjective. Examples of
derivatives typically classified as Level 2 include generic interest
rate swaps, foreign currency swaps, commodity swaps, and
certain option and forward contracts. Examples of derivatives
classified as Level 3 may include derivative loan commitments
written for our mortgage loans that we intend to sell, long-dated
equity options where volatility is not observable, credit risk
participation swaps, and complex and highly structured
derivatives.
MORTGAGE SERVICING RIGHTS (MSRs) Residential MSRs are
carried at fair value on a recurring basis, and commercial MSRs,
which are carried at LOCOM, will be written down to fair value if
impaired. MSRs do not trade in an active market with readily
observable prices. We determine the fair value of MSRs using a
valuation model that estimates the present value of expected
future net servicing income. 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 for
residential MSRs), discount rates, default rates, cost to service
(including delinquency and foreclosure costs), escrow account
earnings, contractual servicing fee income, ancillary income and
late fees. Our valuation approach is validated by our internal
valuation model validation group. Changes in the fair value of
MSRs reflect the collection/realization of expected cash flows as
well as changes in valuation inputs and assumptions. Fair value
measurements of our MSRs use significant unobservable inputs
and, accordingly, we classify them as Level 3.
EQUITY SECURITIES Marketable equity securities and certain
nonmarketable equity securities 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 and can be subject to
nonrecurring fair value adjustments to record impairment. The
carrying value of equity securities accounted for under the
measurement alternative are also remeasured to fair value upon
the occurrence of orderly observable transactions of the same or
similar securities of the same issuer.
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, generally
market comparable pricing, to determine fair value for such
securities. We use all available information in making this
determination, which includes observable transaction prices for
the same or similar security, third-party pricing service 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 are Federal Reserve Bank
stock and Federal Home Loan Bank stock, for which carrying
values approximate 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.
Liabilities
DEPOSIT AND SHORT-TERM FINANCIAL LIABILITIES Deposit and
short-term financial liabilities including federal funds purchased,
securities sold under repurchase agreements, commercial paper
and other short-term borrowings, are recorded at historical cost.
Carrying value is a reasonable estimate of fair value for short-
term financial liabilities because of the relatively short time
between their origination and expected realization. Fair values
for deposits with contractual or defined maturities are estimated
using discounted cash flow models. We are not required to
estimate fair values for deposits with indeterminate maturities.
OTHER LIABILITIES Other liabilities recorded at fair value on a
recurring basis predominantly include short sale liabilities. We
value these instruments using quoted prices in active markets,
where available. When quoted prices for the same instruments
are not available or markets are not active, fair values are
estimated using recent trades of similar securities.
LONG-TERM DEBT Our long-term debt is largely denominated in
U.S. dollars and issued with a fixed or floating rate at varying
levels of seniority and maturity. The long-term debt is recorded
at amortized cost. We utilize third-party pricing service prices,
discounted cash flow models, or a combination of the two when
estimating fair value of our long-term debt.
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 vendor pricing services. Our valuation
processes vary depending on which approach is utilized.
INTERNAL MODEL VALUATIONS Many of our Level 3 fair value
estimates are based on internally-developed models, which
typically involve use of discounted cash flow or market
comparable pricing techniques. Some of the inputs used in these
valuations are unobservable. Unobservable inputs are generally
208
Wells Fargo & Company
derived from historic performance of similar assets or
determined from previous market trades in similar instruments.
Unobservable inputs usually include discount rates, default rates,
loss severity upon default, volatilities, correlations and
prepayment rates. Such unobservable inputs can be correlated to
similar portfolios with known historical experience or recent
trades where particular unobservable inputs may be implied. We
attempt to correlate each unobservable input to historical
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. Model validation helps ensure
our models are appropriate for intended use and appropriate
controls exist to help mitigate risk of invalid valuations. Model
validation assesses the adequacy and appropriateness of our
models, 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.
We also have ongoing monitoring procedures in place for our
Level 3 assets and liabilities that use internal valuation models.
These procedures, which are designed to provide reasonable
assurance that models continue to perform as expected, 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 fluctuations in
value.
•
•
VENDOR-DEVELOPED VALUATIONS We routinely obtain pricing
from third-party vendors to value our assets or liabilities. In
certain limited circumstances, this includes our Level 3 assets or
liabilities. We have processes in place to approve and periodically
review third-party vendors to ensure information obtained and
valuation techniques used are appropriate. This review may
consist of, among other things, obtaining and evaluating control
reports issued and pricing methodology materials distributed.
We monitor and review vendor prices on an ongoing basis to
ensure the fair values are reasonable and in line with market
experience in similar asset classes. While the inputs used to
determine fair value are not provided by the pricing vendors, and
therefore unavailable for our review, we perform one or more of
the following procedures to validate the pricing information and
determine appropriate classification within the fair value
hierarchy:
•
•
•
comparison to other pricing vendors (if available);
variance analysis of prices;
corroboration of pricing by reference to other independent
market data, such as market transactions and relevant
benchmark indices;
review of pricing by Company personnel familiar with
market liquidity and other market-related conditions; and
investigation of prices on a specific instrument-by-
instrument basis.
•
•
We update model inputs and methodologies periodically to
reflect these monitoring procedures. Additionally, 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 subject to additional
oversight by corporate-level risk management. 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.
Wells Fargo & Company
209
Note 19: Fair Values of Assets and Liabilities (continued)
Fair Value Measurements from Vendors
For certain assets and liabilities, we obtain fair value
measurements from vendors and we 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 the same procedures and controls as stated in the
“Vendor-Developed Valuations” section.
Table 19.1 presents unadjusted fair value measurements
obtained from third-party pricing services classified within the
fair value hierarchy. Unadjusted fair value measurements
obtained from brokers and fair value measurements obtained
from brokers or third-party pricing services that we have
adjusted to determine the fair value are excluded from Table
19.1.
The unadjusted fair value measurements obtained from
brokers for AFS debt securities were $45 million in Level 2 assets
and $126 million in Level 3 assets at December 31, 2019, and
$45 million and $129 million at December 31, 2018, respectively.
Table 19.1: Fair Value Measurements obtained from Third-Party Pricing Services
(in millions)
Level 1
Level 2
Level 3
Level 1
Level 2
Level 3
December 31, 2019
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
$
634
329
13,460
—
—
—
13,460
—
—
—
12
(11)
1,500
39,868
167,172
38,067
246,607
110
—
110
1
(3)
—
—
34
42
650
726
—
—
—
—
—
899
256
10,399
—
—
—
10,399
—
—
—
17
(12)
2,949
48,377
160,162
44,292
255,780
158
1
159
—
—
—
—
43
41
758
842
—
—
—
—
—
(1)
Includes corporate debt securities, collateralized loan and other debt obligations, asset-backed securities, and other debt securities.
210
Wells Fargo & Company
Assets and Liabilities Recorded at Fair Value on a
Recurring Basis
Table 19.2 presents the balances of assets and liabilities recorded
at fair value on a recurring basis.
Table 19.2: Fair Value on a Recurring Basis
(in millions)
December 31, 2019
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
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 (3)
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 (1)
Total
$
$
$
32,335
—
—
—
—
—
—
32,335
13,460
—
—
—
—
—
37
—
—
—
—
—
—
13,497
—
—
—
—
26
—
2,946
12
—
—
2,984
33,702
—
33,702
82,518
(23)
—
(2,011)
(11)
—
—
(2,045)
(9,035)
—
—
(2,447)
—
(11,482)
—
4,382
2,434
555
11,006
27,712
1,081
5
47,175
1,500
39,924
162,453
827
3,892
167,172
6,159
29,055
951
—
3,635
4,586
1
248,397
15,408
956
—
—
23,792
1,413
4,135
5,197
49
—
34,586
216
22
238
346,760
(19,328)
(1,746)
(6,729)
(6,213)
(53)
—
(34,069)
(31)
(2)
(5,915)
—
—
(5,948)
—
—
—
183
38
—
—
2
223
—
413
—
—
42
42
367
640
—
—
103
103
—
1,565 (2)
1,198
16
171
11,517
229
8
1,455
5
59
—
1,756
3
7,847
7,850
24,296
(15)
(24)
(1,724)
(23)
(30)
—
(1,816)
—
—
—
—
—
—
(2)
(1,818)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(25,123)
(25,123)
—
—
—
(25,123)
—
—
—
—
—
28,851
28,851
—
—
—
—
—
—
—
28,851
36,717
2,434
738
11,044
27,712
1,081
7
79,733
14,960
40,337
162,453
827
3,934
167,214
6,563
29,695
951
—
3,738
4,689
1
263,459
16,606
972
171
11,517
24,047
1,421
8,536
5,214
108
(25,123)
14,203
33,921
7,869
41,790
428,451
146
428,597
(19,366)
(1,770)
(10,464)
(6,247)
(83)
28,851
(9,079)
(9,066)
(2)
(5,915)
(2,447)
—
(17,430)
(2)
(26,511)
Total liabilities recorded at fair value
$
(13,527)
(40,017)
(1)
(2)
(3)
Represents balance sheet netting of derivative asset and liability balances, related cash collateral and portfolio level counterparty valuation adjustments. See Note 18 (Derivatives) for additional
information.
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.
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)
Wells Fargo & Company
211
Note 19: Fair Values of Assets and Liabilities (continued)
(continued from previous page)
(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
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 (3)
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 (1)
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)
(23,790)
—
—
—
(23,790)
—
—
—
—
—
23,548
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
(1)
(2)
(3)
Represents balance sheet netting of derivative asset and liability balances, related cash collateral and portfolio level counterparty valuation adjustments. See Note 18 (Derivatives) for additional
information.
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.
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.
212
Wells Fargo & Company
The changes in Level 3 assets and liabilities measured at fair value on a recurring basis for the year ended December 31, 2019,
are presented in Table 19.3.
Table 19.3: Changes in Level 3 Fair Value Assets and Liabilities on a Recurring Basis – 2019
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, 2019
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
3
237
34
16
290
444
—
41
41
370
800
389
389
2,044
997
60
244
—
(30)
3
(4)
(31)
2
—
—
—
3
29
—
—
34
58
(2)
—
Mortgage servicing rights (residential) (8)
14,649
(4,779)
Net derivative assets and liabilities:
Interest rate contracts
Commodity contracts
Equity contracts
Foreign exchange contracts
Credit contracts
Total derivative contracts
Equity securities:
Marketable
Nonmarketable
Total equity securities
Other liabilities
25
4
(17)
(26)
35
21
—
5,468
5,468
(2)
585
(203)
(571)
34
(7)
(162)
—
2,383
2,383
—
—
—
—
—
—
2
—
—
—
(5)
(37)
—
—
(40)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(2)
(22)
6
(10)
(28)
14
—
(5)
(5)
(1)
(152)
(133)
(133)
(277)
(140)
(4)
(73)
1,647
(396)
158
292
(26)
1
29
—
(1)
(1)
—
—
—
1
—
1
—
—
6
6
—
—
—
—
6
299
55
—
—
—
2
6
—
—
8
3
9
12
—
(1)
(2)
(6)
—
(9)
—
183
38
2
223
(49)
413
—
—
—
—
—
(153)
(153)
(202)
(16)
(93)
—
—
—
23
21
—
—
44
—
(12)
(12)
—
—
42
42
367
640
103
103
1,565
1,198
16
171
11,517
214
(16)
(269)
(18)
29
(60)
3
7,847
7,850
(2)
—
(35)
5
(1)
(31) (5)
—
—
—
—
(4)
—
—
—
(4) (6)
54 (7)
(3)
(8) (7)
(2,569) (7)
249
9
(186)
9
(6)
75 (9)
—
2,386
2,386 (10)
— (7)
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
(10)
See Table 19.4 for detail.
All assets and liabilities transferred into level 3 were previously classified within level 2.
All assets and liabilities transferred out of level 3 are classified as level 2, except for $153 million of asset-backed securities that were transferred to loans during third quarter 2019.
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.
For more information on the changes in mortgage servicing rights, see Note 11 (Mortgage Banking Activities).
Included in mortgage banking income, net gains from trading activities and from equity securities, and other noninterest income.
Included in net gains (losses) from equity securities in the income statement.
Wells Fargo & Company
213
Note 19: Fair Values of Assets and Liabilities (continued)
Table 19.4 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, 2019.
Table 19.4: Gross Purchases, Sales, Issuances and Settlements – Level 3 – 2019
Purchases
Sales
Issuances
Settlements
Net
—
(372)
(13)
—
(385)
—
—
—
—
—
—
(9)
(9)
(9)
(235)
(2)
—
—
—
—
—
—
133
133
302
248
—
10
(286)
1,933
—
—
—
—
(12)
(12)
(1)
(1)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(2)
(22)
—
(10)
(34)
(2)
(22)
6
(10)
(28)
169
(155)
14
—
(5)
(5)
(19)
(307)
(257)
(257)
(743)
(249)
(14)
(86)
—
(396)
158
292
(26)
—
28
—
—
—
—
(5)
(5)
(1)
(152)
(133)
(133)
(277)
(140)
(4)
(73)
1,647
(396)
158
292
(26)
1
29
(1)
(1)
—
(in millions)
Year ended December 31, 2019
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
Total derivative contracts
Equity securities:
Nonmarketable
Total equity securities
Other liabilities
—
372
19
—
391
—
—
—
—
18
155
—
—
173
96
12
3
—
—
—
—
—
13
13
—
—
—
(1)
For more information on the changes in mortgage servicing rights, see Note 11 (Mortgage Banking Activities).
214
Wells Fargo & Company
The changes in Level 3 assets and liabilities measured at fair value on a recurring basis for the year ended December 31, 2018,
are presented in Table 19.5.
Table 19.5: Changes in Level 3 Fair Value Assets and Liabilities on a Recurring Basis – 2018
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, 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:
Other asset-backed securities
Total asset-backed securities
Total available-for-sale debt securities
Mortgage loans held for sale
Loans held for sale
Loans
3
354
31
19
407
925
1
75
76
407
1,020
566
566
2,994
998
14
376
—
(12)
(1)
(3)
(16)
8
—
—
—
4
72
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
Total derivative contracts
Equity securities:
Marketable
Nonmarketable (10)
Total equity securities
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)
(344)
—
—
—
—
—
—
—
(344)
(10)
—
—
—
—
—
81
—
—
81
—
(4)
(4)
—
3
237
34
16
290
444
—
41
41
370
800
389
389
2,044
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)
—
(7)
(1)
(2)
(3)
(4)
See Table 19.6 for detail.
All assets and liabilities transferred into level 3 were previously classified within level 2.
All assets and liabilities transferred out of level 3 are classified as level 2.
Represents only net gains (losses) that are due to changes in economic conditions and management’s estimates of fair value and excludes changes due to the collection/realization of cash flows over
time.
Included in net gains (losses) from trading activities 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.
For more information on the changes in mortgage servicing rights, see Note 11 (Mortgage Banking Activities)
Included in mortgage banking income, net gains from trading activities and from equity securities, and other noninterest income.
(5)
(6)
(7)
(8)
(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 ASU 2016-01 in first quarter
2018.
Included in net gains (losses) from equity securities in the income statement.
(11)
Wells Fargo & Company
215
Note 19: Fair Values of Assets and Liabilities (continued)
Table 19.6 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, 2018.
Table 19.6: Gross Purchases, Sales, Issuances and Settlements – Level 3 – 2018
(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:
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
Total derivative contracts
Equity securities:
Marketable
Nonmarketable
Total equity securities
Other liabilities
Purchases
Sales
Issuances
Settlements
Net
—
408
20
—
428
—
—
—
—
33
61
25
25
119
87
4
8
—
—
—
3
—
12
15
—
—
—
—
—
(348)
(4)
—
(352)
(6)
—
—
—
—
(149)
(12)
(12)
(167)
(320)
(40)
—
(71)
—
—
(37)
—
(7)
(44)
—
(51)
(51)
—
—
—
—
—
—
79
—
—
—
—
—
166
166
245
353
—
17
2,010
—
—
—
—
—
—
—
—
—
—
—
(161)
—
—
(161)
(210)
(1)
(33)
(34)
(71)
(209)
(350)
(350)
(874)
(156)
—
(156)
—
351
(11)
556
9
(11)
894
—
(399)
(399)
—
—
(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)
—
(1)
For more information on the changes in mortgage servicing rights, see Note 11 (Mortgage Banking Activities).
216
Wells Fargo & Company
The changes in Level 3 assets and liabilities measured at fair value on a recurring basis for the year ended December 31, 2017,
are presented in Table 19.7.
Table 19.7: 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:
3
309
34
28
374
Securities of U.S. states and political subdivisions
1,140
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
1
91
92
432
879
962
962
3,505
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
(267)
12
77
(47)
(81)
—
3,259
3,259
—
(4)
604
(17)
(199)
(5)
24
27
434
—
1,563
1,563
—
1
—
3
2
(9)
(4)
4
—
(4)
(4)
(1)
—
—
—
—
—
5
—
—
—
23
22
103
1
1
22
(36)
1
(6)
3
3
134
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
42
(7)
—
35
1,105
—
(12)
(12)
(47)
16
(400)
(400)
662
(75)
(3)
(376)
2,781
(654)
13
(37)
—
(65)
20
—
—
6
—
6
5
—
—
—
—
—
—
—
5
134
34
—
—
—
2
(53)
—
—
—
(723)
(51)
—
(2)
(2)
—
—
—
1
1
—
—
—
—
(4)
—
(4)
3
354
31
19
407
(1,334)
925
—
—
—
—
—
—
—
1
75
76
407
1,020
566
566
(1,334)
2,994
(10)
(18)
—
—
—
(2)
45
—
—
—
43
—
—
—
—
—
998
14
376
13,625
71
19
(511)
7
36
—
(378)
—
4,821
4,821
—
(3)
—
(13)
2
(4)
(15) (5)
—
—
(11)
(11)
—
—
—
—
(11) (6)
(34) (7)
—
(12) (7)
(126) (7)
(52)
15
(259)
6
(62)
—
(352) (9)
—
1,569
1,569
(10)
—
—
(5)
(7)
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
(10)
See Table 19.8 for detail.
All assets and liabilities transferred into level 3 were previously classified within level 2.
All assets and liabilities transferred out of level 3 are classified as level 2.
Represents only net gains (losses) that are due to changes in economic conditions and management’s estimates of fair value and excludes changes due to the collection/realization of cash flows over
time.
Included in net gains (losses) from trading activities 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.
For more information on the changes in mortgage servicing rights, see Note 11 (Mortgage Banking Activities).
Included in mortgage banking income, net gains from trading activities and from equity securities, and other noninterest income.
Included in net gains (losses) from equity securities in the income statement.
Wells Fargo & Company
217
Note 19: Fair Values of Assets and Liabilities (continued)
Table 19.8 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, 2017.
Table 19.8: 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
(654)
13
81
—
(68)
20
(608)
—
—
—
—
—
—
(12)
(12)
(47)
16
(400)
(400)
662
(75)
(3)
(376)
2,781
(654)
13
(37)
—
(65)
20
(723)
—
(2)
(2)
—
—
(1)
For more information on the changes in mortgage servicing rights, see Note 11 (Mortgage Banking Activities).
Table 19.9 and Table 19.10 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 inherent in the 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 in the
“Level 3 Asset and Liability Valuation Processes” section within
this Note regarding vendor-developed valuations).
significant unobservable inputs for certain classes of Level 3
assets and liabilities measured using internal models 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.
Weighted averages of inputs are calculated using
outstanding unpaid principal balance for cash instruments, such
as loans and securities, and notional amounts for derivative
instruments.
218
Wells Fargo & Company
Table 19.9: Valuation Techniques – Recurring Basis – December 31, 2019
($ in millions, except cost to service amounts)
December 31, 2019
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
Corporate debt securities
Asset-backed securities:
Diversified payment rights (1)
Other commercial and consumer
Mortgage loans held for sale (residential)
Loans (2)
Fair Value
Level 3
Valuation Technique(s)
Significant Unobservable
Input
Range of Inputs
Weighted
Average
$
379
Discounted cash flow
Discount rate
1.3
-
5.4
%
2.4
Vendor priced
Market comparable pricing
Comparability adjustment
(15.0) -
19.2
34
183
640
220
60
125
92
11
1,183
15
171
Vendor priced
Discounted cash flow
Discount rate
3.2
Market comparable pricing
Comparability adjustment
(19.7)
Vendor priced
Discounted cash flow
Discount rate
Vendor priced
Discounted cash flow
Default rate
Discount rate
Loss severity
Prepayment rate
2.3
0.0
3.0
0.0
5.7
-
-
-
-
-
Market comparable pricing
Comparability adjustment
(56.3) -
Discounted cash flow
Discount rate
Prepayment rate
Loss severity
Mortgage servicing rights (residential)
11,517
Discounted cash flow
Cost to service per loan (3)
$
Net derivative assets and (liabilities):
Interest rate contracts
146
Discounted cash flow
Discount rate
Prepayment rate (4)
Default rate
Loss severity
Prepayment rate
Interest rate contracts: derivative loan
commitments
68
Discounted cash flow
Fall-out factor
Equity contracts
Credit contracts
147
(416)
2
27
Initial-value servicing
(32.2) -
149.0 bps
Discounted cash flow
Conversion factor
Weighted average life
(8.8) -
0.5
-
0.0
%
3.0
yrs
Option model
Correlation factor
(77.0) -
99.0
%
Volatility factor
6.8
-
100.0
Market comparable pricing
Comparability adjustment
(56.1) -
Option model
Credit spread
Loss severity
0.0
12.0
-
-
10.8
17.8
60.0
Nonmarketable equity securities
7,847
Market comparable pricing
Comparability adjustment
(20.2) -
(4.2)
Insignificant Level 3 assets, net of liabilities
27
Total level 3 assets, net of liabilities
$
22,478 (5)
(1)
(2)
(3)
(4)
(5)
Securities backed by specified sources of current and future receivables generated from non-U.S. originators.
Consists of reverse mortgage loans.
The high end of the range of inputs is for servicing modified loans. For non-modified loans the range is $61 - $231.
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.
Consists of total Level 3 assets of $24.3 billion and total Level 3 liabilities of $1.8 billion, before netting of derivative balances.
14.9
14
3.1
15.5
5.6
43.5
15.4
(6.3)
4.3
100.0
36.5
495
13.6
24.4
5.0
50.0
25.0
99.0
%
3.9
6.0
0.0
61
6.0
9.6
0.0
50.0
2.8
1.0
-
-
-
-
-
-
-
-
-
-
1.3
9.2
(4.4)
2.8
0.7
4.5
21.7
7.8
(40.3)
4.1
85.6
14.1
102
7.2
11.9
1.7
50.0
15.0
16.7
36.4
(7.7)
1.5
23.8
18.7
(16.0)
0.8
45.6
(14.6)
Wells Fargo & Company
219
Note 19: Fair Values of Assets and Liabilities (continued)
Table 19.10: Valuation Techniques – Recurring Basis – December 31, 2018
($ in millions, except cost to service amounts)
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
Corporate debt securities
Asset-backed securities:
Diversified payment rights (1)
Other commercial and consumer
Mortgage loans held for sale (residential)
Loans (3)
Fair Value
Level 3
Valuation Technique(s)
Significant
Unobservable Input
Range of Inputs
Weighted
Average
$
404
Discounted cash flow
Discount rate
2.1 -
6.4
%
3.4
Vendor priced
Market comparable pricing
Comparability adjustment
(13.5) -
22.1
%
3.2
Vendor priced
Discounted cash flow
Discount rate
4.0
Market comparable pricing
Comparability adjustment
(11.3)
11.7
16.6
Vendor priced
171
198
(2)
Discounted cash flow
Discounted cash flow
Vendor priced
Discounted cash flow
Discount rate
Discount rate
Weighted average life
Default rate
Discount rate
Loss severity
Prepayment rate
3.4 -
4.6
1.1
-
-
0.0 -
1.1 -
0.0
3.2
-
-
43
298
739
220
56
128
20
982
15
244
Market comparable pricing
Comparability adjustment
(56.3) -
Discounted cash flow
Discount rate
Mortgage servicing rights (residential)
14,649
Discounted cash flow
Net derivative assets and (liabilities):
Interest rate contracts
(35)
Discounted cash flow
Prepayment rate
Loss severity
Cost to service per
loan (4)
Discount rate
Prepayment rate (5)
Default rate
Loss severity
Prepayment rate
3.4 -
2.9
0.0
-
-
$
62 -
7.1 -
9.0 -
0.0 -
50.0 -
2.8 -
Interest rate contracts: derivative loan
commitments
Equity contracts
Credit contracts
60
104
(121)
3
32
Discounted cash flow
Fall-out factor
1.0 -
99.0
Initial-value servicing
(36.6) -
91.7 bps
Discounted cash flow
Conversion factor
Weighted average life
(9.3) -
1.0
-
0.0
%
3.0
yrs
Option model
Correlation factor
(77.0) -
99.0
%
Volatility factor
6.5 -
100.0
Market comparable pricing
Comparability adjustment
(15.5) -
Option model
Credit spread
Loss severity
0.9 -
13.0 -
40.0
21.5
60.0
6.2
5.2
1.5
yrs
15.6
%
6.6
43.3
13.4
(6.3)
6.4
100.0
34.8
507
15.3
23.5
5.0
50.0
25.0
%
8.5
(1.4)
4.4
4.7
1.1
0.8
5.5
23.4
4.6
(36.3)
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
Nonmarketable equity securities
5,468
Market comparable pricing
Comparability adjustment
(20.6) -
(4.3)
(15.8)
Insignificant Level 3 assets, net of liabilities
93
Total level 3 assets, net of liabilities
$
23,771 (6)
(1)
(2)
(3)
(4)
(5)
(6)
Securities backed by specified sources of current and future receivables generated from non-U.S. originators.
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.
Consists of reverse mortgage loans.
The high end of the range of inputs is for servicing modified loans. For non-modified loans the range is $62 - $204.
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.
Consists of total Level 3 assets of $25.3 billion and total Level 3 liabilities of $1.6 billion, before netting of derivative balances.
220
Wells Fargo & Company
The valuation techniques used for our Level 3 assets and
liabilities, as presented in the previous tables, are described as
follows:
• Discounted cash flow – Discounted cash flow valuation
techniques generally consist of developing an estimate of
future cash flows that are expected to occur over the life of
an instrument and then discounting those cash flows at a
rate of return that results in the fair value amount.
• Market comparable pricing – Market comparable pricing
valuation techniques are used to determine the fair value of
certain instruments by incorporating known inputs, such as
recent transaction prices, pending transactions, or prices of
other similar investments that require significant
adjustment to reflect differences in instrument
characteristics.
• Option model – Option model valuation techniques are
generally used for instruments in which the holder has a
contingent right or obligation based on the occurrence of a
future event, such as the price of a referenced asset going
above or below a predetermined strike price. Option models
estimate the likelihood of the specified event occurring by
incorporating assumptions such as volatility estimates, price
of the underlying instrument and expected rate of return.
Vendor-priced – Prices obtained from third-party pricing
vendors or brokers that are used to record the fair value of
the asset or liability for which the related valuation
technique and significant unobservable inputs are not
provided.
•
Significant unobservable inputs presented in the previous
tables are those we consider significant to the fair value of the
Level 3 asset or liability. We consider unobservable inputs to be
significant if by their exclusion the fair value of the Level 3 asset
or liability would be impacted by a predetermined percentage
change. We also consider qualitative factors, such as nature of
the instrument, type of valuation technique used, and the
significance of the unobservable inputs relative to other inputs
used within the valuation. Following is a description of the
significant unobservable inputs provided in the table.
•
Comparability adjustment – is an adjustment made to
observed market data, such as a transaction price in order to
reflect dissimilarities in underlying collateral, issuer, rating,
or other factors used within a market valuation approach,
expressed as a percentage of an observed price.
Conversion Factor – is the risk-adjusted rate in which a
particular instrument may be exchanged for another
instrument upon settlement, expressed as a percentage
change from a specified rate.
Correlation factor – is the likelihood of one instrument
changing in price relative to another based on an established
relationship expressed as a percentage of relative change in
price over a period over time.
•
•
•
•
Cost to service – is the expected cost per loan of servicing a
portfolio of loans, which includes estimates for
unreimbursed expenses (including delinquency and
foreclosure costs) that may occur as a result of servicing
such loan portfolios.
Credit spread – is the portion of the interest rate in excess of
a benchmark interest rate, such as Overnight Index Swap
(OIS), LIBOR or U.S. Treasury rates, that when applied to an
investment captures changes in the obligor’s
creditworthiness.
• Default rate – is an estimate of the likelihood of not
collecting contractual amounts owed expressed as a
constant default rate (CDR).
• Discount rate – is a rate of return used to calculate the
present value of the future expected cash flow to arrive at
the fair value of an instrument. The discount rate consists of
a benchmark rate component and a risk premium
component. The benchmark rate component, for example,
OIS, LIBOR or U.S. Treasury rates, is generally observable
within the market and is necessary to appropriately reflect
the time value of money. The risk premium component
reflects the amount of compensation market participants
require due to the uncertainty inherent in the instruments’
cash flows resulting from risks such as credit and liquidity.
Fall-out factor – is the expected percentage of loans
associated with our interest rate lock commitment portfolio
that are likely of not funding.
Initial-value servicing – is the estimated value of the
underlying loan, including the value attributable to the
embedded servicing right, expressed in basis points of
outstanding unpaid principal balance.
Loss severity – is the estimated percentage of contractual
cash flows lost in the event of a default.
Prepayment rate – is the estimated rate at which forecasted
prepayments of principal of the related loan or debt
instrument are expected to occur, expressed as a constant
prepayment rate (CPR).
Volatility factor – is the extent of change in price an item is
estimated to fluctuate over a specified period of time
expressed as a percentage of relative change in price over a
period over time.
•
•
•
•
•
• Weighted average life – is the weighted average number of
years an investment is expected to remain outstanding
based on its expected cash flows reflecting the estimated
date the issuer will call or extend the maturity of the
instrument or otherwise reflecting an estimate of the timing
of an instrument’s cash flows whose timing is not
contractually fixed.
Wells Fargo & Company
221
Note 19: 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, MLHFS, loans, other
nonmarketable equity investments, and AFS 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 MSRs.
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 MSRs and alternatively, a decrease in any one of
these inputs would result in the MSRs 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 10 (Securitizations
and Variable Interest Entities).
222
Wells Fargo & Company
Assets and Liabilities Recorded at Fair Value on a
Nonrecurring Basis
We may be required, from time to time, to measure certain
assets at fair value on a nonrecurring basis in accordance with
GAAP. These adjustments to fair value usually result from
application of LOCOM accounting, write-downs of individual
assets or use of the measurement alternative for nonmarketable
equity securities.
Table 19.11 provides the fair value hierarchy and fair value at
the date of the nonrecurring fair value adjustment for all assets
Table 19.11: Fair Value on a Nonrecurring Basis
that were still held as of December 31, 2019 and 2018, and for
which a nonrecurring fair value adjustment was recorded during
the years then ended.
Table 19.12 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.
December 31, 2019
December 31, 2018
Level 1
Level 2
Level 3
1,213
313
339
346
685
774
149
1,233
—
—
1
1
157
6
Total
2,446
313
339
347
686
931
155
3,134
1,397
4,531
—
—
—
—
—
—
—
—
(in millions)
Level 1
Level 2
Level 3
Mortgage loans held for sale (1)
$
Loans held for sale
Loans:
Commercial
Consumer
Total loans
Nonmarketable equity securities
Other assets
Total assets at fair value on a nonrecurring basis
$
—
—
—
—
—
—
—
—
2,034
3,803
5
280
213
493
1,308
359
4,199
—
—
1
1
173
27
4,004
Total
5,837
5
280
214
494
1,481
386
8,203
(1)
Consists of commercial mortgages and residential real estate 1-4 family first mortgage loans.
Premises and equipment includes the full impairment of
certain capitalized software projects. Other assets includes
impairments of operating lease ROU assets, as well as valuation
losses on foreclosed real estate and other collateral owned.
Table 19.12: Change in Value of Assets with Nonrecurring Fair Value
Adjustment
Year ended December 31,
(in millions)
Mortgage loans held for sale
$
Loans held for sale
Loans:
Commercial
Consumer
Total loans
Nonmarketable equity securities
Premises and equipment
Other assets
Total
$
2019
11
—
(291)
(207)
(498)
322
(170)
(84)
(419)
2018
21
(39)
(221)
(284)
(505)
265
—
(40)
(298)
Wells Fargo & Company
223
Note 19: Fair Values of Assets and Liabilities (continued)
Table 19.13 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 19.13: Valuation Techniques – Nonrecurring Basis
assets we consider both individually and in the aggregate,
insignificant relative to our overall Level 3 nonrecurring
measurements. We made this determination based upon an
evaluation of each class that considered the magnitude of the
positions, nature of the unobservable inputs and potential for
significant changes in fair value due to changes in those inputs.
($ in millions)
December 31, 2019
Fair Value
Level 3
Valuation Technique(s) (1)
Significant
Unobservable
Inputs (1)
Range of inputs
Weighted
Average (2)
Residential mortgage loans held for sale
$
3,803 (3)
Discounted cash flow
Default rate (4)
Discount rate
0.3 –
1.5 –
48.3%
9.4
Loss severity
0.4 –
100.0
Prepayment rate (5)
4.8 –
100.0
4.6%
4.3
23.4
23.2
Insignificant Level 3 assets
Total
December 31, 2018
Residential mortgage loans held for sale
$
$
201
4,004
1,233 (3)
Discounted cash flow
Default rate (4)
Discount rate
Loss severity
Prepayment rate (5)
0.2 –
1.5 –
0.5 –
3.5 –
2.3%
1.4%
8.5
66.0
100.0
4.0
1.7
46.5
Insignificant Level 3 assets
Total
164
$
1,397
(1)
(2)
(3)
(4)
(5)
Refer to the narrative following Table 19.10 for a definition of the valuation technique(s) and significant unobservable inputs.
For residential MLHFS, weighted averages are calculated using the outstanding unpaid principal balance of the loans.
Consists of approximately $1.3 billion and $1.2 billion of government insured/guaranteed loans purchased from GNMA-guaranteed mortgage securitizations at December 31, 2019 and 2018,
respectively, and $2.5 billion and $27 million, respectively, of other mortgage loans that are not government insured/guaranteed.
Applies only to non-government insured/guaranteed loans.
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) MLHFS measured at
fair value include residential mortgage loan originations for
which an active secondary market and readily available market
prices exist to reliably support our valuations. Loan origination
fees on these loans are recorded when earned, and related direct
loan origination costs are recognized when incurred. We believe
fair value measurement for MLHFS, which we economically
hedge with 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 purchase 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. Fair value measurement 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 measured at fair value consist 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, continue to be subject to the fair value
option.
224
Wells Fargo & Company
Table 19.14 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 19.14: 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
December 31, 2019
December 31, 2018
Fair value
carrying
amount
Aggregate
unpaid
principal
$
16,606
16,279
133
8
972
21
171
129
157
10
1,020
29
201
159
Fair value
carrying
amount less
aggregate
unpaid
principal
Fair value
carrying
amount
Aggregate
unpaid
principal
Fair value
carrying
amount less
aggregate
unpaid principal
327
(24)
(2)
(48)
(8)
(30)
(30)
11,771
11,573
127
7
1,469
21
244
179
158
9
1,536
32
274
208
198
(31)
(2)
(67)
(11)
(30)
(29)
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 19.15 by income
statement line item. Amounts recorded as interest income are
excluded from Table 19.15.
Table 19.15: Fair Value Option – Changes in Fair Value Included in Earnings
(in millions)
Mortgage
banking
noninterest
income
Net gains
(losses) from
trading
activities
Mortgage loans held for sale
$
1,064
Loans held for sale
Loans
—
—
—
11
—
2019
Other
noninterest
income
—
2
—
Mortgage
banking
noninterest
income
Net gains
(losses) from
trading
activities
2018
Other
noninterest
income
Mortgage
banking
noninterest
income
Net gains
(losses) from
trading
activities
462
—
—
—
(1)
—
—
1
(1)
1,229
—
—
—
45
—
2017
Other
noninterest
income
—
2
—
Year ended December 31,
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 19.16 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 19.16: Fair Value Option – Gains/Losses Attributable to
Instrument-Specific Credit Risk
(in millions)
Gains (losses) attributable to
instrument-specific credit risk:
Mortgage loans held for sale
Loans held for sale
Total
Year ended December 31,
2019
2018
2017
$
$
2
13
15
(16)
—
(16)
(12)
45
33
Wells Fargo & Company
225
Note 19: Fair Values of Assets and Liabilities (continued)
Disclosures about Fair Value of Financial Instruments
Table 19.17 presents a summary of fair value estimates for
financial instruments that are not carried at fair value on a
recurring basis. Some financial instruments are excluded from
the scope of this table, such as certain insurance contracts and
leases. This table also excludes assets and liabilities that are not
financial instruments such as the value of the long-term
relationships with our deposit, credit card and trust customers,
MSRs, premises and equipment, goodwill and deferred taxes.
Loan commitments, standby letters of credit and
commercial and similar letters of credit are not included in
Table 19.17. 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, 2019 and 2018.
The total of the fair value calculations presented does not
represent, and should not be construed to represent, the
underlying fair value of the Company.
Table 19.17: Fair Value Estimates for Financial Instruments
(in millions)
December 31, 2019
Financial assets
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)
Nonmarketable equity securities (cost method)
$
21,757
119,493
102,140
153,933
6,736
5
933,042
4,790
21,757
119,257
—
46,138
—
—
—
—
—
236
102,140
109,933
2,939
5
—
—
—
789
4,721
—
21,757
119,493
102,140
156,860
7,660
5
54,125
891,714
945,839
—
4,823
4,823
Total financial assets
$
1,341,896
187,152
269,378
902,047
1,358,577
Financial liabilities
Deposits (3)
Short-term borrowings
Long-term debt (4)
Total financial liabilities
December 31, 2018
Financial assets
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)
Nonmarketable equity securities (cost method)
$
118,849
104,512
228,159
$
451,520
$
23,551
149,736
80,207
144,788
3,355
572
923,703
5,643
—
—
—
—
87,279
104,513
231,332
423,124
—
194
80,207
97,275
2,129
572
23,551
149,542
—
44,339
—
—
—
—
31,858
—
1,720
33,578
—
—
—
501
1,233
—
119,137
104,513
233,052
456,702
23,551
149,736
80,207
142,115
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)
Short-term borrowings
Long-term debt (4)
Total financial liabilities
$
130,645
105,787
229,008
$
465,440
—
—
—
—
107,448
105,789
225,904
439,141
22,641
—
2,230
24,871
130,089
105,789
228,134
464,012
(1)
(2)
(3)
(4)
Amounts consist of financial instruments for which carrying value approximates fair value.
Excludes lease financing with a carrying amount of $19.5 billion and $19.7 billion at December 31, 2019 and 2018, respectively.
Excludes deposit liabilities with no defined or contractual maturity of $1.2 trillion at both December 31, 2019 and 2018.
Excludes capital lease obligations under capital leases of $32 million and $36 million at December 31, 2019 and 2018, respectively.
226
Wells Fargo & Company
Note 20: 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.
In January 2020, we issued $2.0 billion of our Preferred
Stock, Series Z. On February 12, 2020, the Company announced
a redemption of the remaining outstanding shares of our
Preferred Stock, Series K, and a partial redemption of 26,720
outstanding shares of our Preferred Stock, Series T. The
redemptions will occur on March 16, 2020.
Table 20.1: Preferred Stock Shares
DEP Shares
Dividend Equalization Preferred Shares (DEP)
Series I
Floating Class A Preferred Stock (1)
Series K
December 31, 2019
December 31, 2018
Liquidation
preference
per share
Shares
authorized
and designated
Liquidation
preference
per share
Shares
authorized
and designated
$
10
97,000
$
10
97,000
100,000
25,010
100,000
25,010
Floating Non-Cumulative Perpetual Class A Preferred Stock (2)(3)
1,000
3,500,000
1,000
3,500,000
Series L
7.50% Non-Cumulative Perpetual Convertible Class A Preferred Stock (4)
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 (5)
Total
—
1,071,418
9,251,728
—
1,406,460
9,586,770
(1)
(2)
(3)
(4)
(5)
Series I preferred stock issuance relates to trust preferred securities. See Note 10 (Securitizations and Variable Interest Entities) for additional information. This issuance has a floating interest rate
that is the greater of three-month LIBOR plus 0.93% and 5.56975%.
Floating rate for Preferred Stock, Series K, is three-month LIBOR plus 3.77%.
In third quarter 2019, 1,550,000 shares of Preferred Stock, Series K, were redeemed.
Preferred Stock, Series L, may be converted at any time, at the option of the holder, into 6.3814 shares of our common stock, plus cash in lieu of fractional shares, subject to anti-dilution
adjustments.
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.
Wells Fargo & Company
227
Note 20: Preferred Stock (continued)
Table 20.2: Preferred Stock – Shares Issued and Carrying Value
(in millions, except shares)
DEP Shares
December 31, 2019
December 31, 2018
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
Series K (1)(3)(4)
25,010
2,501
2,501
—
—
96,546
$
—
—
25,010
2,501
2,501
—
—
Floating Non-Cumulative Perpetual Class A Preferred Stock
1,802,000
1,802
1,546
256
3,352,000
3,352
2,876
476
Series L (1)(5)
7.50% Non-Cumulative Perpetual Convertible Class A Preferred Stock
3,967,995
3,968
3,200
768
3,968,000
3,968
3,200
768
Series N (1)
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
69,000
1,725
1,725
Series R (1)
6.625% Fixed-to-Floating Non-Cumulative Perpetual Class A Preferred Stock
33,600
840
840
Series S (1)
5.90% Fixed-to-Floating Non-Cumulative Perpetual Class A Preferred Stock
80,000
2,000
2,000
Series T (1)
6.00% Non-Cumulative Perpetual Class A Preferred Stock
32,000
800
800
Series U (1)
5.875% Fixed-to-Floating Non-Cumulative Perpetual Class A Preferred Stock
80,000
2,000
2,000
Series V (1)
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
1,071,418
1,072
1,072
—
—
—
—
—
—
—
—
—
—
—
—
—
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
1,406,460
1,407
1,407
—
—
—
—
—
—
—
—
—
—
—
—
—
Total
7,492,169
$
22,573
21,549
1,024
9,377,216
$
24,458
23,214
1,244
(1)
(2)
(3)
(4)
(5)
Preferred shares qualify as Tier 1 capital.
Floating rate for Preferred Stock, Series I, is the greater of three-month LIBOR plus 0.93% and 5.56975%.
Floating rate for Preferred Stock, Series K, is three-month LIBOR plus 3.77%.
In third quarter 2019, 1,550,000 shares of Preferred Stock, Series K, were redeemed.
Preferred Stock, Series L, may be converted at any time, at the option of the holder, into 6.3814 shares of our common stock, plus cash in lieu of fractional shares, subject to anti-dilution
adjustments.
228
Wells Fargo & Company
ESOP CUMULATIVE CONVERTIBLE PREFERRED STOCK All shares of
our ESOP Cumulative Convertible Preferred Stock (ESOP
Preferred Stock) were issued to a trustee acting on behalf of the
Wells Fargo & Company 401(k) Plan (the 401(k) Plan). Dividends
on the ESOP Preferred Stock are cumulative from the date of
initial issuance and are payable quarterly at annual rates based
upon the year of issuance. Each share of ESOP Preferred Stock
released from the unallocated reserve of the 401(k) Plan is
converted into shares of our common stock based on the stated
value of the ESOP Preferred Stock and the then current market
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.
Table 20.3: 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 (1)
Total ESOP Preferred Stock (2)
Unearned ESOP shares (3)
Shares issued and outstanding
Carrying value
Adjustable dividend rate
Dec 31,
2019
Dec 31,
2018
Dec 31,
2019
Dec 31,
2018
Minimum
Maximum
254,945
192,210
197,450
116,784
136,151
97,948
49,134
26,796
—
336,945 $
222,210
233,835
144,338
174,151
133,948
77,634
61,796
21,603
255
192
198
117
136
98
49
27
—
1,071,418
1,406,460 $
1,072
$
(1,143)
337
222
234
144
174
134
78
62
22
1,407
(1,502)
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
In April 2019, all of the 2010 ESOP Preferred Stock was converted into common stock.
At December 31, 2019 and 2018, additional paid-in capital included $71 million and $95 million, respectively, related to ESOP preferred stock.
(1)
(2)
(3) We recorded a corresponding charge to unearned ESOP shares in connection with the issuance of the ESOP Preferred Stock. The unearned ESOP shares are reduced as shares of the ESOP Preferred
Stock are committed to be released.
Wells Fargo & Company
229
Note 21: Common Stock and Stock Plans
Common Stock
Table 21.1 presents our reserved, issued and authorized shares of
common stock at December 31, 2019.
Table 21.1: 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
6,774,855
375,293
488,214,122
65,835,437
561,199,707
5,481,811,474
2,956,988,819
9,000,000,000
(1)
Includes employee restricted share rights, performance share awards, 401(k), and deferred
compensation 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 no
warrants and 23,217,208 warrants to purchase shares of our
common stock in 2019 and 2018, 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 Since 2010, we
have granted restricted share rights (RSRs) and performance
share awards (PSAs) as our primary long-term incentive awards
using our Long-Term Incentive Compensation Plan (LTICP).
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.
Table 21.2 summarizes the major components of stock
incentive compensation expense and the related recognized tax
benefit.
Table 21.2: Stock Incentive Compensation Expense
(in millions)
RSRs (1)
Performance shares
Stock options
Total stock incentive
compensation expense
Related recognized tax benefit
Year ended December 31,
2019
$
1,109
108
—
$
$
1,217
301
2018
1,013
9
—
1,022
252
2017
743
112
(6)
849
320
(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.
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, 2019, was 246 million.
Director Awards
Beginning in 2011, we granted only common stock awards under
the LTICP to non-employee directors elected or re-elected at the
annual meeting of stockholders and prorated awards to directors
who join the Board at any other time. Stock awards vest
immediately. Options also were granted to directors prior to
2011 and can be exercised after 12 months through the tenth
anniversary of the grant date.
Restricted Share Rights
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 are granted. A summary of the status of our RSRs at
December 31, 2019, and changes during 2019 is presented in
Table 21.3.
Table 21.3: Restricted Share Rights
Weighted-
average
grant-date
fair value
Number
Nonvested at January 1, 2019
45,572,498 $
Granted
Vested
Canceled or forfeited
Nonvested at December 31, 2019
22,743,879
(15,281,949)
(2,118,967)
50,915,461
54.85
49.32
55.03
55.37
52.30
The weighted-average grant date fair value of RSRs granted
during 2018 and 2017 was $58.47 and $57.54, respectively.
At December 31, 2019, there was $1.0 billion of total
unrecognized compensation cost related to nonvested RSRs. The
cost is expected to be recognized over a weighted-average
period of 2.4 years. The total fair value of RSRs that vested
during 2019, 2018 and 2017 was $773 million, $824 million and
$865 million, respectively.
230
Wells Fargo & Company
The weighted-average grant date fair value of performance
awards granted during 2018 and 2017 was $58.62 and $57.14,
respectively.
At December 31, 2019, there was $29 million of total
unrecognized compensation cost related to nonvested
performance awards. The cost is expected to be recognized over
a weighted-average period of 1.6 years. The total fair value of
PSAs that vested during 2019, 2018 and 2017 was $82 million,
$107 million and $117 million, respectively.
Stock Options
Table 21.5 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.
Number
Weighted-
average
exercise price
Weighted-
average
remaining
contractual term
(in yrs.)
Aggregate
intrinsic
value
(in millions)
8,343,157 $
(170,141)
(8,112,456)
60,560
13.46
13.05
13.34
30.69
0.3
$
1
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, 2019, the determination of the number of
performance shares that will vest will occur in first quarter of
2020 after review of the Company’s performance by the Human
Resources Committee of the Board.
A summary of the status of our PSAs at December 31, 2019,
and changes during 2019 is in Table 21.4, based on the
performance adjustments recognized as of December 2019.
Table 21.4: Performance Share Awards
Number
Weighted- average
grant-date fair value (1)
Nonvested at January 1, 2019
5,984,686 $
Granted
Vested
Canceled or forfeited
2,320,530
(1,610,502)
(190,501)
Nonvested at December 31, 2019
6,504,213
49.91
49.26
48.59
56.48
49.81
(1)
Reflects approval date fair value for grants subject to variable accounting.
Table 21.5: Stock Option Activity
Incentive compensation plans
Options outstanding as of December 31, 2018
Canceled or forfeited
Exercised
Options exercisable and outstanding as of December 31, 2019
The total intrinsic value to option holders, which is the stock
market value in excess of the option exercise price, of options
exercised during 2019, 2018 and 2017 was $291 million,
$375 million and $623 million, respectively.
Cash received from the exercise of stock options for 2019,
2018 and 2017 was $108 million, $227 million and $602 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.
Wells Fargo & Company
231
Note 21: Common Stock and Stock Plans (continued)
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 2019, 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 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.
Table 21.6 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 21.6: Common Stock and Unreleased Preferred Stock in the Wells Fargo ESOP Fund
(in millions, except shares)
Allocated shares (common)
Unreleased shares (preferred)
Shares outstanding
December 31,
2019
2018
2017
138,978,383
1,071,418
138,182,911
124,670,717
1,406,460
1,556,104
Fair value of unreleased ESOP preferred shares
$
1,072
1,407
1,556
Allocated shares (common)
Unreleased shares (preferred)
$
2019
233
101
Dividends paid
Year ended December 31,
2018
213
159
2017
195
166
232
Wells Fargo & Company
Note 22: Revenue from Contracts with Customers
Our revenue includes net interest income on financial
instruments and noninterest income. Table 22.1 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, substantially all
of which represents products and services for WIM customers
served through Community Banking distribution channels. For
additional description of our operating segments, including
Table 22.1: Revenue by Operating Segment
additional financial information and the underlying management
accounting process, see Note 27 (Operating Segments).
We adopted ASU 2014-09 – Revenue from Contracts with
Customers on a modified retrospective basis as of January 1,
2018. For details on the impact of the adoption of this ASU, see
Note 1 (Summary of Significant Accounting Policies) in our 2018
Form 10-K.
(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 (losses) from trading activities (1)
Net gains (losses) on debt securities (1)
Net gains (losses) from equity securities (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 (losses) from trading activities (1)
Net gains (losses) on debt securities (1)
Net gains (losses) from equity securities (1)
Lease income (1)
Other income of the segment (1)
Total noninterest income
Revenue
(continued on following page)
Community
Banking
$
27,610
Wholesale
Banking
17,699
2,823
1,931
805
(93)
2,643
3,655
239
452
—
274
313
1,278
2,307
44
24
51
2,155
—
2,726
17,706
45,316
1,974
292
486
1,889
2,667
359
1,139
—
358
196
108
1,801
412
303
915
89
416
1,612
(570)
9,978
27,677
Wealth and
Investment
Management
4,037
16
8,946
2,587
6
11,539
6
8
—
—
8
1
17
(12)
72
53
—
272
—
Year ended December 31, 2019
Other
(2,115)
Consolidated
Company
47,231
(15)
4,798
(1,932)
(840)
(5)
(2,777)
(4)
(7)
—
—
(4)
(1)
(12)
8
(41)
1
—
—
—
9,237
3,038
1,797
14,072
4,016
1,379
452
358
474
421
3,084
2,715
378
993
140
2,843
1,612
3,181
37,832
85,063
1,341
13,304
17,341
(316)
(3,156)
(5,271)
29,219
18,690
4,441
(2,355)
49,995
Year ended December 31, 2018
2,641
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
2,074
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
16
(15)
4,716
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
$
$
$
Wells Fargo & Company
233
Note 22: Revenue from Contracts with Customers (continued)
(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 (losses) from trading activities (1)
Net gains (losses) on debt securities (1)
Net gains (losses) from equity securities (1)
Lease income (1)
Other income of the segment (1)
Total noninterest income
Revenue
Community
Banking
$
28,658
Wholesale
Banking
18,810
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
$
Wealth and
Investment
Management
4,641
17
9,072
2,877
(2)
11,947
6
8
—
—
9
1
18
(10)
88
92
2
208
—
63
12,431
17,072
Year ended December 31, 2017
Other
(2,552)
Consolidated
Company
49,557
(16)
5,111
(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
(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 notes 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.
Represents combined amount of previously reported “Charges and fees on loans” and “Letters of credit fees.”
(2)
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.
and include fees for account and overdraft services. Account
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 22.2 presents our service charges on deposit accounts
SERVICE CHARGES ON DEPOSIT ACCOUNTS are earned on
depository accounts for commercial and consumer customers
by operating segment.
Table 22.2: Service Charges on Deposit Accounts by Operating Segment
Community
Banking
Wholesale
Banking
Wealth and
Investment
Management
Year ended December 31,
Other
Consolidated
Company
(in millions)
Overdraft fees
Account charges
Service charges on deposit accounts
2019
2018
2017
2019
2018
2017
2019
2018
2017
2019
2018
2017
2019
2018
2017
$ 1,965
1,776
1,941
858
865
968
$ 2,823
2,641
2,909
5
1,969
1,974
5
2,069
2,074
6
2,195
2,201
1
15
16
1
15
16
1
16
17
—
(15)
(15)
—
(15)
(15)
—
1,971
(16) 2,827
(16) 4,798
1,782
2,934
4,716
1,948
3,163
5,111
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.
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.
Other revenues earned from other brokerage advisory
services include omnibus and networking fees received from
mutual fund companies in return for providing record keeping
and other administrative services, and annual account
maintenance fees charged to customers.
234
Wells Fargo & Company
Table 22.3 presents our brokerage advisory, commissions
and other fees by operating segment.
Table 22.3: 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)
Asset-based revenue (1)
Transactional revenue
Other revenue
Brokerage advisory, commissions and
other fees
2019
2018
2017
2019
2018
2017
$ 1,478
1,482
1,372
383
70
340
65
382
76
$ 1,931
1,887
1,830
—
26
266
292
1
70
246
317
1
40
263
304
2019
6,777
1,534
635
2018
2017
2019
2018
2017
2019
2018
2017
6,899
1,618
644
6,630
(1,480)
(1,484)
(1,371)
6,775
6,898
6,632
1,802
640
(383)
(69)
(380)
(65)
(400)
(77)
1,560
902
1,648
890
1,824
902
8,946
9,161
9,072
(1,932)
(1,929)
(1,848)
9,237
9,436
9,358
(1) We earned trailing commissions of $1.2 billion for the year ended December 31, 2019 and $1.3 billion for both of the years ended December 31, 2018 and 2017, respectively.
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 22.4 presents our trust and investment management
fees by operating segment.
Table 22.4: Trust and Investment Management Fees by Operating Segment
(in millions)
Investment management fees
Trust fees
Other revenue
Trust and investment management fees
$ 805
Community
Banking
Wholesale
Banking
Wealth and
Investment
Management
Year ended December 31,
Other
Consolidated
Company
2019
2018
2017
2019
2018
2017
2019
2018
2017
2019
2018
2017
2019
2018
2017
$ —
804
1
—
908
2
910
1
887
1
889
—
338
148
486
—
329
116
445
—
1,990
2,087
2,053
—
—
—
1,990
2,087
2,054
421
102
523
557
40
728
78
757
67
(840)
(932)
(916)
—
—
(1)
859
189
1,033
1,149
196
169
2,587
2,893
2,877
(840)
(932)
(917)
3,038
3,316
3,372
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 FEES include credit and debit card interchange and network
revenues and various card-related fees. Credit and debit card
Table 22.5: Card Fees by Operating Segment
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 22.5 presents our card fees by operating segment.
Community
Banking
Wholesale
Banking
Wealth and
Investment
Management
Year ended December 31,
Other
Consolidated
Company
(in millions)
2019
2018
2017
Credit card interchange and network revenues (1)
$ 809
792
944
Debit card interchange and network revenues
2,148
2,053
1,964
Late fees, cash advance fees, balance transfer fees,
and annual fees
Card fees
698
698
705
2019
359
—
—
361
345
—
1
—
—
$ 3,655
3,543
3,613
359
362
345
6
—
—
6
6
—
—
6
6
—
—
6
(4)
—
—
(4)
(4)
—
—
(4)
(4)
1,170
1,155
1,291
—
—
2,148
2,053
1,964
698
699
705
(4)
4,016
3,907
3,960
2018
2017
2019
2018
2017
2019
2018
2017
2019
2018
2017
(1)
The cost of credit card rewards and rebates of $1.5 billion, $1.4 billion and $1.2 billion for the years ended December 31, 2019, 2018 and 2017, respectively, are presented net against the related
revenues.
Wells Fargo & Company
235
Note 22: Revenue from Contracts with Customers (continued)
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. In October 2019, we sold our commercial real estate
brokerage business (Eastdil).
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 for products or
services such as merchant payment services, safe deposit boxes,
and loan syndication agency services. These fees are generally
recognized over time as we perform the services. Most of these
fees are in the Community Banking operating segment.
Note 23: Employee Benefits and Other Expenses
Pension and Postretirement Plans
We sponsor a frozen noncontributory qualified defined benefit
retirement plan, the Wells Fargo & Company Cash Balance Plan
(Cash Balance Plan), which covers eligible employees of Wells
Fargo. The Cash Balance Plan was frozen on July 1, 2009, and no
new benefits accrue after that date.
Prior to July 1, 2009, eligible employees’ Cash Balance Plan
accounts were allocated a compensation credit based on a
percentage of their certified compensation; the freeze
discontinued the allocation of compensation credits after
June 30, 2009. Investment credits continue to be allocated to
participants’ accounts based on their accumulated balances.
Although not required, we made a $192 million contribution
to our Cash Balance Plan in 2019. We do not expect that we will
be required to make a contribution to the Cash Balance Plan in
2020; however, this is dependent on the finalization of the
actuarial valuation in 2020. Our decision of whether to make a
contribution in 2020 will be based on various factors including
the actual investment performance of plan assets during 2020.
Given these uncertainties, we cannot estimate at this time the
amount, if any, that we will contribute in 2020 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 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). Lump sum payments (included in the
“Benefits paid” line in Table 23.1) did not exceed this threshold in
2019. 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.
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 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.
236
Wells Fargo & Company
Table 23.1 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. The increases in the
benefit obligation of the qualified plans and nonqualified plans
were primarily due to actuarial losses, reflecting a decrease in the
discount rates, partially offset by benefits paid. The decrease in
Table 23.1: Changes in Benefit Obligation and Fair Value of Plan Assets
the benefit obligation for the other benefit plans was primarily
due to benefits paid (net of participant contributions) and net
actuarial gains, partially offset by interest cost. Net actuarial
gains were primarily due to actual benefit claims being less than
projected, partially offset by a decrease in the discount rate.
(in millions)
Change in benefit obligation:
Benefit obligation at beginning of year
Service cost
Interest cost
Plan participants’ contributions
Actuarial loss (gain)
Benefits paid
Medicare Part D subsidy
Settlements, Curtailments, and Amendments
Other
Foreign exchange impact
December 31, 2019
December 31, 2018
Pension benefits
Pension benefits
Qualified
Non-
qualified
Other
benefits
Qualified
Non-
qualified
Other
benefits
$
10,129
11
419
—
1,229
(672)
—
(2)
—
2
557
—
22
—
49
(57)
—
—
—
1
555
—
23
44
(11)
(86)
—
—
—
—
11,110
11
392
—
(674)
(719)
—
1
13
(5)
621
—
21
—
(27)
(57)
—
—
—
(1)
611
—
21
48
(33)
(92)
2
—
—
(2)
Benefit obligation at end of year
11,116
572
525
10,129
557
555
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
Fair value of plan assets at end of year
Funded status at end of year
Amounts recognized on the balance sheet at end of year:
Assets
Liabilities
9,477
1,758
199
—
(672)
—
(1)
—
2
10,763
(353)
1
(354)
$
$
—
—
57
—
(57)
—
—
—
—
—
(572)
—
(572)
511
64
7
44
(86)
—
—
—
—
540
15
44
(29)
10,667
(478)
10
—
(719)
—
—
1
(4)
9,477
(652)
1
(653)
—
—
57
—
(57)
—
—
—
—
—
(557)
—
(557)
565
(17)
5
48
(92)
2
—
—
—
511
(44)
—
(44)
Table 23.2 provides information for pension and post
retirement plans with benefit obligations in excess of plan assets.
Table 23.2: Plans with Benefit Obligations in Excess of Plan Assets
(in millions)
Projected benefit obligation
Accumulated benefit obligation
Fair value of plan assets
December 31, 2019
December 31, 2018
Pension Benefits
Other Benefits
Pension Benefits
Other Benefits
$
11,653
11,634
10,727
N/A
29
—
10,640
10,627
9,429
N/A
555
511
Wells Fargo & Company
237
Note 23: Employee Benefits and Other Expenses (continued)
Table 23.3 presents the components of net periodic benefit
cost and other comprehensive income (OCI).
Table 23.3: Net Periodic Benefit Cost and Other Comprehensive Income
December 31, 2019
December 31, 2018
December 31, 2017
Pension benefits
Pension benefits
Pension benefits
Qualified
Non-
qualified
Other
benefits
Qualified
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
Amortization of prior service credit
Settlement
$
11
419
(567)
148
—
—
11
38
(148)
—
—
—
Total recognized in other comprehensive income
(110)
Total recognized in net periodic benefit cost and
other comprehensive income
$
(99)
—
22
—
10
—
2
34
49
(10)
—
—
(2)
37
71
—
23
(28)
(17)
(10)
—
(32)
(47)
17
—
10
—
(20)
(52)
11
392
(641)
131
—
134
27
445
(131)
1
—
(134)
181
208
—
21
—
14
—
2
37
(27)
(14)
—
—
(2)
(43)
(6)
—
21
(31)
(18)
(10)
—
(38)
15
18
—
10
—
43
5
5
412
(652)
148
—
7
(80)
33
(148)
1
—
(8)
(122)
(202)
—
24
—
11
—
6
41
46
(11)
—
—
(6)
29
70
—
28
(30)
(9)
(10)
—
(21)
(128)
9
—
10
—
(109)
(130)
(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, 2019 and 2018 balances are
reported in other noninterest expense on the consolidated statement of income. For 2017, these balances were reported in employee benefits.
Table 23.4 provides the amounts recognized in cumulative
OCI (pre-tax).
Table 23.4: Benefits Recognized in Cumulative OCI
(in millions)
Net actuarial loss (gain)
Net prior service cost (credit)
Total
December 31, 2019
December 31, 2018
Pension benefits
Pension benefits
Qualified
3,226
1
3,227
$
$
Non-
qualified
Other
benefits
186
—
186
(357)
(146)
(503)
Qualified
3,336
1
3,337
Non-
qualified
Other
benefits
149
—
149
(327)
(156)
(483)
238
Wells Fargo & Company
Plan Assumptions
For additional information on our pension accounting
assumptions, see Note 1 (Summary of Significant Accounting
Policies). Table 23.5 presents the weighted-average assumptions
used to estimate the projected benefit obligation.
Table 23.5: Weighted-Average Assumptions Used to Estimate Projected Benefit Obligation
Discount rate
Interest crediting rate
December 31, 2019
December 31, 2018
Pension benefits
Pension benefits
Qualified
3.21%
2.70
Non-
qualified
Other
benefits
3.03
1.35
3.10
N/A
Qualified
4.30
3.22
Non-
qualified
Other
benefits
4.20
2.18
4.24
N/A
Table 23.6 presents the weighted-average assumptions
used to determine the net periodic benefit cost.
Table 23.6: Weighted-Average Assumptions Used to Determine Net Periodic Benefit Cost
December 31, 2019
December 31, 2018
December 31, 2017
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
4.30%
3.22
6.24
4.10
2.05
N/A
4.24
N/A
5.75
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
(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 8.30% for health care costs in 2020. This rate is
assumed to trend down 0.40%-0.50% per year until the trend
rate reaches an ultimate rate of 4.50% in 2028. The 2019
periodic benefit cost was determined using an initial annual trend
rate of 8.40%. This rate was assumed to decrease 0.50%-0.60%
per year until the trend rate reached an ultimate rate of 4.50% in
2026.
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 a moderate
amount of long-term growth opportunities while ensuring that
risk is mitigated through diversification across numerous asset
classes and various investment strategies, coupled with an
investment strategy for the fixed income assets that is generally
designed to approximate the interest rate sensitivity of the Cash
Balance Plan’s benefit obligations. As of the end of 2019, the
asset allocation for our Cash Balance Plan had a mix range of
20%-40% equities, 50%-70% fixed income, and approximately
10% in real estate, 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 predominately invested in fixed income
securities and cash. 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 23.7.
Table 23.7: Projected Benefit Payments
(in millions)
Year ended December 31,
2020
2021
2022
2023
2024
Pension benefits
Qualified
Non-
qualified
Other
Benefits
$
826
811
797
738
720
50
48
45
44
42
42
42
41
40
38
2025-2029
3,391
187
167
Wells Fargo & Company
239
Note 23: Employee Benefits and Other Expenses (continued)
Fair Value of Plan Assets
Table 23.8 presents the classification of the fair value of the
pension plan and other benefit plan assets in the fair value
hierarchy. See Note 19 (Fair Values of Assets and Liabilities) for a
description of the fair value hierarchy.
Table 23.8: Pension and Other Benefit Plan Assets
Pension plan assets
Carrying value at year end
Other benefits plan assets
Level 1
Level 2
Level 3
Total
Level 1
Level 2
Level 3
Total
(in millions)
December 31, 2019
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
$
3
821
—
—
33
700
210
201
92
567
—
141
68
57
287
5,259
167
217
97
290
113
9
374
120
249
35
50
48
—
—
—
—
—
—
—
—
—
—
—
7
—
9
290
6,080
167
217
130
990
323
210
466
687
249
183
118
114
Plan investments - excluding investments at NAV
$
2,893
7,315
16
10,224
Investments at NAV (6)
Net receivables
Total plan assets
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
902
—
—
55
582
167
141
72
449
—
148
63
34
284
4,414
118
114
186
238
89
7
357
110
205
33
32
44
Plan investments - excluding investments at NAV
$
2,615
6,231
Investments at NAV (6)
Net receivables
Total plan assets
478
61
$ 10,763
286
5,316
118
114
241
820
256
148
429
559
205
195
95
86
8,868
566
43
$
9,477
—
—
—
—
—
—
—
—
—
—
—
14
—
8
22
53
—
—
—
—
—
—
—
—
12
—
—
—
4
69
69
—
—
—
—
—
—
—
—
9
—
—
—
4
145
—
177
—
—
73
19
11
—
22
—
—
—
—
447
22
—
183
—
—
115
28
17
—
40
—
—
—
—
82
405
—
—
—
—
—
—
—
—
—
—
—
—
—
24
24
—
—
—
—
—
—
—
—
—
—
—
—
—
24
24
198
—
177
—
—
73
19
11
—
34
—
—
—
28
540
—
—
540
91
—
183
—
—
115
28
17
—
49
—
—
—
28
511
—
—
511
(1)
(2)
(3)
(4)
(5)
(6)
This category includes a diversified mix of assets, which are being managed in accordance with a duration target of approximately 10 years and an emphasis on corporate credit bonds combined with
investments in U.S. Treasury securities and other U.S. agency and non-agency bonds.
This category includes assets that are 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.
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.
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.
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.
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.
240
Wells Fargo & Company
Table 23.9 presents the changes in Level 3 pension plan and
other benefit plan assets measured at fair value.
Table 23.9: Fair Value Level 3 Pension and Other Benefit Plan Assets
(in millions)
Quarter ended December 31, 2019
Pension plan assets:
Real estate
Other
Total pension plan assets
Other benefits plan assets:
Other
Total other benefit plan assets
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
Gains (losses)
Balance
beginning
of year
Realized
Unrealized (1)
Purchases,
sales
and
settlements
(net)
Transfers
Into/
(Out of)
Level 3
Balance
end of
year
$
$
$
$
$
$
$
$
14
8
22
24
24
20
8
28
23
23
1
—
1
—
—
(2)
—
(2)
1
1
1
2
3
—
—
(1)
—
(1)
—
—
(9)
(1)
(10)
—
—
(3)
—
(3)
—
—
—
—
—
—
—
—
—
—
—
—
7
9
16
24
24
14
8
22
24
24
(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.
Wells Fargo & Company
241
Note 23: 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 1 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 $1.1 billion in 2019 and $1.2 billion in both 2018 and 2017.
Other Expenses
Table 23.10 separately presents other expenses exceeding 1% of
the sum of net interest income and total noninterest income in
any of the years presented.
Table 23.10: Other Expenses
(in millions)
Operating losses
Outside professional services
Contract services (1)
Leases (2)
Advertising and promotion
Outside data processing
Other
Year ended December 31,
2019
$
4,321
3,198
2,489
1,155
1,076
673
3,840
2018
3,124
3,306
2,192
1,334
857
660
2017
5,492
3,813
1,638
1,351
614
891
4,129
3,789
Total other noninterest expense
$ 16,752
15,602
17,588
(1)
(2)
The amount for 2017 has been revised to conform with the current period presentation
whereby temporary help is included in contract services rather than in all other noninterest
expense.
Represents expenses for assets we lease to customers.
242
Wells Fargo & Company
Note 24: Income Taxes
Table 24.1 presents the components of income tax expense.
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. In 2018, we
reclassified $400 million from cumulative OCI to retained
earnings to update amounts to an appropriate tax rate under the
Tax Act. See Note 26 (Other Comprehensive Income) for more
information.
We have determined that a valuation allowance is required
for 2019 in the amount of $306 million, predominantly
attributable to deferred tax assets in various state and non-U.S.
jurisdictions where we believe it is more likely than not that these
deferred tax assets will not be realized. In these jurisdictions,
carry back limitations, lack of sources of taxable income, and tax
planning strategy limitations contributed to our conclusion that
the deferred tax assets would not be realizable. We have
concluded that it is more likely than not that the remaining
deferred tax assets will be realized based on our history of
earnings, sources of taxable income in carry back periods, and our
ability to implement tax planning strategies.
At December 31, 2019, we had net operating loss carry
forwards with related deferred tax assets of $363 million. If
these carry forwards are not utilized, they will mostly expire in
varying amounts through December 31, 2039.
We do not intend to distribute earnings of certain non-U.S.
subsidiaries in a taxable manner, and therefore intend to limit
distributions of non-U.S. 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 non-U.S.
taxes. All other undistributed non-U.S. earnings will continue to
be permanently reinvested outside the U.S. and the related tax
liability on these earnings is insignificant.
Table 24.1: Income Tax Expense
(in millions)
Current:
Federal
State and local
Non-U.S.
Total current
Deferred:
Federal
State and local
Non-U.S.
Total deferred
Total
Year ended December 31,
2019
2018
2017
$
5,244
2,005
154
7,403
(2,374)
(863)
(9)
(3,246)
$
4,157
2,382
1,140
170
3,692
1,706
236
28
1,970
5,662
3,507
561
183
4,251
156
564
(54)
666
4,917
The tax effects of our temporary differences that gave rise
to significant portions of our deferred tax assets and liabilities
are presented in Table 24.2.
Table 24.2: Net Deferred Tax Liability (1)
(in millions)
Deferred tax assets
Dec 31,
2019
Dec 31,
2018
Allowance for credit losses
$
2,587
Deferred compensation and employee
benefits
Accrued expenses
PCI loans
Basis difference in debt securities
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
2,969
874
69
690
—
363
1,207
8,759
(306)
(3,080)
(4,413)
(1,626)
(4,146)
(511)
(504)
(561)
(890)
Total deferred tax liabilities
(15,731)
Net deferred tax liability (2)
$
(7,278)
2,644
2,893
815
467
98
1,022
366
1,272
9,577
(315)
(3,475)
(4,271)
(1,301)
(7,252)
(427)
—
(696)
(831)
(18,253)
(8,991)
(1)
(2)
Prior period amounts have been revised to conform with the current period presentation.
The net deferred tax liability is included in accrued expenses and other liabilities.
Wells Fargo & Company
243
Note 24: Income Taxes (continued)
Table 24.3 reconciles the statutory federal income tax
expense and rate to the effective income tax expense and rate.
Our effective tax rate is calculated by dividing income tax
expense by income before income tax expense less the net
income from noncontrolling interests.
Table 24.3: Effective Income Tax Expense and Rate
(in millions)
Amount
2019
Rate
Amount
2018
Rate
Amount
Statutory federal income tax expense and rate
$
4,978
21.0%
$
5,892
21.0%
$
9,485
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
896
(460)
(1,715)
653
—
(195)
3.8
(2.0)
(7.2)
2.7
—
(0.8)
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
(3,713)
(870)
Effective income tax expense and rate
$
4,157
17.5%
$
5,662
20.2%
$
4,917
December 31,
2017
Rate
35.0%
3.4
(3.0)
(5.2)
4.9
(13.7)
(3.3)
18.1%
All three years include income tax expense related to non-
tax-deductible litigation accruals. The 2019 and 2018 effective
tax rates reflect the reduction in the U.S. federal statutory
income tax rate from 35% to 21% resulting from the Tax Cuts &
Jobs Act (Tax Act). The 2018 effective tax rate also reflected the
reconsideration of reserves for state income taxes following the
U.S. Supreme Court opinion in South Dakota v. Wayfair, Inc. as
well as $164 million of income tax expense resulting from the
final re-measurement of our initial estimates for the impacts of
the Tax Act. The 2017 effective income tax rate included an
estimated impact of the Tax Act, including a benefit of
$3.9 billion resulting from the re-measurement of the
Company’s estimated net deferred tax liability as of
December 31, 2017, partially offset by $173 million of income
tax expense for the estimated deemed repatriation of the
Company’s previously undistributed non-U.S. earnings.
Table 24.4 presents the change in unrecognized tax benefits.
Table 24.4: Change in Unrecognized Tax Benefits
(in millions)
Balance at beginning of year
Additions:
For tax positions related to the current year
For tax positions related to prior years
Reductions:
For tax positions related to prior years
Lapse of statute of limitations
Settlements with tax authorities
Year ended
December 31,
2019
$
5,750
2018
5,167
123
91
(378)
(5)
(123)
393
503
(262)
(7)
(44)
Balance at end of year
$
5,458
5,750
Of the $5.5 billion of unrecognized tax benefits at
December 31, 2019, approximately $3.8 billion would, if
recognized, affect the effective tax rate. The remaining
$1.7 billion of unrecognized tax benefits relates to income tax
positions on temporary differences.
We recognize interest and penalties related to unrecognized
tax benefits as a component of income tax expense. As of
December 31, 2019 and 2018, we have accrued approximately
$998 million and $968 million, respectively, for the payment of
interest and penalties. In 2019, we recognized in income tax
expense a net tax expense related to interest and penalties of
$35 million. In 2018, we recognized in income tax expense a net
tax expense related to interest and penalties of $200 million.
We are subject to U.S. federal income tax as well as income
tax in numerous state and non-U.S. jurisdictions. We are
routinely examined by tax authorities in these various
jurisdictions. The IRS is currently examining the 2015 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 non-U.S. taxing
authorities. With few exceptions, Wells Fargo and its subsidiaries
are not subject to federal, state, local and non-U.S. 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 2014. For the
2003 through 2006 periods, we have paid the IRS the contested
income tax and interest associated with these issues and refund
claims have been filed for the respective years. It is possible that
one or more of these examinations, appeals or litigation may be
resolved within the next twelve months resulting in a decrease of
up to $1.3 billion to our gross unrecognized tax benefits.
244
Wells Fargo & Company
Note 25: Earnings and Dividends Per Common Share
Table 25.1 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 on share repurchases, and the Consolidated
Statement of Changes in Equity and Note 21 (Common Stock
and Stock Plans) for information about stock and options activity
and terms and conditions of warrants.
Table 25.1: 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 (2)
Restricted share rights (2)
Warrants (2)
Diluted average common shares outstanding (denominator)
Per share
2019
19,549
1,611
17,938
4,393.1
4.08
Year ended December 31,
2018
22,393
1,704
20,689
4,799.7
4.31
2017
22,183
1,629
20,554
4,964.6
4.14
4,393.1
4,799.7
4,964.6
0.8
31.5
—
4,425.4
4.05
8.0
26.3
4.4
17.1
24.7
10.9
4,838.4
5,017.3
4.28
4.10
$
$
$
$
(1)
(2)
The years ended December 31, 2019 and December 31, 2018, includes $220 million and $155 million, respectively, as a result of eliminating the discount on our Series K and Series J Preferred Stock.
The Series K Preferred Stock was partially redeemed on September 16, 2019, and the Series J Preferred stock was redeemed on September 17, 2018.
Calculated using the treasury stock method.
Table 25.2 presents the outstanding Convertible Preferred
Stock, Series L, and options to purchase shares of common stock
that were anti-dilutive and therefore not included in the
calculation of diluted earnings per common share.
Table 25.2: Outstanding Anti-Dilutive Securities
Weighted-average shares
Year ended December 31,
(in millions)
2019
2018
2017
Convertible Preferred Stock, Series
L (1)
Stock options (2)
25.3
—
25.3
0.3
25.3
1.9
(1)
(2)
Calculated using the if-converted method.
Calculated using the treasury stock method.
Table 25.3 presents dividends declared per common share.
Table 25.3: Dividends Declared Per Common Share
Per common share
Year ended December 31,
2019
1.92
$
2018
1.64
2017
1.54
Wells Fargo & Company
245
Note 26: Other Comprehensive Income
Table 26.1 provides the components of other comprehensive
income (OCI), reclassifications to net income by income
statement line item, and the related tax effects.
Table 26.1: Summary of Other Comprehensive Income
(in millions)
Debt securities (1):
Before
tax
Tax
effect
2019
Net of
tax
Before
tax
Tax
effect
Year ended December 31,
2018
Net of
tax
Before
tax
Tax
effect
2017
Net of
tax
Net unrealized gains (losses) arising during the period
$
5,439
(1,337)
4,102
(4,493)
1,100
(3,393)
2,719
(1,056)
1,663
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
Subtotal reclassifications to net income
263
(140)
—
(1)
122
(65)
34
—
—
(31)
198
(106)
—
(1)
91
357
(108)
—
(1)
248
(88)
27
—
—
269
(81)
—
(1)
(61)
187
198
(479)
(456)
—
(737)
(75)
181
172
—
278
123
(298)
(284)
—
(459)
Net change
5,561
(1,368)
4,193
(4,245)
1,039
(3,206)
1,982
(778)
1,204
Derivatives and hedging activities:
Fair Value Hedges:
Change in fair value of excluded components on
fair value hedges (4)
Cash Flow Hedges:
Net unrealized 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
(3)
(21)
291
8
299
275
1
5
(72)
(2)
(74)
(68)
(2)
(254)
63
(191)
(253)
95
(158)
(16)
(278)
67
(211)
(287)
108
(179)
219
6
225
207
292
2
294
(238)
(72)
—
(72)
58
220
2
222
(551)
8
(543)
(180)
(1,083)
208
(3)
205
408
(343)
5
(338)
(675)
(40)
10
(30)
(434)
106
(328)
49
(12)
37
141
(8)
133
93
73
73
(35)
5
(30)
(20)
(2)
(2)
106
(3)
103
73
71
71
127
126
253
(181)
(156)
(156)
(31)
(29)
(60)
46
1
1
96
97
193
(135)
(155)
(155)
150
3
153
202
96
96
(57)
2
(55)
(67)
3
3
93
5
98
135
99
99
763
(62)
825
Other comprehensive income (loss)
$
6,002
(1,458)
4,544
(4,820)
1,144
(3,676)
1,197
(434)
Less: Other comprehensive loss from noncontrolling
interests, net of tax
Wells Fargo other comprehensive income (loss), net
of tax
—
$ 4,544
(2)
(3,674)
(1)
(2)
(3)
(4)
(5)
The year ended December 31, 2017, includes net unrealized gains (losses) arising during the period from equity securities of $81 million and reclassification of net (gains) losses to net income related
to equity securities of $(456) million. 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 years ended December 31, 2018, and December 31, 2019, reflect net unrealized gains (losses) arising during the period and reclassification of net (gains)
losses to net income from only debt securities.
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.
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.
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.
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 and 2019 balances are
reclassified to other noninterest expense on the consolidated statement of income. For 2017 these balances were reclassified to employee benefits.
246
Wells Fargo & Company
Table 26.2 provides the cumulative OCI balance activity on
an after-tax basis.
Table 26.2: Cumulative OCI Balances
(in millions)
Balance, December 31, 2016
Transition adjustment (4)
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 (5)
Balance, January 1, 2018
Reclassification of certain tax effects to retained earnings (6)
Net unrealized losses arising during the period
Amounts reclassified from accumulated other comprehensive income
Net change
Less: Other comprehensive loss from noncontrolling interests
Balance, December 31, 2018
Transition adjustment (7)
Balance, January 1, 2019
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, 2019
Debt
securities (1)
Fair value
hedges (2)
Cash flow
hedges (3)
Defined
benefit
plans
adjustments
Foreign
currency
translation
adjustments
Cumulative
other
comprehensive
income (loss)
$
(1,099)
—
(1,099)
1,663
(459)
1,204
(66)
171
(118)
53
31
(3,393)
187
(3,175)
—
(3,122)
481
(2,641)
4,102
91
4,193
—
—
169
169
(158)
—
(158)
—
11
—
11
2
(191)
—
(189)
—
(178)
—
(178)
(2)
—
(2)
—
89
(1)
88
(179)
(338)
(517)
—
(429)
—
(429)
(89)
(211)
222
(78)
—
(507)
—
(507)
(16)
225
209
—
(1,943)
—
(1,943)
37
98
135
—
(1,808)
—
(1,808)
(353)
(328)
193
(488)
—
(2,296)
—
(2,296)
(30)
103
73
—
(184)
—
(184)
99
—
99
4
(89)
—
(89)
9
(155)
—
(146)
(2)
(233)
—
(233)
71
—
71
—
(3,137)
168
(2,969)
1,462
(699)
763
(62)
(2,144)
(118)
(2,262)
(400)
(4,278)
602
(4,076)
(2)
(6,336)
481
(5,855)
4,125
419
4,544
—
$
1,552
(180)
(298)
(2,223)
(162)
(1,311)
(1)
(2)
(3)
(4)
(5)
(6)
(7)
The year ended December 31, 2017, includes net unrealized gains (losses) arising during the period from equity securities of $81 million and reclassification of net (gains) losses to net income related
to equity securities of $(456) million. 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 years ended December 31, 2018, and December 31, 2019, reflect net unrealized gains (losses) arising during the period and reclassification of net (gains)
losses to net income from only debt securities.
Substantially all of the amounts for fair value hedges are foreign exchange contracts.
Substantially all of the amounts for cash flow hedges are foreign exchange contracts for the year-ended December 31, 2019, and interest rate contracts for the years ended December 31, 2018 and
2017.
Transition adjustment relates to our adoption of ASU 2017-12 – Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities.
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.
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): Reclassif ication of Certain Tax Effects from Accumulated Other Comprehensive Income in third quarter 2018.
The transition adjustment relates to our adoption of ASU 2017-08 – Receivables – Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt
Securities. See Note 1 (Summary of Significant Accounting Policies) for more information.
Wells Fargo & Company
247
Note 27: Operating Segments
As of December 31, 2019, we had 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 reporting process. The
management reporting process is based on U.S. GAAP with
specific adjustments, such as for funds transfer pricing for asset/
liability management, for shared revenues and expenses, and tax-
equivalent adjustments to consistently reflect income from
taxable and tax-exempt sources. The management reporting
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. On February 11, 2020, we announced a new
organizational structure with five principal lines of business:
Consumer and Small Business Banking; Consumer Lending;
Commercial Banking; Corporate and Investment Banking; and
Wealth and Investment Management. The Company is currently
in the process of transitioning to this new organizational
structure, including identifying leadership for some of these
principal business lines and aligning management reporting and
allocation methodologies. These changes will not impact the
consolidated financial results of the Company, but are expected
to result in changes to our operating segments. We will update
our operating segment disclosures, including comparative
financial results, when the Company completes its transition and
is managed in accordance with the new organizational structure.
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
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, 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, and CRE
loan servicing.
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, 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 and provide investment management
capabilities delivered to global institutional clients through
separate accounts and the Wells Fargo Funds.
Other includes the elimination of certain items that are included
in more than one business segment, substantially all of which
represents products and services for Wealth and Investment
Management customers served through Community Banking
distribution channels.
248
Wells Fargo & Company
Table 27.1 presents our results by operating segment.
Table 27.1: Operating Segments
(income/expense in millions, average balances in billions)
2019
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) (3)
Net income (loss) before noncontrolling interests
Less: Net income (loss) from noncontrolling interests
Net income (loss)
2018
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) (3)
Net income (loss) before noncontrolling interests
Less: Net income (loss) from noncontrolling interests
Net income (loss)
2017
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) (3)
Net income (loss) before noncontrolling interests
Less: Net income (loss) from noncontrolling interests
Net income (loss)
2019
Average loans
Average assets
Average deposits
2018
Average loans
Average assets
Average deposits
Community
Banking
Wholesale
Banking
Wealth and
Investment
Management
Other (1)
Consolidated
Company
$
$
$
$
$
$
$
27,610
2,319
17,706
32,696
10,301
2,426
7,875
477
7,398
29,219
1,783
17,694
30,491
14,639
3,784
10,855
461
10,394
28,658
2,555
18,360
32,615
11,848
634
11,214
276
10,938
459.4
1,028.4
782.0
463.7
1,034.1
757.2
17,699
378
9,978
15,352
11,947
1,246
10,701
5
10,696
18,690
(58)
10,016
16,157
12,607
1,555
11,052
20
11,032
18,810
(19)
11,190
16,624
13,395
3,496
9,899
(15)
9,914
475.3
861.0
422.5
465.7
830.5
423.7
4,037
5
13,304
13,709
3,627
904
2,723
10
2,713
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
75.6
84.3
146.0
74.6
83.9
165.0
(2,115)
(15)
(3,156)
(3,579)
(1,677)
(419)
(1,258)
—
(1,258)
(2,355)
24
(3,232)
(3,460)
(2,151)
(538)
(1,613)
—
(1,613)
(2,552)
(3)
(3,149)
(3,378)
(2,320)
(881)
(1,439)
—
(1,439)
(59.3)
(60.3)
(64.2)
(58.8)
(59.6)
(70.0)
47,231
2,687
37,832
58,178
24,198
4,157
20,041
492
19,549
49,995
1,744
36,413
56,126
28,538
5,662
22,876
483
22,393
49,557
2,528
38,832
58,484
27,377
4,917
22,460
277
22,183
951.0
1,913.4
1,286.3
945.2
1,888.9
1,275.9
(1)
(2)
(3)
Includes the elimination of certain items that are included in more than one business segment, substantially all of which represents products and services for WIM customers served through
Community Banking distribution channels.
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
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.
Income tax expense (benefit) for our Wholesale Banking operating segment included income tax credits related to low-income housing and renewable energy investments of $1.8 billion, $1.6 billion
and $1.4 billion for the years ended December 31, 2019, 2018 and 2017 respectively.
Wells Fargo & Company
249
Note 28: Parent-Only Financial Statements
The following tables present Parent-only condensed financial
statements.
Table 28.1: 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
Net income
Year ended December 31,
2019
2018
2017
$
21,930
3,356
43
(162)
25,167
664
—
4,931
2
1,327
6,924
18,243
(945)
361
$
19,549
22,427
3,298
49
(424)
25,350
644
2
4,541
3
286
5,476
19,874
(544)
1,975
22,393
20,746
1,984
146
1,238
24,114
189
—
3,595
5
1,888
5,677
18,437
(319)
3,427
22,183
(1)
Includes dividends paid from indirect bank subsidiaries of $21.8 billion, $20.8 billion and $17.9 billion in 2019, 2018 and 2017, respectively.
Table 28.2: Parent-Only Statement of Comprehensive Income
(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:
Total comprehensive income
2019
19,549
$
(45)
(12)
75
4,526
4,544
$
24,093
Year ended December 31,
2018
22,393
(12)
(198)
(132)
(3,332)
(3,674)
18,719
2017
22,183
94
(158)
118
771
825
23,008
(1)
The year ended December 31, 2017 includes net unrealized gains arising during the period from equity securities of $3 million and reclassification of net (gains) to net income related to equity
securities of $(21) million. 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 years ended December 31, 2019 and 2018, reflect net unrealized gains (losses) arising during the period and reclassification of net (gains) losses to net income from only
debt securities.
250
Wells Fargo & Company
Table 28.3: Parent-Only Balance Sheet
(in millions)
Assets
Cash, cash equivalents, and restricted cash due from:
Subsidiary banks
Nonaffiliates
Debt securities:
Available-for-sale, at fair value
Loans to nonbank subsidiaries
Investments in subsidiaries (1)
Equity securities
Other assets
Total assets
Liabilities and equity
Accrued expenses and other liabilities
Long-term debt
Indebtedness to nonbank subsidiaries
Total liabilities
Stockholders’ equity
Total liabilities and equity
Dec 31,
2019
Dec 31,
2018
$
14,948
16,301
1
1
145,383
208,076
1,007
4,608
374,024
8,050
152,628
26,200
186,878
187,146
374,024
$
$
$
—
1
139,163
202,695
2,164
4,639
364,963
6,986
135,079
26,732
168,797
196,166
364,963
(1)
The years ended December 31, 2019, and December 31, 2018, include indirect ownership of bank subsidiaries with equity of $170.4 billion and $167.6 billion, respectively.
Wells Fargo & Company
251
Note 28: Parent-Only Financial Statements (continued)
Table 28.4: Parent-Only Statement of Cash Flows
(in millions)
Cash flows from operating activities:
Net cash provided by operating activities
Cash flows from investing activities:
Available-for-sale debt securities:
Proceeds from sales:
Subsidiary banks
Nonaffiliates
Prepayments and maturities:
Subsidiary banks
Purchases:
Subsidiary banks
Equity securities, not held for trading:
Proceeds from sales and capital returns
Purchases
Loans:
Net 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:
Year ended December 31,
2019
2018
2017
$
27,601
19,024
22,233
—
—
—
—
326
(1,052)
(3)
(5,286)
1,703
(384)
22
(4,674)
—
—
—
—
355
(220)
(7)
(2,441)
756
2,407
109
959
8,658
8,824
10,250
(3,900)
743
(215)
(35,876)
(73,729)
69,286
(2,029)
113
(17,875)
Net increase (decrease) in short-term borrowings and indebtedness to subsidiaries
(636)
12,467
(8,685)
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 used by financing activities
Net change in cash, cash equivalents, and restricted cash
Cash, cash equivalents, and restricted cash at beginning of year
Cash, cash equivalents, and restricted cash at end of year
$
20,369
(8,143)
—
(1,550)
(1,391)
380
(302)
(24,533)
(8,198)
(275)
(24,279)
(1,352)
16,301
14,949
1,876
(9,162)
—
(2,150)
(1,622)
632
(331)
(20,633)
(7,692)
(248)
(26,863)
(6,880)
23,181
16,301
22,217
(13,709)
677
—
(1,629)
1,211
(393)
(9,908)
(7,480)
(138)
(17,837)
(13,479)
36,660
23,181
252
Wells Fargo & Company
Note 29: 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 29.1 presents regulatory capital information for
Wells Fargo & Company and the Bank in accordance with the
Basel III capital requirements. We must report the lower of our
Common Equity Tier 1 (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
Table 29.1: Regulatory Capital Information
operational risk component. The Basel III capital requirements
for calculating CET1 and tier 1 capital, along with RWAs, are fully
phased-in. However, the requirements for determining tier 2 and
total capital are still in accordance with Transition Requirements
and are scheduled to be fully phased-in by the end of 2021.
Accordingly, the information presented below reflects fully
phased-in CET1 capital, tier 1 capital, and RWAs, but reflects
total capital still in accordance with Transition Requirements.
At December 31, 2019, the Bank and our other insured
depository institutions were considered well-capitalized under
the requirements of the Federal Deposit Insurance Act.
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, 2019, the Bank met these
requirements.
December 31, 2019
Wells Fargo & Company
December 31, 2018
December 31, 2019
Wells Fargo Bank, N.A.
December 31, 2018
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
$
138,760
158,949
188,333
138,760
158,949
196,223
146,363
167,866
198,798
146,363
167,866
207,041
145,149
145,149
158,615
145,149
145,149
166,056
142,685
142,685
155,558
142,685
142,685
163,380
1,230,066
1,913,297
1,245,853
1,913,297
1,177,350
1,850,299
1,247,210
1,850,299
1,110,379
1,695,807
1,152,791
1,695,807
1,058,653
1,652,009
1,154,182
1,652,009
11.28%
12.92
15.31 *
8.31
11.14 *
12.76 *
15.75
8.31
12.43
14.26
16.89
9.07
11.74 *
13.46 *
16.60 *
9.07
13.07
13.07
14.28 *
8.56
12.59 *
12.59 *
14.40
8.56
13.48
13.48
14.69
8.64
12.36 *
12.36 *
14.16 *
8.64
Supplementary leverage: (2)
Total leverage exposure
$
Supplementary leverage ratio
December 31, 2019
2,247,729
7.07%
Wells Fargo & Company
December 31, 2018
2,174,564
7.72
December 31, 2019
2,006,180
7.24
Wells Fargo Bank, N.A.
December 31, 2018
1,957,276
7.29
*Denotes the lowest capital ratio as determined under the Advanced and Standardized Approaches.
(1)
(2)
The leverage ratio consists of Tier 1 capital divided by total average assets, excluding goodwill and certain other items.
The supplementary leverage ratio (SLR) consists of Tier 1 capital divided by total leverage exposure. Total leverage exposure consists of total average assets, less goodwill and other permitted Tier 1
capital deductions (net of deferred tax liabilities), plus certain off-balance sheet exposures.
Table 29.2 presents the minimum required regulatory
capital ratios under Transition Requirements to which the
Company and the Bank were subject as of December 31, 2019,
and December 31, 2018.
Table 29.2: Minimum Required Regulatory Capital Ratios – Transition Requirements (1)
Regulatory capital ratios:
Common equity tier 1 capital
Tier 1 capital
Total capital
Tier 1 leverage
Supplementary leverage (2)
December 31, 2019
December 31, 2018
December 31, 2019
Wells Fargo & Company
Wells Fargo Bank, N.A.
December 31, 2018
9.000%
10.500
12.500
4.000
5.000
7.875
9.375
11.375
4.000
5.000
7.000
8.500
10.500
4.000
6.000
6.375
7.875
9.875
4.000
6.000
(1)
At December 31, 2019, under transition requirements, the CET1, tier 1 and total capital minimum ratio requirements for Wells Fargo & Company include a capital conservation buffer of 2.500% and a
global systemically important bank (G-SIB) surcharge of 2.000%. Only the 2.500% capital conservation buffer applies to the Bank at December 31, 2019.
(2) Wells Fargo & Company is required to maintain a SLR of at least 5.000% (comprised of a 3.000% minimum requirement plus a supplementary leverage buffer of 2.000%) to avoid restrictions on
capital distributions and discretionary bonus payments. The Bank is required to maintain a SLR of at least 6.000% to be considered well-capitalized under applicable regulatory capital adequacy
guidelines.
Wells Fargo & Company
253
Tier 1
Total
Assets:
Risk-weighted assets
Adjusted average assets (1)
Regulatory capital ratios:
Common equity tier 1 capital
Tier 1 capital
Total capital
Tier 1 leverage (1)
Report of Independent Registered Public Accounting Firm
To 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, 2019 and 2018, 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, 2019, 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, 2019 and 2018, and the results of its operations and its cash flows for each of the years in the three-year
period ended December 31, 2019, 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, 2019, 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 26, 2020, 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.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial
statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or
disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex
judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements,
taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit
matters or on the accounts or disclosures to which they relate.
Assessment of the allowance for credit losses
As discussed in Notes 1 and 6 to the consolidated financial statements, the allowance for credit losses is the Company’s estimate of
credit losses inherent in the loan portfolio, including unfunded credit commitments, at the balance sheet date. The allowance for credit
losses at December 31, 2019 was $10.5 billion, or 1.09% of total loans. Of the total allowance for credit losses, $9.2 billion relates to
loans collectively evaluated for impairment in accordance with ASC 450-20 and $1.3 billion relates to loans individually evaluated for
impairment in accordance with ASC 310-10. The Company has an established process to determine the appropriateness of the
allowance for credit losses that estimates the losses inherent in its portfolio and related unfunded credit commitments. The Company
develops and documents its allowance methodology at the portfolio segment level - commercial and consumer. For each portfolio
segment, losses are estimated collectively for groups of loans with similar characteristics, and individually or pooled for impaired loans.
We identified the assessment of the allowance for credit losses as a critical audit matter because of the complexity and significant
judgment involved in evaluating the measurement uncertainty in the estimate. There was a high degree of subjectivity related to the
selection of a credit loss estimation model that fits the credit risk characteristics for particular loan portfolios, including the assessment
of limitations to credit loss estimation addressed through imprecision. There was also a high degree of subjectivity and potential for
management bias related to determining an amount of imprecision for inclusion within the Company’s overall estimate of inherent
credit losses. Further, the assessment of credit risk ratings for commercial loans required the use of significant judgment as well as
industry knowledge and experience to evaluate individual borrower’s financial strength and the quality of collateral.
254
Wells Fargo & Company
The primary procedures we performed to address this critical audit matter included the following: We tested certain internal controls
over the Company’s allowance for credit losses estimation process that are designed to (1) evaluate and monitor the ability of the model
methodologies to estimate credit losses for selected commercial and consumer portfolios, (2) assess the limitations to credit loss
estimation models, (3) determine the amount of imprecision for inclusion within the Company’s overall estimate of the effect of
quantitative and qualitative factors on inherent credit losses, and (4) assess credit risk ratings for commercial loans. We involved credit
risk professionals with specialized skills and knowledge who assisted in testing the Company’s process to evaluate the design of selected
commercial and consumer portfolio model methodologies and the appropriateness of credit risk ratings to estimate losses in
accordance with relevant U.S. generally accepted accounting principles and identify and assess the limitations to the credit loss
estimation models. We evaluated the methodologies and assumptions used to estimate certain imprecision amounts. We tested the
accuracy of the range for certain quantifiable imprecision amounts, including, as applicable, recalculation of the range and procedures
over relevance and reliability of the inputs into the calculation of the range. We tested whether certain imprecision amounts reflect risks
inherent in the processes and assumptions used to estimate the allowance for credit losses. We performed trend analyses on the
imprecision amount relative to the allowance for credit losses to identify any potential for management bias considering portfolio
trends, internal and external credit metrics, and economic factors.
Assessment of the residential mortgage servicing rights (MSRs)
As discussed in Notes 1, 10, 11, 12, and 19 to the consolidated financial statements, the Company recognizes MSRs when it purchases
servicing rights from third parties, or retains servicing rights in connection with the sale or securitization of loans it originated. The
Company has elected to carry its residential MSRs at fair value with periodic changes reflected in earnings. The Company’s residential
MSR asset as of December 31, 2019 was $11.5 billion on an underlying loan servicing portfolio of $1.1 trillion.
The Company uses a valuation model for determining fair value 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. These assumptions include estimates of prepayment speeds, discount rates, default rates, cost to service (including delinquency
and foreclosure costs), escrow account earnings, contractual servicing fee income, ancillary income and late fees. The estimated fair
value of MSRs is periodically benchmarked to independent appraisals.
We identified the assessment of the valuation of residential MSRs as a critical audit matter because of the complexity and significant
judgment involved in deriving the estimate. There was a high degree of subjectivity used to evaluate the following key assumptions
because they are unobservable and the sensitivity of changes to those assumptions had a significant effect on the valuation:
prepayment speeds, discount rate, and costs to service. There was also a high degree of subjectivity and potential for management bias
related to updates made to key assumptions due to changes in market conditions, mortgage interest rates, or servicing standards.
The primary procedures we performed to address the critical audit matter included the following: We tested certain internal controls
over the Company’s residential MSR valuation process to (1) assess the valuation model, (2) evaluate the key assumptions used in
determining the MSR fair value, and (3) compare the MSR fair value to independent appraisals. We involved valuation professionals with
specialized skills and knowledge who assisted in evaluating the design of the valuation model used to estimate the MSR fair value in
accordance with relevant U.S. generally accepted accounting principles, and to evaluate key assumptions (prepayment speeds, discount
rates, and costs to service) based on an analysis of backtesting results and a comparison of key assumptions to available data for
comparable entities and independent appraisals. We assessed the key assumption updates made during the year by considering
backtesting results, external market events, and independent appraisals or other circumstances and by involving valuation professionals
to assist in determining that there were no significant assumption updates that a market participant would have expected to be
incorporated in the valuation at year end that were not incorporated.
We have served as the Company’s auditor since 1931.
San Francisco, California
February 26, 2020
Wells Fargo & Company
255
Quarterly Financial Data
Condensed Consolidated Statement of Income - Quarterly (Unaudited)
2019
Quarter ended
2018
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
$ 15,595
16,499
16,986
17,003
16,921
16,364
16,015
15,347
4,395
4,874
4,891
4,692
4,277
3,792
3,474
3,109
11,200
11,625
12,095
12,311
12,644
12,572
12,541
12,238
644
695
503
845
521
580
452
191
Net interest income after provision for credit losses
10,556
10,930
11,592
11,466
12,123
11,992
12,089
12,047
Noninterest income
Service charges on deposit accounts
Trust and investment fees
Card fees
Other fees
Mortgage banking
Insurance
Net gains from trading activities
Net gains (losses) on debt securities
Net gains from equity securities
Lease income
Other
Total noninterest income
Noninterest expense
Salaries
Commission and incentive compensation
Employee benefits
Technology and equipment
Net occupancy
Core deposit and other intangibles
FDIC and other deposit assessments
Other
1,279
3,572
1,020
656
783
98
131
(8)
451
343
335
1,219
3,559
1,027
858
466
91
276
3
956
402
1,528
1,206
3,568
1,025
800
758
93
229
20
622
424
744
1,094
3,373
1,176
3,520
944
770
708
96
357
125
814
443
574
981
888
467
109
10
9
21
402
753
1,204
3,631
1,017
850
846
104
158
57
416
453
633
1,163
3,675
1,001
846
770
102
191
41
295
443
485
1,173
3,683
908
800
934
114
243
1
783
455
602
8,660
10,385
9,489
9,298
8,336
9,369
9,012
9,696
4,721
2,651
1,436
802
749
26
130
4,695
2,735
1,164
693
760
27
93
4,541
2,597
1,336
607
719
27
144
4,425
2,845
1,938
661
717
28
159
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
5,099
5,032
3,478
3,143
3,866
3,546
3,796
4,394
Total noninterest expense
15,614
15,199
13,449
13,916
13,339
13,763
13,982
15,042
7,120
966
6,154
90
6,064
353
5,711
7,598
1,512
6,086
79
6,007
554
5,453
7,119
1,810
5,309
123
5,186
394
4,792
6,701
1,374
5,327
191
5,136
403
4,733
1.22
1.21
4,665.8
4,700.8
1.14
1.13
4,784.0
4,823.2
0.98
0.98
4,865.8
4,899.8
0.97
0.96
4,885.7
4,930.7
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
3,602
678
2,924
51
$
2,873
327
Wells Fargo net income applicable to common stock
$
2,546
Per share information
Earnings per common share
Diluted earnings per common share
Average common shares outstanding
$
0.61
0.60
6,116
1,304
4,812
202
4,610
573
4,037
0.93
0.92
7,632
1,294
6,338
132
6,206
358
5,848
1.31
1.30
6,848
881
5,967
107
5,860
353
5,507
1.21
1.20
4,197.1
4,358.5
4,469.4
4,551.5
Diluted average common shares outstanding
4,234.6
4,389.6
4,495.0
4,584.0
256
Wells Fargo & Company
Average Balances, Yields and Rates Paid (Taxable-Equivalent basis) - Quarterly (1) - (Unaudited)
(in millions)
Earning assets
Interest-earning deposits with banks
Federal funds sold and securities purchased under resale agreements
Debt securities (2):
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
Total held-to-maturity debt securities
Total debt securities
Mortgage loans held for sale (3)
Loans held for sale (3)
Loans:
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 (3)
Equity securities
Other
Funding sources
Deposits:
Total earning assets
Interest-bearing checking
Market rate and other savings
Savings certificates
Other time deposits
Deposits in non-U.S 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 (4)
Noninterest-earning assets
Cash and due from banks
Goodwill
Other
Total noninterest-earning assets
Noninterest-bearing funding sources
Deposits
Other liabilities
Total equity
Noninterest-bearing funding sources used to fund earning assets
Net noninterest-bearing funding sources
Total assets
Average prime rate
Average three-month London Interbank Offered Rate (LIBOR)
Average
balance
Yields/
rates
$
127,287
109,201
1.63% $
1.72
103,818
3.12
2019
Interest
income/
expense
Quarter ended December 31,
2018
Average
balance
Yields/
rates
Interest
income/
expense
150,091
76,108
2.18% $
2.22
90,110
3.52
523
472
811
70
354
1,038
53
1,091
395
1,910
248
123
593
1
965
3,686
234
15
2,747
577
1,255
239
214
5,032
1.79
3.58
2.58
4.40
2.63
3.88
2.92
2.19
3.88
2.49
3.28
2.51
2.84
3.90
4.13
3.84
3.40
4.07
4.71
4.41
3.90
3.66
2,678
5.32
403
12.26
1,233
5.04
600
6.60
571
4.92
5,485
4.37
10,517
2.81
269
22
1.36
3.51% $ 15,738
1.09% $
0.59
1.68
2.10
1.50
174
1,094
137
459
208
2,072
0.85
439
1.50
1,743
3.02
141
2.04
4,395
1.30
—
—
0.98
4,395
2.53% $ 11,343
15,636
39,502
161,146
4,745
165,891
40,497
261,526
45,109
12,701
95,303
39
153,152
518,496
23,985
1,365
283,650
67,307
122,136
20,076
19,421
512,590
292,388
30,147
39,898
47,274
34,239
443,946
956,536
38,278
6,478
1,781,626
63,292
732,705
32,358
87,069
54,751
970,175
115,949
230,430
27,279
1,343,833
437,793
1,781,626
19,943
26,389
113,885
160,217
351,738
53,879
192,393
(437,793)
160,217
1,941,843
$
$
$
$
$
$
$
$
825
426
794
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
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
4.02
2,868
5.60
491
12.69
1,211
5.16
592
6.95
637
5.25
5,799
4.79
11,396
2.79
261
18
1.78
3.93% $ 17,089
1.21% $
0.43
0.87
2.46
1.66
165
741
48
575
236
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
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
285,260
34,844
37,858
45,536
36,359
439,857
946,336
37,412
4,074
1,732,850
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
(1)
(2)
(3)
(4)
Yields/rates and amounts include the effects of hedge and risk management activities associated with the respective asset and liability categories.
Yields/rates are based on interest income/expense amounts for the period, annualized based on the accrual basis for the respective accounts. The average balance amounts represent amortized cost
for the periods presented.
Nonaccrual loans and related income are included in their respective loan categories.
Includes taxable-equivalent adjustments of $143 million and $168 million for the quarters ended December 31, 2019 and 2018, respectively, predominantly related to tax-exempt income on certain
loans and securities. The federal statutory tax rate was 21% for the periods ended December 31, 2019 and 2018.
Wells Fargo & Company
257
4.83%
1.93%
5.28%
2.62%
Glossary of Acronyms
Allowance for credit losses
Available-for-sale
Asset/Liability Management Committee
Adjustable-rate mortgage
LCR
LHFS
LIBOR
LIHTC
Liquidity coverage ratio
Loans held for sale
London Interbank Offered Rate
Low income housing tax credit
Accounting Standards Codification
LOCOM
Lower of cost or market value
ACL
AFS
ALCO
ARM
ASC
ASU
AUA
AUM
AVM
BCBS
BHC
CCAR
CD
CDS
CECL
CET1
CFPB
CLO
CLTV
CPI
CRE
DPD
ESOP
FASB
FDIC
FHA
FHLB
Accounting Standards Update
Assets under administration
Assets under management
Automated valuation model
Basel Committee on Bank Supervision
Bank holding company
Comprehensive Capital Analysis and Review
Certificate of deposit
Credit default swaps
Current expected credit loss
Common Equity Tier 1
Consumer Financial Protection Bureau
Collateralized loan obligation
Combined loan-to-value
Collateral protection insurance
Commercial real estate
Days past due
Employee Stock Ownership Plan
Financial Accounting Standards Board
Federal Deposit Insurance Corporation
Federal Housing Administration
Federal Home Loan Bank
FHLMC
Federal Home Loan Mortgage Corporation
FICO
FNMA
FRB
GAAP
GNMA
GSE
G-SIB
HQLA
HTM
Fair Isaac Corporation (credit rating)
Federal National Mortgage Association
Board of Governors of the Federal Reserve System
Generally accepted accounting principles
Government National Mortgage Association
Government-sponsored entity
Globally systemic important bank
High-quality liquid assets
Held-to-maturity
LTV
MBS
Loan-to-value
Mortgage-backed security
MLHFS
Mortgage loans held for sale
MSR
NAV
NPA
NSFR
OCC
OCI
OTC
OTTI
PCI
PTPP
RBC
RMBS
ROA
ROE
ROTCE
RWAs
SEC
S&P
SLR
SOFR
SPE
TDR
TLAC
VA
VaR
VIE
WIM
Mortgage servicing right
Net asset value
Nonperforming asset
Net stable funding ratio
Office of the Comptroller of the Currency
Other comprehensive income
Over-the-counter
Other-than-temporary impairment
Purchased credit-impaired
Pre-tax pre-provision profit
Risk-based capital
Residential mortgage-backed securities
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 debt restructuring
Total Loss Absorbing Capacity
Department of Veterans Affairs
Value-at-Risk
Variable interest entity
Wealth and Investment Management
258
Wells Fargo & Company
Stock Performance
These graphs compare the cumulative total stockholder return and total compound annual growth rate (CAGR) for
our common stock (NYSE: WFC) for the five- and ten-year periods ended December 31, 2019, 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
2014
$100
100
100
2015
$102
101
100
2016
$106
114
129
2017
$120
138
153
2018
$94
132
126
2019
$114
174
172
5-year
CAGR
3% Wells Fargo
12% S&P 500
11% 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
Wells Fargo
(WFC)
S&P 500
KBW Nasdaq
Bank Index
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
$100
$116
$105
$133
$182
$226
$230
$241
$272
$213
$259
100
100
115
123
117
95
136
126
180
174
205
190
208
191
233
245
284
291
271
239
357
326
10-year
CAGR
10% Wells Fargo
14% S&P 500
13% KBW Nasdaq
Bank Index
259
Wells 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 7,400 locations, more than 13,000 ATMs, the internet (wellsfargo.com)
and mobile banking, and has offices in 32 countries and territories to support customers who conduct business
in the global economy. With approximately 260,000 team members, Wells Fargo serves one in three households in the
United States. Wells Fargo & Company was ranked No. 29 on Fortune’s 2019 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
Our annual reports on Form 10-K, quarterly reports
New York Stock Exchange: WFC
4,134,425,937 common shares outstanding (12/31/19)
S T O 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
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
You can buy Wells Fargo stock directly from Wells Fargo,
even if you’re not a Wells Fargo stockholder, through
at www.sec.gov.
optional cash payments or automatic monthly deductions
F O R W A R D - L O O K I N G S T A T E M E N T S
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 2019 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 28282-1921.
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
S H A R E O W N E R S E R V I C E S
A N D T R A N S F E R A G E N T
A N N U A L S H A R E H O L D E R S ’
M E E T I N G
KPMG LLP
San Francisco, California
1-415-963-5100
I N V E S T O R R E L AT I O N S
1-415-371-2921
investorrelations@wellsfargo.com
EQ Shareowner Services
10 a.m. Mountain Daylight Time
P.O. Box 64874
Tuesday, April 28, 2020
St. Paul, Minnesota
The Grand America Hotel
55164-0874
1-877-840-0492
555 South Main Street
Salt Lake City, Utah
www.shareowneronline.com
84111-4100
260
Wells Fargo’s Extensive Network
LOCATIONS*
7.4K
ATMs
13K
CUSTOME RS
70M+
WELLSFARGO.C OM**
30.3M
digital (online and mobile) active customers
MOBILE BANKING**
24.4M
mobile active users
*Number of domestic and global locations. Includes Wells Fargo Advisors Private Client Group and Financial Network locations.
**Data as of November 2019.
N U M B E R O F D O M E S T I C L O C A T I O N S B Y S T AT E
WA
189
OR
128
MT
43
WY
30
ID
85
NV
119
CA
1,232
UT
115
CO
198
AZ
259
NM
91
AK
53
HI
6
Data as of December 31, 2019.
A R O U N D T H E W O R L D
ND
27
SD
55
NE
54
MN
182
IA
85
WI
82
MI
42
IL
103
IN
34
OH
63
KS
31
OK
15
TX
740
KY
9
TN
44
AL
140
MS
25
MO
36
AR
37
LA
20
ME
4
NY
191
9
6
5
1
8
WV
10
PA
324
7
4
2
3
VA
313
NC
352
SC
149
GA
302
FL
701
1
2
3
4
5
6
7
8
9
CT: 90
DC : 40
DE: 22
MD: 121
MA: 33
NH: 6
NJ: 336
RI: 6
VT: 7
t
r
o
p
e
R
l
a
u
n
n
A
9
1
0
2
|
Argentina
Australia
Bahamas
Bangladesh
Brazil
Canada
Cayman Islands
Chile
China
Colombia
Israel
Italy
Dominican Republic
Japan
France
Germany
Hong Kong
India
Ireland
Luxembourg
Netherlands
New Zealand
Philippines
Singapore
South Korea
Sweden
Taiwan
Thailand
United Arab Emirates
United Kingdom
Vietnam
W
E
L
L
S
F
A
R
G
O
W
E
L
L
S
F
A
R
G
O
&
C
O
M
P
A
N
Y
2
0
1
9
A
N
N
U
A
L
R
E
P
O
R
T
WEL LS FARGO & COMPANY
420 MONTGOMERY STREET | SAN FRA NC ISCO , CA | 94104
1- 866-87 8-58 65 | WELLSFARGO.COM
FPOFPO
© 2020 Wells Fargo & Company. All rights reserved.
Deposit products offered through Wells Fargo Bank, N.A. Member FDIC.
CCM3520 (Rev 00, 1/each)
Wells Fargo & Company
2019 Annual Report