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WELLS FARGO & COMPANY/MN - Quarter Report: 2020 June (Form 10-Q)



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2020  
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 001-2979
WELLS FARGO & COMPANY
(Exact name of registrant as specified in its charter)
Delaware
 
No.
41-0449260
 
(State of incorporation)
 
(I.R.S. Employer Identification No.)
 
420 Montgomery Street, San Francisco, California 94104
(Address of principal executive offices)  (Zip Code) 
Registrant’s telephone number, including area code:  1-866-249-3302 
 
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Trading Symbol
Name of Each Exchange
on Which Registered
Common Stock, par value $1-2/3
WFC
NYSE
7.5% Non-Cumulative Perpetual Convertible Class A Preferred Stock, Series L
WFC.PRL
NYSE
Depositary Shares, each representing a 1/1000th interest in a share of Non-Cumulative Perpetual Class A Preferred Stock, Series N
WFC.PRN
NYSE
Depositary Shares, each representing a 1/1000th interest in a share of Non-Cumulative Perpetual Class A Preferred Stock, Series O
WFC.PRO
NYSE
Depositary Shares, each representing a 1/1000th interest in a share of Non-Cumulative Perpetual Class A Preferred Stock, Series P
WFC.PRP
NYSE
Depositary Shares, each representing a 1/1000th interest in a share of 5.85% Fixed-to-Floating Rate Non-Cumulative Perpetual Class A Preferred Stock, Series Q
WFC.PRQ
NYSE
Depositary Shares, each representing a 1/1000th interest in a share of 6.625% Fixed-to-Floating Rate Non-Cumulative Perpetual Class A Preferred Stock, Series R
WFC.PRR
NYSE
Depositary Shares, each representing a 1/1000th interest in a share of Non-Cumulative Perpetual Class A Preferred Stock, Series T
WFC.PRT
NYSE
Depositary Shares, each representing a 1/1000th interest in a share of Non-Cumulative Perpetual Class A Preferred Stock, Series V
WFC.PRV
NYSE
Depositary Shares, each representing a 1/1000th interest in a share of Non-Cumulative Perpetual Class A Preferred Stock, Series W
WFC.PRW
NYSE
Depositary Shares, each representing a 1/1000th interest in a share of Non-Cumulative Perpetual Class A Preferred Stock, Series X
WFC.PRX
NYSE
Depositary Shares, each representing a 1/1000th interest in a share of Non-Cumulative Perpetual Class A Preferred Stock, Series Y
WFC.PRY
NYSE
Depositary Shares, each representing a 1/1000th interest in a share of Non-Cumulative Perpetual Class A Preferred Stock, Series Z
WFC.PRZ
NYSE
Guarantee of 5.80% Fixed-to-Floating Rate Normal Wachovia Income Trust Securities of Wachovia Capital Trust III
WFC/TP
NYSE
Guarantee of Medium-Term Notes, Series A, due October 30, 2028 of Wells Fargo Finance LLC
WFC/28A
NYSE
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.                     Yes þ   No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).                                Yes þ   No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
    Large accelerated filer   þ                    Accelerated filer ¨
Non-accelerated filer  ¨                     Smaller reporting company 
Emerging growth company  
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.            ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes  No þ
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
 
 
Shares Outstanding
 
 
July 24, 2020
Common stock, $1-2/3 par value
 
4,120,047,105
         




FORM 10-Q
 
CROSS-REFERENCE INDEX
 
PART I
Financial Information
 
Item 1.
Financial Statements
Page
 
Consolidated Statement of Income
 
Consolidated Statement of Comprehensive Income
 
Consolidated Balance Sheet
 
Consolidated Statement of Changes in Equity
 
Consolidated Statement of Cash Flows
 
Notes to Financial Statements
  
 
1

Summary of Significant Accounting Policies  
 
2

Business Combinations
 
3

Cash, Loan and Dividend Restrictions
 
4

Trading Activities
 
5

Available-for-Sale and Held-to-Maturity Debt Securities
 
6

Loans and Related Allowance for Credit Losses
 
7

Leasing Activity
 
8

Equity Securities
 
9

Other Assets
 
10

Securitizations and Variable Interest Entities
 
11

Mortgage Banking Activities
 
12

Intangible Assets
 
13

Guarantees, Pledged Assets and Collateral, and Other Commitments
 
14

Legal Actions
 
15

Derivatives
 
16

Fair Values of Assets and Liabilities
 
17

Preferred Stock
 
18

Revenue from Contracts with Customers
 
19

Employee Benefits and Other Expenses
 
20

Earnings and Dividends Per Common Share
 
21

Other Comprehensive Income
 
22

Operating Segments
 
23

Regulatory and Agency Capital Requirements
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations (Financial Review)
 
 
Summary Financial Data  
 
Overview
 
Earnings Performance
 
Balance Sheet Analysis
 
Off-Balance Sheet Arrangements  
 
Risk Management
 
Capital Management
 
Regulatory Matters
 
Critical Accounting Policies  
 
Current Accounting Developments
 
Forward-Looking Statements  
 
Risk Factors 
 
Glossary of Acronyms
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
Item 4.
Controls and Procedures
 
 
 
PART II
Other Information
 
Item 1.
Legal Proceedings
Item 1A.
Risk Factors
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
Item 6.
Exhibits
 
 
 
 
 
Signature

1



PART I - FINANCIAL INFORMATION

FINANCIAL REVIEW
Summary Financial Data
 
 
 
 
 
 
 
 
 
 
  
 
  
 
  
 
 
 
 
 
 
 
% Change
 
 
  
 
  
 
  
 
Quarter ended
 
 
Jun 30, 2020 from
 
 
Six months ended
 
 
  

($ in millions, except per share amounts)
Jun 30,
2020

 
Mar 31,
2020

 
Jun 30,
2019

 
Mar 31,
2020

 
Jun 30,
2019

 
Jun 30,
2020


Jun 30,
2019

 
%
Change

For the Period
 
 
 
 
 
 
 
 
 
 
  
 
  
 
  
Wells Fargo net income (loss)
$
(2,379
)
 
653

 
6,206

 
NM

 
NM

 
$
(1,726
)
 
12,066

 
NM

Wells Fargo net income (loss) applicable to common stock
(2,694
)
 
42

 
5,848

 
NM

 
NM

 
(2,652
)
 
11,355

 
NM

Diluted earnings (loss) per common share
(0.66
)
 
0.01

 
1.30

 
NM

 
NM

 
(0.65
)
 
2.50

 
NM

Profitability ratios (annualized):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Wells Fargo net income (loss) to average assets (ROA)
(0.49
)%
 
0.13

 
1.31

 
NM

 
NM

 
(0.18
)%
 
1.29

 
NM

Wells Fargo net income (loss) applicable to common stock to average Wells Fargo common stockholders’ equity (ROE)
(6.63
)
 
0.10

 
13.26

 
NM

 
NM

 
(3.23
)
 
12.99

 
NM

Return on average tangible common equity (ROTCE) (1)
(8.00
)
 
0.12

 
15.78

 
NM

 
NM

 
(3.89
)
 
15.47

 
NM

Efficiency ratio (2)
81.6

 
73.6

 
62.3

 
11

 
31

 
77.6

 
63.4

 
22

Total revenue
$
17,836

 
17,717

 
21,584

 
1

 
(17
)
 
$
35,553

 
43,193

 
(18
)
Pre-tax pre-provision profit (PTPP) (3)
3,285

 
4,669

 
8,135

 
(30
)
 
(60
)
 
7,954

 
15,828

 
(50
)
Dividends declared per common share
0.51

 
0.51

 
0.45

 

 
13

 
1.02

 
0.90

 
13

Average common shares outstanding
4,105.5

 
4,104.8

 
4,469.4

 

 
(8
)
 
4,105.2

 
4,510.2

 
(9
)
Diluted average common shares outstanding (4)
4,105.5

 
4,135.3

 
4,495.0

 
(1
)
 
(9
)
 
4,105.2

 
4,540.1

 
(10
)
Average loans
$
971,266

 
965,046

 
947,460

 
1

 
3

 
$
968,156

 
948,728

 
2

Average assets
1,948,939

 
1,950,659

 
1,900,627

 

 
3

 
1,949,799

 
1,891,907

 
3

Average total deposits
1,386,656

 
1,337,963

 
1,268,979

 
4

 
9

 
1,362,309

 
1,265,539

 
8

Average consumer and small business banking deposits (5)
857,943

 
779,521

 
742,671

 
10

 
16

 
819,791

 
741,171

 
11

Net interest margin
2.25
 %
 
2.58

 
2.82

 
(13
)
 
(20
)
 
2.42
 %
 
2.86

 
(15
)
At Period End
 
 
 
 
 
 
 
 
 
 
  
 
  
 
  
Debt securities
$
472,580

 
501,563

 
482,067

 
(6
)
 
(2
)
 
$
472,580

 
482,067

 
(2
)
Loans
935,155

 
1,009,843

 
949,878

 
(7
)
 
(2
)
 
935,155

 
949,878

 
(2
)
Allowance for loan losses
18,926

 
11,263

 
9,692

 
68

 
95

 
18,926

 
9,692

 
95

Goodwill
26,385

 
26,381

 
26,415

 

 

 
26,385

 
26,415

 

Equity securities
52,494

 
54,047

 
61,537

 
(3
)
 
(15
)
 
52,494

 
61,537

 
(15
)
Assets
1,968,766

 
1,981,349

 
1,923,388

 
(1
)
 
2

 
1,968,766

 
1,923,388

 
2

Deposits
1,410,711

 
1,376,532

 
1,288,426

 
2

 
9

 
1,410,711

 
1,288,426

 
9

Common stockholders’ equity
159,322

 
162,654

 
177,235

 
(2
)
 
(10
)
 
159,322

 
177,235

 
(10
)
Wells Fargo stockholders’ equity
179,386

 
182,718

 
199,042

 
(2
)
 
(10
)
 
179,386

 
199,042

 
(10
)
Total equity
180,122

 
183,330

 
200,037

 
(2
)
 
(10
)
 
180,122

 
200,037

 
(10
)
Tangible common equity (1)
131,329

 
134,787

 
148,864

 
(3
)
 
(12
)
 
131,329

 
148,864

 
(12
)
Capital ratios (6):
 
 
 
 
 
 
 
 
 
 
  
 
  
 
  
Total equity to assets
9.15
 %
 
9.25

 
10.40

 
(1
)
 
(12
)
 
9.15
 %
 
10.40

 
(12
)
Risk-based capital:
 
 
 
 
 
 
 
 


 
  
 
  
 


Common Equity Tier 1
10.97

 
10.67

 
11.97

 
3

 
(8
)
 
10.97

 
11.97

 
(8
)
Tier 1 capital
12.60

 
12.22

 
13.69

 
3

 
(8
)
 
12.60

 
13.69

 
(8
)
Total capital
15.29

 
15.21

 
16.75

 
1

 
(9
)
 
15.29

 
16.75

 
(9
)
Tier 1 leverage
7.95

 
8.03

 
9.12

 
(1
)
 
(13
)
 
7.95

 
9.12

 
(13
)
Common shares outstanding
4,119.6

 
4,096.4

 
4,419.6

 
1

 
(7
)
 
4,119.6

 
4,419.6

 
(7
)
Book value per common share (7)
$
38.67

 
39.71

 
40.10

 
(3
)
 
(4
)
 
$
38.67

 
40.10

 
(4
)
Tangible book value per common share (1)(7)
31.88

 
32.90

 
33.68

 
(3
)
 
(5
)
 
31.88

 
33.68

 
(5
)
Team members (active, full-time equivalent)
266,300

 
262,800

 
262,800

 
1

 
1

 
266,300

 
262,800

 
1

(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 generally accepted accounting principles (GAAP) financial measures, see the “Capital Management – Tangible Common Equity” section in this Report.
(2)
The efficiency ratio is noninterest expense divided by total revenue (net interest income and noninterest income).
(3)
Pre-tax pre-provision profit (PTPP) is total revenue less noninterest expense. Management believes that PTPP is a useful financial measure because it enables investors and others to assess the Company’s ability to generate capital to cover credit losses through a credit cycle.
(4)
In second quarter 2020, diluted average common shares outstanding equaled average common shares outstanding because our securities convertible into common shares had an anti-dilutive effect.
(5)
Consumer and small business banking deposits are total deposits excluding mortgage escrow and wholesale deposits.
(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 reflects fully phased-in common equity tier 1 capital, tier 1 capital and risk-weighted assets, but reflects total capital still in accordance with Transition Requirements. See the “Capital Management” section and Note 23 (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.

2

Overview (continued)

This Quarterly 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” section, and in the “Risk Factors” and “Regulation and Supervision” sections 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 $1.97 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 7,300 locations, more than 13,000 ATMs, digital (online, mobile and social), and contact centers (phone, email and correspondence), and we have offices in 31 countries and territories to support customers who conduct business in the global economy. With approximately 266,000 active, full-time equivalent team members, we serve one in three households in the United States and ranked No. 30 on Fortune’s 2020 rankings of America’s largest corporations. We ranked fourth in both assets and in the market value of our common stock among all U.S. banks at June 30, 2020.
Wells Fargo’s top priority remains meeting its regulatory requirements 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 an appropriate culture in place.
In response to the COVID-19 pandemic, we have been working diligently to protect employee safety while continuing to carry out Wells Fargo’s role as a provider of critical and essential services to the public. We have taken comprehensive steps to help customers, employees and communities.
For our customers, we have suspended residential property foreclosure activities, offered fee waivers, and provided payment deferrals, among other actions. We have also rapidly expanded digital access and deployed new tools, including changes to our ATMs and mobile technology for the convenience of our customers.
For our employees, we have enabled approximately 200,000 to work remotely. For jobs that cannot be done from home, we have taken significant actions to help ensure employee safety, including adopting social distancing measures, requiring employees to wear facial coverings, and implementing an enhanced cleaning program.
To support our communities, we are directing $175 million in charitable donations from the Wells Fargo Foundation to help address food, shelter, small business and housing stability, as well as providing help to public health organizations fighting to contain the spread of COVID-19. We have also committed to donating the gross processing fees received from the Paycheck Protection Program to help small businesses impacted by the COVID-19 pandemic and will work with nonprofit organizations to provide capital, technical support, and long-term resiliency programs to small businesses with an emphasis on serving minority-owned businesses.
 
We have strong levels of capital and liquidity, and we remain focused on delivering for our customers and communities to get through these unprecedented times.

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 as defined under the consent order will be limited to the level as of December 31, 2017. Compliance with this asset cap is measured on a two-quarter daily average basis to allow for management of temporary fluctuations. Due to the COVID-19 pandemic, on April 8, 2020, the FRB amended the consent order to allow the Company to exclude from the asset cap any on-balance sheet exposure resulting from loans made by the Company in connection with the Small Business Administration’s Paycheck Protection Program and the FRB’s Main Street Lending Program. As required under the amendment to the consent order, certain fees and other economic benefits received by the Company from loans made in connection with these programs shall be transferred to the U.S. Treasury or to non-profit organizations approved by the FRB that support small businesses. 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

3


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 (CPI) 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” section in our 2019 Form 10-K and Note 14 (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 in our 2019 Form 10-K and Note 14 (Legal Actions) to Financial Statements in this Report.

Financial Performance
Wells Fargo had a net loss of $2.4 billion in second quarter 2020 with diluted loss per common share of $0.66, compared with net income of $6.2 billion and diluted income per common share (EPS) of $1.30 a year ago. Financial performance items for second quarter 2020 compared with the same period a year ago included:
revenue of $17.8 billion, down $3.7 billion, with net interest income of $9.9 billion, down $2.2 billion, or 18%, and noninterest income of $8.0 billion, down $1.5 billion, or 16%;
 
a net interest margin of 2.25%, down 57 basis points;
provision for credit losses of $9.5 billion, up $9.0 billion;
noninterest expense of $14.6 billion, up $1.1 billion, or 8%;
an efficiency ratio of 81.6%, compared with 62.3%;
average loans of $971.3 billion, up $23.8 billion;
average deposits of $1.39 trillion, up $117.7 billion;
net loan charge-off rate of 0.46% (annualized) of average loans, compared with 0.28% (annualized);
nonaccrual loans of $7.6 billion, up $1.7 billion, or 28%; and
return on assets (ROA) of (0.49)% and return on equity (ROE) of (6.63)%, down from 1.31% and 13.26%, respectively.

Balance Sheet and Liquidity
Our balance sheet remained strong during second quarter 2020 with solid levels of liquidity and capital. Our total assets were $1.97 trillion at June 30, 2020. Cash and other short-term investments increased $98.4 billion from December 31, 2019, reflecting an increase in cash balances, partially offset by lower federal funds sold and securities purchased under resale agreements. Debt securities decreased $24.5 billion from December 31, 2019, predominantly due to a decrease in available-for-sale debt securities, partially offset by an increase in held-to-maturity debt securities. Loans decreased $27.1 billion from December 31, 2019, due to paydowns in real estate 1-4 family mortgage loans, credit card loans, and commercial and industrial loans, as well as the designation in second quarter 2020 of real estate 1-4 family mortgage loans as mortgage loans held for sale (MLHFS). The decrease in loans was partially offset by an increase in commercial real estate loans driven by new originations and draws on construction loans.
Average deposits in second quarter 2020 were $1.39 trillion, up $117.7 billion from second quarter 2019, on growth across the deposit gathering businesses reflecting customers’ preferences for liquidity due to the COVID-19 pandemic.

Credit Quality
Credit quality declined due to the economic impact that the COVID-19 pandemic had on our customer base.
Net loan charge-offs were $1.1 billion, or 0.46% (annualized) of average loans, in second quarter 2020, compared with $653 million a year ago (0.28%)(annualized). Our commercial portfolio net loan charge-offs were $602 million, or 44 basis points (annualized) of average commercial loans, in second quarter 2020, compared with net loan charge-offs of $165 million, or 13 basis points (annualized), a year ago, predominantly driven by increased losses in our commercial and industrial and commercial real estate loan portfolios. The increased losses in our commercial and industrial portfolio were primarily related to higher net loan charge-offs in our oil and gas portfolio. Our consumer portfolio net loan charge-offs were $511 million, or 48 basis points (annualized) of average consumer loans, in second quarter 2020, compared with net loan charge-offs of $488 million, or 45 basis points (annualized), a year ago, predominantly driven by increased losses in our residential real estate and automobile loan portfolios, partially offset by lower losses in our credit card and other revolving credit and installment loan portfolios.
The allowance for credit losses (ACL) for loans of $20.4 billion at June 30, 2020, increased $9.8 billion, compared with a year ago, and increased $10.0 billion from December 31, 2019. We had a $11.4 billion increase in the allowance for credit losses for loans in the first half of 2020, partially offset by a $1.3 billion decrease as a result of our adoption on January 1, 2020, of Accounting Standards Update (ASU) 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial

4

Overview (continued)

Instruments (CECL). The allowance coverage for total loans was 2.19% at June 30, 2020, compared with 1.12% a year ago and 1.09% at December 31, 2019. The allowance covered 4.6 times annualized net loan charge-offs in second quarter 2020, compared with 4.0 times in second quarter 2019. Our provision for credit losses for loans was $9.6 billion in second quarter 2020, up from $503 million a year ago. The increase in the allowance for credit losses for loans and the provision for credit losses reflected current and forecasted economic conditions due to the COVID-19 pandemic.
Nonperforming assets (NPAs) at June 30, 2020, of $7.8 billion, increased $1.4 billion, or 22%, from March 31, 2020, and $2.2 billion, or 38%, from December 31, 2019, and represented 0.83% of total loans at June 30, 2020. Nonaccrual loans increased $1.4 billion from March 31, 2020, due to increases in commercial loans driven by the oil and gas portfolio and increases in real estate mortgage loans, as the economic impact of the COVID-19 pandemic continued to impact our customer base. Foreclosed assets decreased $57 million from March 31, 2020. For information on how we are assisting our customers in response to the COVID-19 pandemic, see the “Risk Management – Credit Risk Management” section in this Report.

Capital
We maintained a solid capital position in the first half of 2020, with total equity of $180.1 billion at June 30, 2020, compared with $188.0 billion at December 31, 2019. We reduced our common shares outstanding by 14.9 million shares from December 31, 2019, through share repurchases, partially offset by issuances and conversions of preferred shares. On March 15, 2020, we, along with the other members of the Financial Services Forum (which consists of the eight largest and most diversified financial institutions headquartered in the U.S.), decided to temporarily suspend share repurchases for the remainder of the first quarter and for second quarter 2020. On June 25, 2020, the FRB announced that it was prohibiting large bank holding companies (BHCs) subject to the FRB’s capital plan rule, including Wells Fargo, from making any capital distribution (excluding any capital distribution arising from the issuance of a capital instrument eligible for inclusion in the numerator of a regulatory capital ratio), unless otherwise approved by the FRB. Through the end of third quarter 2020, the FRB authorized certain limited exceptions to this prohibition, which are described in the “Capital Management – Capital Planning and Stress Testing” section in this Report.
 
In first quarter 2020, we issued $2.0 billion of Non-Cumulative Perpetual Class A Preferred Stock, Series Z. Additionally, we redeemed the remaining $1.8 billion of our Fixed-to-Floating Rate Non-Cumulative Perpetual Class A Preferred Stock, Series K. We also redeemed $669 million of our Non-Cumulative Perpetual Class A Preferred Stock, Series T.
On July 28, 2020, the Company reduced its third quarter 2020 common stock dividend to $0.10 per share.
We believe an important measure of our capital strength is the Common Equity Tier 1 (CET1) ratio, which was 10.97% at June 30, 2020, down from 11.14% at December 31, 2019, but still above our internal target of 10% and the regulatory minimum of 9%. As of June 30, 2020, our eligible external total loss absorbing capacity (TLAC) as a percentage of total risk-weighted assets was 25.33%, compared with the required minimum of 22.0%. Likewise, our other regulatory capital ratios remained strong. See the “Capital Management” section in this Report for more information regarding our capital, including the calculation of our regulatory capital amounts.

5


Earnings Performance 
Wells Fargo net loss for second quarter 2020 was $2.4 billion ($0.66 diluted loss per common share), compared with net income of $6.2 billion ($1.30 diluted income per common share) in the same period a year ago. Net income decreased to a net loss in second quarter 2020, compared with the same period a year ago, due to a $2.2 billion decrease in net interest income, a $9.0 billion increase in our provision for credit losses, a $1.5 billion decrease in noninterest income, and a $1.1 billion increase in noninterest expense, partially offset by a $5.2 billion decrease in income tax expense. Net loss for the first half of 2020 was $1.7 billion, compared with net income of $12.1 billion in the same period a year ago. Net income decreased to a net loss in the first half of 2020, compared with the same period a year ago, due to a $3.2 billion decrease in net interest income, a $12.2 billion increase in our provision for credit losses, a $4.4 billion decrease in noninterest income, and a $234 million increase in noninterest expense, partially offset by a $5.9 billion decrease in income tax expense.
 
Revenue, the sum of net interest income and noninterest income, was $17.8 billion in second quarter 2020, compared with $21.6 billion in the same period a year ago. Revenue for the first half of 2020 was $35.6 billion, compared with $43.2 billion in the same period a year ago. Net interest income represented 55% of revenue in second quarter 2020, compared with 56% in the same period a year ago, and 60% of revenue in the first half of 2020, compared with 57% in the same period a year ago. Noninterest income represented 45% of revenue in second quarter 2020, compared with 44% in the same period a year ago, and 40% of revenue in the first half of 2020, compared with 43% in the same period a year ago.


6

Earnings Performance (continued)




Net Interest Income
Net interest income is the interest earned on debt securities, loans (including yield-related loan fees) and other interest-earning assets minus the interest paid on deposits, short-term borrowings and long-term debt. The net interest margin is the average yield on earning assets minus the average interest rate paid for deposits and our other sources of funding. Net interest income and the net interest margin are presented on a taxable-equivalent basis in Table 1 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 ending June 30, 2020 and 2019.
Net interest income and the net interest margin in any one period can be significantly affected by a variety of factors including the mix of earning assets in our portfolio, the 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 $10.0 billion and $21.5 billion in the second quarter and first half of 2020, respectively, compared with $12.3 billion and $24.7 billion for the same periods a year ago. Net interest margin on a taxable-equivalent basis was 2.25% and 2.42% in the second quarter and first half of 2020, respectively, compared with 2.82% and 2.86% for the same periods a year ago. The decrease in net interest income and net interest margin in the second quarter and first half of 2020, compared with the same periods a year ago, was driven by unfavorable impacts of repricing due to lower market rates and changes in mix of earning assets and funding sources, including sales of high yielding Pick-a-Pay loans in 2019.
Average earning assets increased $40.0 billion in second quarter 2020, compared with the same period a year ago. The change was driven by increases in:
average interest-earning deposits with banks of $35.3 billion;
average loans of $23.8 billion;
average mortgage loans held for sale of $7.5 billion; and
other earning assets of $3.0 billion;
partially offset by decreases in:
average federal funds sold and securities purchased under resale agreements of $21.7 billion; and
average equity securities of $7.8 billion.


 
Average earning assets increased $44.9 billion in the first half of 2020, compared with the same period a year ago. The change was driven by increases in:
average loans of $19.4 billion;
average interest-earning deposits with banks of $12.0 billion;
average mortgage loans held for sale of $7.0 billion;
average debt securities of $4.2 billion;
other earning assets of $3.0 billion; and
average federal funds sold and securities purchased under resale agreements of $1.1 billion;
partially offset by decreases in:
average equity securities of $1.7 billion.

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 $1.39 trillion and $1.36 trillion in the second quarter and first half of 2020, respectively, compared with $1.27 trillion for both the second quarter and first half of 2019, and represented 143% of average loans in second quarter 2020 and 141% in the first half of 2020, compared with 134% in second quarter 2019 and 133% in the first half of 2019. Average deposits were 78% and 76% of average earning assets in the second quarter and first half of 2020, compared with 73% in both periods a year ago. The average deposit cost for second quarter 2020 was 17 basis points, down 53 basis points from a year ago, reflecting the lower interest rate environment.

7


Table 1: Average Balances, Yields and Rates Paid (Taxable-Equivalent Basis) (1)
  
Quarter ended June 30,
 
 
 
 
 
 
2020

 
 
 
 
 
2019

(in millions)
Average
balance

 
Yields/
rates

 
Interest
income/
expense

 
Average
balance

 
Yields/
rates

 
Interest
income/
expense

Earning assets
 
 
 
 
 
 
 
 
 
 
 
Interest-earning deposits with banks
$
176,327

 
0.12
 %
 
$
51

 
141,045

 
2.33
%
 
$
819

Federal funds sold and securities purchased under resale agreements
76,384

 
0.01

 
2

 
98,130

 
2.44

 
598

Debt securities (2): 
 
 
 
 
 
 
 
 
 
 
 
Trading debt securities
96,049

 
2.76

 
663

 
86,514

 
3.45

 
746

Available-for-sale debt securities:
 
 
 
 
 
 
 
 
 
 
 
Securities of U.S. Treasury and federal agencies
9,452

 
0.83

 
19

 
15,402

 
2.21

 
85

Securities of U.S. states and political subdivisions
35,728

 
2.98

 
267

 
45,769

 
4.02

 
460

Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
Federal agencies
143,600

 
2.33

 
837

 
149,761

 
2.99

 
1,120

Residential and commercial
4,433

 
2.27

 
25

 
5,562

 
4.02

 
56

Total mortgage-backed securities
148,033

 
2.33

 
862

 
155,323

 
3.03

 
1,176

Other debt securities
39,231

 
2.75

 
268

 
45,063

 
4.40

 
494

Total available-for-sale debt securities
232,444

 
2.44

 
1,416

 
261,557

 
3.39

 
2,215

Held-to-maturity debt securities:
 
 
 
 
 
 
 
 
 
 
 
Securities of U.S. Treasury and federal agencies
48,574

 
2.14

 
258

 
44,762

 
2.19

 
244

Securities of U.S. states and political subdivisions
14,168

 
3.81

 
135

 
6,958

 
4.06

 
71

Federal agency and other mortgage-backed securities
104,047

 
2.21

 
575

 
95,506

 
2.64

 
632

Other debt securities
15

 
2.58

 

 
58

 
3.86

 

Total held-to-maturity debt securities
166,804

 
2.33

 
968

 
147,284

 
2.57

 
947

Total debt securities
495,297

 
2.46

 
3,047

 
495,355

 
3.16

 
3,908

Mortgage loans held for sale (3)
25,960

 
3.55

 
230

 
18,464

 
4.22

 
195

Loans held for sale (3)
1,650

 
1.87

 
7

 
1,642

 
4.80

 
20

Loans:
 
 
 
 
 
 
 
 
 
 
 
Commercial loans:
 
 
 
 
 
 
 
 
 
 
 
Commercial and industrial – U.S.
310,104

 
2.58

 
1,990

 
285,084

 
4.47

 
3,176

Commercial and industrial – Non-U.S.
72,241

 
2.48

 
445

 
62,905

 
3.90

 
611

Real estate mortgage
123,525

 
3.03

 
930

 
121,869

 
4.58

 
1,390

Real estate construction
21,361

 
3.37

 
179

 
21,568

 
5.36

 
288

Lease financing
18,087

 
4.34

 
196

 
19,133

 
4.71

 
226

Total commercial loans
545,318

 
2.76

 
3,740

 
510,559

 
4.47

 
5,691

Consumer loans:
 
 
 
 
 
 
 
 
 
 
 
Real estate 1-4 family first mortgage
280,878

 
3.44

 
2,414

 
286,169

 
3.88

 
2,776

Real estate 1-4 family junior lien mortgage
27,700

 
4.24

 
292

 
32,609

 
5.75

 
468

Credit card
36,539

 
10.78

 
979

 
38,154

 
12.65

 
1,204

Automobile
48,441

 
4.99

 
601

 
45,179

 
5.23

 
589

Other revolving credit and installment
32,390

 
5.45

 
440

 
34,790

 
7.12

 
617

Total consumer loans
425,948

 
4.45

 
4,726

 
436,901

 
5.18

 
5,654

Total loans (3)
971,266

 
3.50

 
8,466

 
947,460

 
4.80

 
11,345

Equity securities
27,417

 
1.70

 
117

 
35,215

 
2.70

 
237

Other
7,715

 
(0.02
)
 

 
4,693

 
1.76

 
20

Total earning assets
$
1,782,016

 
2.68
 %
 
$
11,920

 
1,742,004

 
3.94
%
 
$
17,142

Funding sources
 
 
 
 
 
 
 
 
 
 
 
Deposits:
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing checking
$
53,592

 
0.07
 %
 
$
9

 
57,549

 
1.46
%
 
$
210

Market rate and other savings
799,949

 
0.16

 
311

 
690,677

 
0.59

 
1,009

Savings certificates
27,051

 
1.11

 
75

 
30,620

 
1.62

 
124

Other time deposits
59,920

 
1.01

 
149

 
96,887

 
2.61

 
630

Deposits in non-U.S. offices
37,682

 
0.44

 
41

 
51,875

 
1.86

 
240

Total interest-bearing deposits
978,194

 
0.24

 
585

 
927,608

 
0.96

 
2,213

Short-term borrowings
63,535

 
(0.10
)
 
(17
)
 
114,754

 
2.26

 
646

Long-term debt
232,395

 
2.13

 
1,237

 
236,734

 
3.21

 
1,900

Other liabilities
29,947

 
1.53

 
116

 
24,314

 
2.18

 
132

Total interest-bearing liabilities
1,304,071

 
0.59

 
1,921

 
1,303,410

 
1.50

 
4,891

Portion of noninterest-bearing funding sources
477,945

 

 

 
438,594

 

 

Total funding sources
$
1,782,016

 
0.43

 
1,921

 
1,742,004

 
1.12

 
4,891

Net interest margin and net interest income on a taxable-equivalent basis (4)
 
 
2.25
 %
 
$
9,999

 
 
 
2.82
%
 
$
12,251

Noninterest-earning assets
 
 
 
 
 
 
 
 
 
 
 
Cash and due from banks
$
21,227

 
  
 
  
 
19,475

 
  
 
  
Goodwill
26,384

 
  
 
  
 
26,415

 
  
 
  
Other
119,312

 
 
 
 
 
112,733

 
 
 
 
Total noninterest-earning assets
$
166,923

 
 
 
 
 
158,623

 
 
 
 
Noninterest-bearing funding sources
 
 
 
 
 
 
  
 
 
 
 
Deposits
$
408,462

 
 
 
 
 
341,371

 
 
 
 
Other liabilities
52,298

 
 
 
 
 
56,161

 
 
 
 
Total equity
184,108

 
 
 
 
 
199,685

 
 
 
 
Noninterest-bearing funding sources used to fund earning assets
(477,945
)
 
 
 
 
 
(438,594
)
 
 
 
 
Net noninterest-bearing funding sources
$
166,923

 
 
 
 
 
158,623

 
 
 
 
Total assets
$
1,948,939

 
 
 
 
 
1,900,627

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Average prime rate
 
 
3.25
 %
 
 
 
 
 
5.50
%
 
 
Average three-month London Interbank Offered Rate (LIBOR)
 
 
0.60

 
 
 
 
 
2.51

 
 
(1)
Yields/rates and amounts include the effects of hedge and risk management activities associated with the respective asset and liability categories.
(2)
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.
(3)
Nonaccrual loans and related income are included in their respective loan categories.
(4)
Includes taxable-equivalent adjustments of $119 million and $156 million for the quarters ended June 30, 2020 and 2019, respectively, and $259 million and $318 million for the first half of 2020 and 2019, respectively, predominantly related to tax-exempt income on certain loans and securities.

8




 
Six months ended June 30,
 
 
  
 
  
 
2020

 
  
 
  
 
2019

(in millions)
Average
balance

 
Yields/
rates

 
Interest
income/
expense

 
Average
balance

 
Yields/
rates

 
Interest
income/
expense

Earning assets
 
 
 
 
 
 
 
 
 
 
 
Interest-earning deposits with banks
$
152,924

 
0.57
%
 
$
432

 
140,915

 
2.33
%
 
$
1,629

Federal funds sold and securities purchased under resale agreements
91,969

 
0.84

 
382

 
90,875

 
2.42

 
1,093

Debt securities (2):
 
 
 
 
 
 
 
 
 
 
 
Trading debt securities
98,556

 
2.91

 
1,433

 
87,938

 
3.52

 
1,544

Available-for-sale debt securities: 
 
 
 
 
 
 
 
 
 
 
 
Securities of U.S. Treasury and federal agencies
10,116

 
1.14

 
57

 
14,740

 
2.18

 
159

Securities of U.S. states and political subdivisions
37,340

 
3.22

 
601

 
47,049

 
4.02

 
946

Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
Federal agencies
151,119

 
2.51

 
1,899

 
150,623

 
3.04

 
2,293

Residential and commercial
4,540

 
2.55

 
58

 
5,772

 
4.17

 
120

Total mortgage-backed securities
155,659

 
2.51

 
1,957

 
156,395

 
3.09

 
2,413

Other debt securities
39,386

 
3.11

 
611

 
45,920

 
4.43

 
1,011

Total available-for-sale debt securities
242,501

 
2.66

 
3,226

 
264,104

 
3.44

 
4,529

Held-to-maturity debt securities:
 
 
 
 
 
 
 
 
 
 
 
Securities of U.S. Treasury and federal agencies
47,255

 
2.17

 
509

 
44,758

 
2.20

 
487

Securities of U.S. states and political subdivisions
13,852

 
3.82

 
265

 
6,560

 
4.05

 
133

Federal agency and other mortgage-backed securities
101,221

 
2.38

 
1,203

 
95,753

 
2.69

 
1,288

Other debt securities
20

 
2.90

 

 
60

 
3.91

 
1

Total held-to-maturity debt securities
162,348

 
2.44

 
1,977

 
147,131

 
2.60

 
1,909

Total debt securities
503,405

 
2.64

 
6,636

 
499,173

 
3.20

 
7,982

Mortgage loans held for sale (3)
23,161

 
3.69

 
427

 
16,193

 
4.28

 
347

Loans held for sale (3)
1,567

 
2.49

 
19

 
1,752

 
5.04

 
44

Loans:
 
 
 
 
 
 
 
 
 
 
 
Commercial loans:
  
 
 
 
  
 
  
 
 
 
  
Commercial and industrial – U.S.
299,303

 
3.05

 
4,536

 
285,827

 
4.47

 
6,345

Commercial and industrial – Non U.S.
71,451

 
2.82

 
1,001

 
62,863

 
3.90

 
1,215

Real estate mortgage
122,656

 
3.47

 
2,117

 
121,644

 
4.58

 
2,763

Real estate construction
20,819

 
3.94

 
408

 
21,999

 
5.40

 
589

Lease financing
18,687

 
4.37

 
408

 
19,261

 
4.66

 
450

Total commercial loans
532,916

 
3.19

 
8,470

 
511,594

 
4.48

 
11,362

Consumer loans:
 
 
 
 
 
 
 
 
 
 
 
Real estate 1-4 family first mortgage
287,217

 
3.53

 
5,064

 
285,694

 
3.92

 
5,597

Real estate 1-4 family junior lien mortgage
28,303

 
4.70

 
662

 
33,197

 
5.75

 
949

Credit card
38,147

 
11.53

 
2,186

 
38,168

 
12.76

 
2,416

Automobile
48,350

 
4.98

 
1,197

 
45,007

 
5.21

 
1,163

Other revolving credit and installment
33,223

 
5.89

 
974

 
35,068

 
7.13

 
1,240

Total consumer loans
435,240

 
4.65

 
10,083

 
437,134

 
5.22

 
11,365

Total loans (3)
968,156

 
3.85

 
18,553

 
948,728

 
4.82

 
22,727

Equity securities
32,475

 
2.00

 
325

 
34,154

 
2.63

 
448

Other
7,573

 
0.37

 
14

 
4,555

 
1.69

 
38

Total earning assets
$
1,781,230

 
3.02
%
 
$
26,788

 
1,736,345

 
3.97
%
 
$
34,308

Funding sources
 
 
 
 
 
 
 
 
 
 
 
Deposits:
  
 
 
 
  
 
  
 
 
 
  
Interest-bearing checking
$
58,339

 
0.50
%
 
$
144

 
56,905

 
1.44
%
 
$
407

Market rate and other savings
781,044

 
0.33

 
1,289

 
689,628

 
0.54

 
1,856

Savings certificates
28,575

 
1.30

 
185

 
27,940

 
1.46

 
202

Other time deposits
70,949

 
1.43

 
505

 
97,356

 
2.64

 
1,275

Deposits in non-U.S. offices
45,508

 
0.90

 
204

 
53,649

 
1.88

 
499

Total interest-bearing deposits
984,415

 
0.48

 
2,327

 
925,478

 
0.92

 
4,239

Short-term borrowings
83,256

 
0.66

 
275

 
111,719

 
2.24

 
1,243

Long-term debt
230,699

 
2.15

 
2,477

 
234,963

 
3.27

 
3,827

Other liabilities
30,073

 
1.71

 
258

 
24,801

 
2.23

 
275

Total interest-bearing liabilities
1,328,443

 
0.81

 
5,337

 
1,296,961

 
1.49

 
9,584

Portion of noninterest-bearing funding sources
452,787

 

 

 
439,384

 

 

Total funding sources
$
1,781,230

 
0.60

 
5,337

 
1,736,345

 
1.11

 
9,584

Net interest margin and net interest income on a taxable-equivalent basis (4)
  
 
2.42
%
 
$
21,451

 
  
 
2.86
%
 
$
24,724

Noninterest-earning assets
  
 
  
 
  
 
  
 
  
 
  
Cash and due from banks
$
20,899

 
 
 
 
 
19,544

 
 
 
 
Goodwill
26,386

 
 
 
 
 
26,417

 
 
 
 
Other
121,284

 
 
 
 
 
109,601

 
 
 
 
Total noninterest-earning assets
$
168,569

 
 
 
 
 
155,562

 
 
 
 
Noninterest-bearing funding sources
  
 
 
 
 
 
  
 
 
 
 
Deposits
$
377,894

 
 
 
 
 
340,061

 
 
 
 
Other liabilities
57,323

 
 
 
 
 
55,864

 
 
 
 
Total equity
186,139

 
 
 
 
 
199,021

 
 
 
 
Noninterest-bearing funding sources used to fund earning assets
(452,787
)
 
 
 
 
 
(439,384
)
 
 
 
 
Net noninterest-bearing funding sources
$
168,569

 
 
 
 
 
155,562

 
 
 
 
Total assets
$
1,949,799

 
 
 
 
 
1,891,907

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Average prime rate
 
 
3.82
%
 
 
 
 
 
5.50
%
 
 
Average three-month London Interbank Offered Rate (LIBOR)
 
 
1.07

 
 
 
 
 
2.60

 
 


9


Noninterest Income
Table 2: Noninterest Income
 
Quarter ended June 30,
 
 
%

 
Six months ended June 30,
 
 
%

(in millions)
2020

 
2019

 
Change

 
2020

 
2019

 
Change

Service charges on deposit accounts
$
930

 
1,206

 
(23
)%
 
$
2,139

 
2,300

 
(7
)%
Trust and investment fees:
 
 
 
 
 
 
 
 
 
 
 
Brokerage advisory, commissions and other fees
2,117

 
2,318

 
(9
)
 
4,599

 
4,511

 
2

Trust and investment management
687

 
795

 
(14
)
 
1,388

 
1,581

 
(12
)
Investment banking
547

 
455

 
20

 
938

 
849

 
10

Total trust and investment fees
3,351

 
3,568

 
(6
)
 
6,925

 
6,941

 

Card fees
797

 
1,025

 
(22
)
 
1,689

 
1,969

 
(14
)
Other fees:
 
 
 
 
 
 
 
 
 
 

Lending related charges and fees
303

 
349

 
(13
)
 
631

 
696

 
(9
)
Cash network fees
88

 
117

 
(25
)
 
194

 
226

 
(14
)
Commercial real estate brokerage commissions

 
105

 
(100
)
 
1

 
186

 
(99
)
Wire transfer and other remittance fees
99

 
121

 
(18
)
 
209

 
234

 
(11
)
All other fees
88

 
108

 
(19
)
 
175

 
228

 
(23
)
Total other fees
578

 
800

 
(28
)
 
1,210


1,570

 
(23
)
Mortgage banking:
 
 
 
 
 
 
 
 
 
 

Servicing income, net
(689
)
 
277

 
NM

 
(418
)
 
641

 
NM

Net gains on mortgage loan origination/sales activities
1,006

 
481

 
109

 
1,114

 
825

 
35

Total mortgage banking
317

 
758

 
(58
)
 
696


1,466

 
(53
)
Net gains from trading activities
807

 
229

 
252

 
871

 
586

 
49

Net gains on debt securities
212

 
20

 
960

 
449

 
145

 
210

Net gains (losses) from equity securities
533

 
622

 
(14
)
 
(868
)
 
1,436

 
NM

Lease income
334

 
424

 
(21
)
 
686

 
867

 
(21
)
Life insurance investment income
163

 
167

 
(2
)
 
324

 
326

 
(1
)
All other (1)
(66
)
 
670

 
NM

 
240

 
1,181

 
(80
)
Total
$
7,956

 
9,489

 
(16
)
 
$
14,361


18,787

 
(24
)
NM – Not meaningful
(1)
In second quarter 2020, insurance income was reclassified to all other noninterest income. Prior period balances have been revised to conform with the current period presentation.
Noninterest income decreased $1.5 billion and $4.4 billion in the second quarter and first half of 2020, respectively, compared with the same periods a year ago, due to overall lower income driven by the economic impact of the COVID-19 pandemic. For more information on the nature of services performed for certain of our revenues discussed below, see Note 18 (Revenue from Contracts with Customers) to Financial Statements in this Report.
Service charges on deposit accounts decreased $276 million and $161 million in the second quarter and first half of 2020, respectively, compared with the same periods a year ago, due to lower customer transaction volumes and higher average account balances. We have provided certain fee waivers and reversals to support customers during the COVID-19 pandemic, which also negatively impacted income from service charges on deposit accounts.
Brokerage advisory, commissions and other fees decreased $201 million in second quarter 2020, compared with the same period a year ago, due to lower asset-based fees and lower transactional revenue. Brokerage advisory, commissions and other fees increased $88 million in the first half of 2020, compared with the same period a year ago, due to higher asset-based fees. Asset-based fees include fees from advisory accounts that are based on a percentage of the market value of the assets as of the beginning of the quarter. All retail brokerage services are provided by our Wealth and Investment Management (WIM) operating segment. For additional information on retail
 
brokerage client assets, including asset composition, see the “Operating Segment Results – Wealth and Investment Management – Retail Brokerage Client Assets” section in this Report.
Trust and investment management fees decreased $108 million and $193 million in the second quarter and first half of 2020, respectively, compared with the same periods a year ago, driven by lower trust fees due to the sale of our Institutional Retirement and Trust (IRT) business in 2019.
Our assets under management (AUM) totaled $766.6 billion at June 30, 2020, compared with $682.0 billion at June 30, 2019. Substantially all of our AUM is managed by our WIM operating segment. Our assets under administration (AUA) totaled $1.7 trillion at June 30, 2020 and $1.8 trillion at June 30, 2019. Management believes that AUM and AUA are useful metrics because they allow investors and others to assess how changes in asset amounts may impact the generation of certain asset-based fees.
Our AUM and AUA included IRT client assets of $21 billion and $730 billion, respectively, at June 30, 2020, which we continue to administer at the direction of the buyer pursuant to a transition services agreement that will terminate no later than July 2021.
Additional information regarding our WIM operating segment AUM is provided in Table 4f and the related discussion in the “Operating Segment Results – Wealth and Investment

10

Earnings Performance (continued)




Management – Trust and Investment Client Assets Under Management” section in this Report.
Card fees decreased $228 million and $280 million in the second quarter and first half of 2020, respectively, compared with the same periods a year ago. The decrease in the second quarter and first half of 2020, compared with the same periods a year ago, was due to lower interchange fees driven by decreased purchase volume due to the impact of the COVID-19 pandemic, and higher fee waivers as part of our actions to support customers during the COVID-19 pandemic, partially offset by lower rewards costs.
Other fees decreased $222 million and $360 million in the second quarter and first half of 2020, respectively, compared with the same periods a year ago, driven by a decline in commission fees as a result of the sale of our commercial real estate brokerage business, Eastdil Secured (Eastdil), in fourth quarter 2019, and lower business payroll income due to the sale of our Business Payroll Services business in first quarter 2019. Additionally, we waived or reversed certain lending related charges or fees as part of our actions to support customers during the COVID-19 pandemic, which also negatively impacted other fees.
Mortgage banking noninterest income, consisting of net servicing income and net gains on mortgage loan origination/ sales activities, decreased $441 million and $770 million in the second quarter and first half of 2020, respectively, compared with the same periods a year ago. For more information, see Note 11 (Mortgage Banking Activities) to Financial Statements in this Report.
Our portfolio of loans serviced for others was $1.6 trillion at both June 30, 2020, and December 31, 2019. At June 30, 2020, the ratio of combined residential and commercial mortgage servicing rights (MSRs) to related loans serviced for others was 0.52%, compared with 0.79% at December 31, 2019.
Net servicing income decreased $1.0 billion and $1.1 billion in the second quarter and first half of 2020, respectively, compared with the same periods a year ago. The decrease in net servicing income in the second quarter and first half of 2020, compared with the same periods a year ago, was driven by MSR valuation losses, net of hedge results, reflecting higher expected servicing costs and updates to other valuation model assumptions affecting prepayment estimates that are independent of interest rate changes, such as changes in home prices and in customer credit profiles. The decrease in net servicing income in the second quarter and first half of 2020 also reflected continued prepayments and the impacts of customer accommodations associated with the COVID-19 pandemic. 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 increased $525 million and $289 million in the second quarter and first half of 2020, respectively, compared with the same periods a year ago, due to higher residential real estate held for sale 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. The increase in the production margin in the second quarter and first half of 2020, compared with the same periods a year ago, was due to higher margins in both our retail and correspondent production channels, as well as a shift to more
 
retail origination volume, which has a higher margin. Table 2a presents the information used in determining the production margin.

Table 2a Selected Mortgage Production Data
 
 
Quarter ended June 30,
 
 
Six months ended June 30,
 
 
 
2020

2019

 
2020

2019

Net gains on mortgage loan origination/sales activities (in millions):
 
 
 
 
 
 
Residential
(A)
$
866

322

 
$
1,226

554

Commercial
 
83

83

 
106

130

Residential pipeline and unsold/repurchased loan management (1)
 
57

76

 
(218
)
141

Total
 
$
1,006

481

 
$
1,114

825

Application data (in billions):
 
 
 
 
 
 
Mortgage applications
 
$
84

90

 
192

154

First mortgage unclosed pipeline (2)
 
50

44

 
50

44

Residential real estate originations (in billions):
 
 
 
 
 
 
Held for sale
(B)
$
43

33

 
$
76

55

Held for investment
 
16

20

 
31

31

Total
 
$
59

53

 
$
107

86

Production margin on residential held for sale mortgage loan originations
(A)/(B)
2.04
%
0.98

 
1.61
%
1.01
%
(1)
Predominantly Includes the results of Government National Mortgage Association (GNMA) loss mitigation activities, interest rate management activities and changes in estimate to the liability for mortgage loan repurchase losses.
(2)
Balances presented are as of June 30, 2020 and 2019.
Net gains from trading activities, which reflect unrealized changes in fair value of our trading positions and realized gains and losses, increased $578 million and $285 million in the second quarter and first half of 2020, respectively, compared with the same periods a year ago. The increase in the second quarter and first half of 2020, compared with the same periods a year ago, reflected trading volatility created by the COVID-19 pandemic. The increase in second quarter 2020, compared with the same period a year ago, also reflected higher gains driven by market liquidity and improvements in the energy sector, as well as increased demand for interest rate products due to lower interest rates. The increase in the first half of 2020, compared with the same period a year ago, also reflected higher income driven by demand for interest rate products due to lower interest rates, as well as higher equities and credit trading volume, partially offset by lower income from wider credit spreads and lower trading volumes in asset-backed securities. 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 from debt securities increased $192 million and $304 million in the second quarter and first half of 2020, respectively, compared with the same periods a year ago, reflecting higher gains from the sale of agency mortgage-backed securities (MBS).
Net gains from equity securities decreased $89 million and $2.3 billion in the second quarter and first half of 2020, respectively, compared with the same periods a year ago, driven

11


by changes in the value of deferred compensation plan investments (largely offset in personnel expense) and higher unrealized losses. The decrease in the first half of 2020, compared with the same period a year ago, also included a $1.0 billion impairment on equity securities. Table 3a presents results for our deferred compensation plan and related investments.
Lease income decreased $90 million and $181 million in the second quarter and first half of 2020, respectively, compared with the same periods a year ago, driven by reductions in the size of the equipment leasing portfolio.
All other income decreased $736 million and $941 million in the second quarter and first half of 2020, respectively, compared with the same periods a year ago. All other income includes insurance income, income or losses from equity method investments, including low-income housing tax credit
 
investments (excluding related tax credits recorded in income tax expense), foreign currency adjustments and related hedges of foreign currency risks, and certain economic hedges. The decrease in the second quarter and first half of 2020, compared with the same periods a year ago, was driven by higher income in the second quarter and first half of 2019 from gains on the sales of purchased credit-impaired (PCI) loans, as well as lower equity method investments income in the second quarter and first half of 2020, partially offset by gains on the sales of loans reclassified to held for sale in 2019 and sold in the second quarter and first half of 2020. The decrease in the first half of 2020, compared with the same period a year ago, also reflected a pre-tax gain on the sale of our Business Payroll Services business in first quarter 2019, partially offset by transition services fees in the first half of 2020 associated with the sale of our IRT business.
Noninterest Expense
Table 3: Noninterest Expense
 
Quarter ended June 30,
 
 
%

 
Six months ended June 30,
 
 
%

(in millions)
2020

 
2019

 
Change

 
2020

 
2019

 
Change

Personnel (1)
$
8,911

 
8,474

 
5
 %
 
$
17,225

 
17,682

 
(3
)%
Technology and equipment (1)
562

 
641

 
(12
)
 
1,268

 
1,335

 
(5
)
Occupancy (2)
871

 
719

 
21

 
1,586

 
1,436

 
10

Core deposit and other intangibles
22

 
27

 
(19
)
 
45

 
55

 
(18
)
FDIC and other deposit assessments
165

 
144

 
15

 
283

 
303

 
(7
)
Operating losses
1,219

 
247

 
394

 
1,683

 
485

 
247

Outside professional services
758

 
821

 
(8
)
 
1,485

 
1,499

 
(1
)
Contract services (1)
634

 
590

 
7

 
1,219

 
1,120

 
9

Leases (3)
244

 
311

 
(22
)
 
504

 
597

 
(16
)
Advertising and promotion
137

 
329

 
(58
)
 
318

 
566

 
(44
)
Outside data processing
142

 
175

 
(19
)
 
307

 
342

 
(10
)
Travel and entertainment
15

 
163

 
(91
)
 
108

 
310

 
(65
)
Postage, stationery and supplies
108

 
119

 
(9
)
 
237

 
241

 
(2
)
Telecommunications
110

 
93

 
18

 
202

 
184

 
10

Foreclosed assets
23

 
35

 
(34
)
 
52

 
72

 
(28
)
Insurance
25

 
25

 

 
50

 
50

 

All other
605

 
536

 
13

 
1,027

 
1,088

 
(6
)
Total
$
14,551

 
13,449

 
8

 
$
27,599

 
27,365

 
1

(1)
In second quarter 2020, personnel-related expenses were combined into a single line item, and expenses for cloud computing services were reclassified from contract services expense to technology and equipment expense. Prior period balances have been revised to conform with the current period presentation.
(2)Represents expenses for both leased and owned properties.
(3)
Represents expenses for assets we lease to customers.
Noninterest expense increased $1.1 billion and $234 million in the second quarter and first half of 2020, compared with the same periods a year ago, predominantly driven by higher operating losses and occupancy expense.
Personnel expense increased $437 million in second quarter 2020, compared with the same period a year ago, and decreased $457 million in the first half of 2020, compared with the same period a year ago. The increase in second quarter 2020, compared with the same period a year ago, was driven by higher deferred compensation expense (offset in net gains from equity securities), and higher salaries expense. The decrease in the first half of 2020, compared with the same period a year ago, was driven by lower deferred compensation expense (offset in net losses from equity securities), partially offset by an increase in salaries and employee benefits expense. The second quarter and first half of 2020 also reflected higher salaries driven by annual salary increases and higher staffing levels, as well as increased employee benefits and incentive compensation expense related to the COVID-19 pandemic, including additional payments for
 
certain customer-facing and support employees and back-up childcare services.
Table 3a presents results for our deferred compensation plan and related hedges. Historically, we used equity securities as economic hedges of our deferred compensation plan liabilities. Changes in the fair value of the equity securities used as economic hedges were recorded in net gains (losses) from equity securities within noninterest income. In second quarter 2020, we entered into arrangements to transition our economic hedges from equity securities to derivative instruments. Changes in fair value of derivatives used as economic hedges are presented within the same financial statement line as the related business activity being hedged. As a result of this transition, we presented the net gains/(losses) on derivatives from economic hedges on the deferred compensation plan liabilities in personnel expense. For additional information on the derivatives used in the economic hedges, see Note 15 (Derivatives) to Financial Statements in this Report.

12

Earnings Performance (continued)




Table 3a: Deferred Compensation and Related Hedges
 
Quarter ended June 30,
 
 
Six months ended June 30,
 
(in millions)
2020

 
2019

 
2020

 
2019

Net interest income
$
3

 
18

 
$
15

 
31

Net gains (losses) from equity securities
346

 
87

 
(275
)
 
432

Total revenue (losses) from deferred compensation plan investments
349

 
105

 
(260
)
 
463

Change in deferred compensation plan liabilities
490

 
114

 
(108
)
 
471

Net derivative (gains) losses from economic hedges of deferred compensation
(141
)
 

 
(141
)
 

Personnel expense
349

 
114

 
(249
)
 
471

Income (loss) before income tax expense
$

 
(9
)
 
$
(11
)
 
(8
)
Occupancy expense increased $152 million and $150 million in the second quarter and first half of 2020, respectively, compared with the same periods a year ago, due to additional cleaning fees, supplies, and equipment expenses related to the COVID-19 pandemic.
Operating losses increased $1.0 billion and $1.2 billion in the second quarter and first half of 2020, respectively, compared with the same periods a year ago, due to higher litigation and customer remediation accruals. The increase in customer remediation accruals reflected expansions of the population of affected customers, remediation payments, and/or remediation time frames for a variety of matters.
Outside professional and contract services expense decreased $19 million in second quarter 2020, compared with the same period a year ago, and increased $85 million in the first half of 2020, compared with the same period a year ago. The decrease in second quarter 2020, compared with the same period a year ago, was due to lower legal expenses and reduced project spending. The increase in the first half of 2020, compared with the same period a year ago, was due to an increase in project spending, partially offset by lower legal expenses.
Advertising and promotion expense decreased $192 million and $248 million in the second quarter and first half of 2020, respectively, compared with the same periods a year ago, driven by decreases in marketing and brand campaign volumes due to the impact of the COVID-19 pandemic.
Travel and entertainment expense decreased $148 million and $202 million in the second quarter and first half of 2020, respectively, compared with the same periods a year ago, driven by a reduction in business travel and company events due to ongoing expense management initiatives, as well as the impact of the COVID-19 pandemic.
 
All other expense increased $69 million in second quarter 2020, compared with the same period a year ago, and decreased $61 million in the first half of 2020, compared with the same period a year ago. The increase in second quarter 2020, compared with the same period a year ago, was due to higher pension plan settlement expenses and lower gains on the extinguishment of debt, partially offset by a reduction in the insurance claims reserve and lower pension benefit plan expenses. The decrease in the first half of 2020, compared with the same period a year ago, was due to a reduction in the insurance claims reserve and lower pension benefit plan expenses, partially offset by higher pension plan settlement expenses.

Income Tax Expense
Income tax benefit was $3.9 billion and $3.8 billion in the second quarter and first half of 2020, respectively, compared with income tax expense of $1.3 billion and $2.2 billion in the same periods a year ago. The decrease in income tax expense to an income tax benefit in both the second quarter and first half of 2020, compared with the same periods a year ago, was driven by lower income. Our effective income tax rate was 62.2% and 68.5% for the second quarter and first half of 2020, respectively, compared with 17.3% and 15.3% for the same periods a year ago. The higher rate in second quarter 2020, compared with the same period a year ago, reflected the impact of annual income tax benefits, primarily tax credits, driven by the reported pre-tax loss, and included net discrete income tax benefits of $98 million predominantly related to the resolution of prior period U.S. federal income tax matters.

13


Operating Segment Results
As of June 30, 2020, 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 structure is intended to help drive operating, control, and business performance. In July 2020, the Company completed the transition to this new organizational structure, including finalizing leadership for these principal business lines and aligning management reporting and allocation methodologies. These changes will not impact the consolidated financial results of the Company. Accordingly, we will update our operating segment disclosures, including comparative financial results, in third quarter 2020. Table 4 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 22 (Operating Segments) to Financial Statements in this Report.
We perform a goodwill impairment assessment annually in the fourth quarter. However, in second quarter 2020, we performed another interim, quantitative impairment assessment of our goodwill given deteriorated macroeconomic conditions from the impact of the COVID-19 pandemic. These market conditions led to a sharp decline in share prices for Wells Fargo and other companies across many industries. As part of our interim assessment, we updated our assumptions used in both the income and market approaches for estimating fair values of our reporting units. The update to assumptions incorporated current market-based information such as price-earnings information and a regular update to our internal enterprise-wide
 
forecasts, which reflected lower interest rates and higher expected credit losses, as well as a weaker macroeconomic outlook.
Since our annual assessment, we have observed declines in the fair values of our reporting units and the amount of excess fair value over the carrying amount of our reporting units; however, we did not have evidence of goodwill impairment as of June 30, 2020. The fair value of each reporting unit exceeded its corresponding carrying amount by 18% or higher. The estimated fair value of our corporate and investment banking reporting unit, included within the Wholesale Banking operating segment, increased in second quarter 2020 as it reflected recent updates in price-earnings information used in our market approach valuations. The increase in fair value resulted in significant excess fair value over the carrying amount for the reporting unit compared with the prior quarter.
The aggregate fair value of our reporting units exceeded our market capitalization as of June 30, 2020. Our individual reporting unit fair values cannot be directly correlated to the Company’s market capitalization. However, we considered several factors in the comparison of aggregate fair value to market capitalization, including (i) control premiums adjusted for the current market environment, which include synergies that may not be reflected in current market pricing, (ii) degree of complexity and execution risk at the reporting unit level compared with the enterprise level, and (iii) issues or risks related to the Company level that may not be included in the fair value of the individual reporting units. Given the uncertainty of the severity or length of the current economic downturn, we will continue to monitor our performance against our internal forecasts as well as market conditions for circumstances that could have a further negative effect on the estimated fair values of our reporting units.
In connection with the planned change to our operating segment disclosures, we will realign our goodwill to the reporting units that underlie our operating segments, which could impact the results of our goodwill impairment assessment. We will reassess goodwill for impairment at the time of the realignment. For additional information about goodwill, see Note 1 (Summary of Significant Accounting Policies) in our 2019 Form 10-K.
Table 4: Operating Segment Results – Highlights
(income/expense in millions,
 
Community
Banking 
 
 
Wholesale
Banking
 
 
Wealth and
Investment Management
 
 
Other (1)
 
 
Consolidated
Company
 
balance sheet data in billions)
 
2020

 
2019

 
2020

 
2019

 
2020

 
2019

 
2020

 
2019

 
2020

 
2019

Quarter ended June 30,
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue
 
$
8,766

 
11,805

 
6,563

 
7,065

 
3,660

 
4,050

 
(1,153
)
 
(1,336
)
 
17,836

 
21,584

Provision (reversal of provision) for credit losses
 
3,378

 
479

 
6,028

 
28

 
257

 
(1
)
 
(129
)
 
(3
)
 
9,534

 
503

Net income (loss)
 
(331
)
 
3,147

 
(2,143
)
 
2,789

 
180

 
602

 
(85
)
 
(332
)
 
(2,379
)
 
6,206

Average loans
 
$
449.3

 
457.7

 
504.3

 
474.0

 
78.7

 
75.0

 
(61.0
)
 
(59.2
)
 
971.3

 
947.5

Average deposits
 
848.5

 
777.6

 
441.2

 
410.4

 
171.8

 
143.5

 
(74.8
)
 
(62.5
)
 
1,386.7

 
1,269.0

Goodwill
 
16.7

 
16.7

 
8.4

 
8.4

 
1.3

 
1.3

 

 

 
26.4

 
26.4

Six months ended June 30,
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue
 
$
18,262

 
23,555

 
12,380

 
14,176

 
7,375

 
8,129

 
(2,464
)
 
(2,667
)
 
35,553

 
43,193

Provision (reversal of provision) for credit losses
 
5,096

 
1,189

 
8,316

 
162

 
265

 
3

 
(138
)
 
(6
)
 
13,539

 
1,348

Net income (loss)
 
(176
)
 
5,970

 
(1,832
)
 
5,559

 
643

 
1,179

 
(361
)
 
(642
)
 
(1,726
)
 
12,066

Average loans
 
$
456.0

 
457.9

 
494.4

 
475.2

 
78.6

 
74.7

 
(60.8
)
 
(59.1
)
 
968.2

 
948.7

Average deposits
 
823.5

 
771.6

 
448.9

 
410.1

 
161.6

 
148.3

 
(71.7
)
 
(64.5
)
 
1,362.3

 
1,265.5

Goodwill
 
16.7

 
16.7

 
8.4

 
8.4

 
1.3

 
1.3

 

 

 
26.4

 
26.4

(1)
Includes the elimination of certain items that are included in more than one business segment, most of which represents products and services for WIM customers served through Community Banking distribution channels.

14

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 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 4a provides additional financial information for Community Banking.
Table 4a: Community Banking
 
Quarter ended June 30,
 
 
 
 
Six months ended June 30,
 
 
 
(in millions, except average balances which are in billions)
2020

 
2019

 
% Change
 
2020

 
2019

 
% Change

Net interest income
$
5,699

 
7,066

 
(19
)%
 
$
12,486

 
14,314

 
(13
)%
Noninterest income:
 
 
 
 
 
 
 
 
 
 
 
Service charges on deposit accounts
419

 
704

 
(40
)
 
1,119

 
1,314

 
(15
)
Trust and investment fees:
 
 
 
 
 
 
 
 
 
 

Brokerage advisory, commissions and other fees (1)
433

 
480

 
(10
)
 
951

 
929

 
2

Trust and investment management (1)
174

 
199

 
(13
)
 
368

 
409

 
(10
)
Investment banking (2)
(67
)
 
(18
)
 
NM

 
(166
)
 
(38
)
 
NM

Total trust and investment fees
540

 
661

 
(18
)
 
1,153

 
1,300

 
(11
)
Card fees
732

 
929

 
(21
)
 
1,541

 
1,787

 
(14
)
Other fees
247

 
335

 
(26
)
 
532

 
667

 
(20
)
Mortgage banking
253

 
655

 
(61
)
 
593

 
1,296

 
(54
)
Net gains (losses) from trading activities
6

 
(11
)
 
155

 
35

 
(6
)
 
683

Net gains on debt securities
123

 
15

 
720

 
317

 
52

 
510

Net gains (losses) from equity securities (3)
388

 
471

 
(18
)
 
(640
)
 
1,072

 
NM

Other (4)
359

 
980

 
(63
)
 
1,126

 
1,759

 
(36
)
Total noninterest income
3,067

 
4,739

 
(35
)
 
5,776

 
9,241

 
(37
)
 
 
 
 
 
 
 
 
 
 
 

Total revenue
8,766

 
11,805

 
(26
)
 
18,262

 
23,555

 
(22
)
 
 
 
 
 
 
 
 
 
 
 

Provision for credit losses
3,378

 
479

 
605

 
5,096

 
1,189

 
329

Noninterest expense:
 
 
 
 
 
 
 
 
 
 

Personnel
5,992

 
5,436

 
10

 
11,447

 
11,417

 

Technology and equipment (4)
648

 
614

 
6

 
1,335

 
1,283

 
4

Occupancy
685

 
542

 
26

 
1,214

 
1,084

 
12

Core deposit and other intangibles

 

 

 
1

 
1

 

FDIC and other deposit assessments
112

 
94

 
19

 
180

 
200

 
(10
)
Outside professional services
460

 
387

 
19

 
902

 
703

 
28

Operating losses
1,037

 
197

 
426

 
1,491

 
416

 
258

Other (4)
(588
)
 
(58
)
 
NM

 
(1,108
)
 
(203
)
 
NM

Total noninterest expense
8,346

 
7,212

 
16

 
15,462

 
14,901

 
4

Income (loss) before income tax expense and noncontrolling interests
(2,958
)
 
4,114

 
NM

 
(2,296
)
 
7,465

 
NM

Income tax expense (benefit)
(2,666
)
 
838

 
NM

 
(2,022
)
 
1,262

 
NM

Less: Net income (loss) from noncontrolling interests (5)
39

 
129

 
(70
)
 
(98
)
 
233

 
NM

Net income (loss)
$
(331
)
 
3,147

 
NM

 
$
(176
)
 
5,970

 
NM

Average loans
$
449.3

 
457.7

 
(2
)
 
$
456.0

 
457.9

 

Average deposits
848.5

 
777.6

 
9

 
823.5

 
771.6

 
7

NM – Not meaningful
(1)
Represents income on products and services for WIM customers served through Community Banking distribution channels which is eliminated in consolidation.
(2)
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.
(3)
Primarily represents gains resulting from venture capital investments.
(4)
In second quarter 2020, insurance income was reclassified to other noninterest income, and expenses for cloud computing services were reclassified from contract services expense (within other noninterest expense) to technology and equipment expense. Prior period balances have been revised to conform with the current period presentation.
(5)
Reflects results attributable to noncontrolling interests predominantly associated with the Company’s consolidated venture capital investments.
Community Banking reported a net loss of $331 million in second quarter 2020, compared with net income of $3.1 billion in the same period a year ago, and reported a net loss of $176 million in the first half of 2020, compared with net income of $6.0 billion in the same period a year ago.
Revenue decreased $3.0 billion and $5.3 billion in the second quarter and first half of 2020, respectively, compared with the same periods a year ago. The decrease in the second quarter and first half of 2020, compared with the same periods a year ago, was driven by lower net interest income reflecting the lower interest rate environment and lower noninterest income reflecting lower fees from reduced consumer spending and transaction activity due to the impact of the COVID-19 pandemic, partially offset by higher net gains on debt securities. The decrease in the first half of 2020, compared with the same period a year ago, also reflected net losses on equity securities (including lower deferred compensation plan investment results,
 
which were largely offset in personnel expense).
The provision for credit losses increased $2.9 billion and $3.9 billion in the second quarter and first half of 2020, respectively, compared with the same periods a year ago, due to increases in the allowance for credit losses reflecting current and forecasted economic conditions due to the impact of the COVID-19 pandemic.
Noninterest expense increased $1.1 billion and $561 million in the second quarter and first half of 2020, respectively, compared with the same periods a year ago. The increase in the second quarter and first half of 2020, compared with the same periods a year ago, was due to higher operating losses, occupancy expense, outside professional services expense, and technology and equipment expense, partially offset by lower other expenses. The increase in second quarter 2020, compared with the same period a year ago, also reflected higher personnel expense.

15


Average loans decreased $8.4 billion and $1.9 billion in the second quarter and first half of 2020, respectively, compared with the same periods a year ago. The decrease in second quarter 2020, compared with the same period a year ago, was driven by lower real estate 1-4 family first mortgage loans and lower junior lien mortgage loans, partially offset by higher commercial loans. The decrease in the first half of 2020, compared with the same period a year ago, was due to lower junior lien mortgage loans, partially offset by higher automobile loans.
Average deposits increased $70.9 billion and $51.9 billion, in the second quarter and first half of 2020, respectively, compared
 
with the same periods a year ago, driven by customers’ preferences for liquidity due to the COVID-19 pandemic.

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 4b provides additional financial information for Wholesale Banking.
Table 4b: Wholesale Banking
 
Quarter ended June 30,
 
 
 
 
Six months ended June 30,
 
 
 
(in millions, except average balances which are in billions)
2020

 
2019

 
% Change
 
2020

 
2019

 
% Change

Net interest income
$
3,891

 
4,535

 
(14
)%
 
$
8,027

 
9,069

 
(11
)%
Noninterest income:
 
 
 
 
 
 
 
 
 
 
 
Service charges on deposit accounts
511

 
502

 
2

 
1,019

 
985

 
3

Trust and investment fees:
 
 
 
 
 
 
 
 
 
 

Brokerage advisory, commissions and other fees
79

 
74

 
7

 
169

 
152

 
11

Trust and investment management
130

 
117

 
11

 
261

 
231

 
13

Investment banking
614

 
475

 
29

 
1,104

 
887

 
24

Total trust and investment fees
823

 
666

 
24

 
1,534

 
1,270

 
21

Card fees
65

 
95

 
(32
)
 
148

 
181

 
(18
)
Other fees
330

 
464

 
(29
)
 
676

 
901

 
(25
)
Mortgage banking
65

 
104

 
(38
)
 
105

 
172

 
(39
)
Net gains from trading activities
794

 
226

 
251

 
835

 
559

 
49

Net gains on debt securities
89

 
5

 
NM

 
132

 
93

 
42

Net gains (losses) from equity securities
(16
)
 
116

 
NM

 
(111
)
 
193

 
NM

Other (1)
11

 
352

 
(97
)
 
15

 
753

 
(98
)
Total noninterest income
2,672

 
2,530

 
6

 
4,353

 
5,107

 
(15
)
 
 
 
 
 
 
 
 
 
 
 

Total revenue
6,563

 
7,065

 
(7
)
 
12,380

 
14,176

 
(13
)
 
 
 
 
 
 
 
 
 
 
 

Provision for credit losses
6,028

 
28

 
NM

 
8,316

 
162

 
NM

Noninterest expense:
 
 
 
 
 
 
 
 
 
 

Personnel
1,311

 
1,384

 
(5
)
 
2,694

 
2,894

 
(7
)
Technology and equipment (1)
8

 
13

 
(38
)
 
19

 
26

 
(27
)
Occupancy
106

 
96

 
10

 
210

 
191

 
10

Core deposit and other intangibles
19

 
23

 
(17
)
 
38

 
47

 
(19
)
FDIC and other deposit assessments
45

 
44

 
2

 
89

 
89

 

Outside professional services
124

 
231

 
(46
)
 
225

 
415

 
(46
)
Operating losses
173

 
10

 
NM

 
177

 
11

 
NM

Other (1)
2,177

 
2,081

 
5

 
4,274

 
4,047

 
6

Total noninterest expense
3,963

 
3,882

 
2

 
7,726

 
7,720

 

Income (loss) before income tax expense (benefit) and noncontrolling interests
(3,428
)
 
3,155

 
NM

 
(3,662
)
 
6,294

 
NM

Income tax expense (benefit) (2)
(1,286
)
 
365

 
NM

 
(1,832
)
 
734

 
NM

Less: Net income from noncontrolling interests
1

 
1

 

 
2

 
1

 
100

Net income (loss)
$
(2,143
)
 
2,789

 
NM

 
$
(1,832
)
 
5,559

 
NM
Average loans
$
504.3

 
474.0

 
6

 
$
494.4

 
475.2

 
4

Average deposits
441.2

 
410.4

 
8

 
448.9

 
410.1

 
9

NM – Not meaningful
(1)
In second quarter 2020, insurance income was reclassified to other noninterest income, and expenses for cloud computing services were reclassified from contract services expense (within other noninterest expense) to technology and equipment expense. Prior period balances have been revised to conform with the current period presentation.
(2)
Income tax expense for our Wholesale Banking operating segment included income tax credits related to low-income housing and renewable energy investments of $465 million and $956 million for the second quarter and first half of 2020, respectively, and $423 million and $850 million for the second quarter and first half of 2019, respectively.
Wholesale Banking reported a net loss of $2.1 billion in second quarter 2020, compared with net income of $2.8 billion in the same period a year ago, and reported a net loss of $1.8 billion in the first half of 2020, compared with net income of $5.6 billion in the same period a year ago.
Net interest income decreased $644 million and $1.0 billion in the second quarter and first half of 2020, respectively, compared with the same periods a year ago, driven by the impact of the lower interest rate environment, partially offset by higher average deposit balances and higher average loan balances.
Noninterest income increased $142 million in second quarter 2020, compared with the same period a year ago, due to increased market sensitive revenue (represents net gains (losses) from trading activities, debt securities, and equity securities) and
 
investment banking fees, partially offset by lower other noninterest income including lower lease income, and lower commercial real estate brokerage fees within other fees related to our sale of Eastdil in fourth quarter 2019. Noninterest income decreased $754 million in the first half of 2020, compared with the same period a year ago, due to lower other income from higher amortization on renewable energy and community lending investments and lower lease income, lower other fees related to our sale of Eastdil, and lower mortgage banking fees, partially offset by higher investment banking fees.
The provision for credit losses increased $6.0 billion and $8.2 billion in the second quarter and first half of 2020, respectively, compared with the same periods a year ago, due to increases in the allowance for credit losses reflecting current and

16

Earnings Performance (continued)




forecasted economic conditions due to the impact of the COVID-19 pandemic and higher charge-offs in the oil and gas and commercial real estate portfolios.
Noninterest expense increased $81 million and $6 million in the second quarter and first half of 2020, respectively, compared with the same periods a year ago. The increase in second quarter 2020, compared with the same period a year ago, was driven by higher operating losses primarily due to litigation accruals, partially offset by lower personnel expense. The increase in the first half of 2020, compared with the same period a year ago, was due to higher operating losses and increased regulatory and risk related expense within other noninterest expense, partially offset by lower personnel expense, and lower lease and travel expenses within other noninterest expense, as well as the impact of the sale of Eastdil in fourth quarter 2019.
Average loans increased $30.3 billion and $19.2 billion in the second quarter and first half of 2020, respectively, compared with the same periods a year ago, reflecting broad-based growth across the lines of businesses driven by draws of revolving lines due to the economic slowdown associated with the COVID-19 pandemic.
 
Average deposits increased $30.8 billion and $38.8 billion in the second quarter and first half of 2020, respectively, compared with the same periods a year ago, reflecting customers’ preferences for liquidity due to the COVID-19 pandemic.

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 and AUA, see the “Earnings Performance – Noninterest Income” section in this Report.
Table 4c provides additional financial information for WIM.

Table 4c: Wealth and Investment Management
 
Quarter ended June 30,
 
 
 
 
Six months ended June 30,
 
 
 
(in millions, except average balances which are in billions)
2020

 
2019

 
% Change
 
2020

 
2019

 
% Change

Net interest income
$
736

 
1,037

 
(29
)%
 
$
1,603

 
2,138

 
(25
)%
Noninterest income:
 
 
 
 
 
 
 
 
 
 
 
Service charges on deposit accounts
4

 
4

 

 
9

 
8

 
13

Trust and investment fees:
 
 
 
 
 
 
 
 
 
 
 
Brokerage advisory, commissions and other fees
2,039

 
2,248

 
(9
)
 
4,436

 
4,372

 
1

Trust and investment management
568

 
687

 
(17
)
 
1,150

 
1,363

 
(16
)
Investment banking
1

 
(1
)
 
200

 
2

 
4

 
(50
)
Total trust and investment fees
2,608

 
2,934

 
(11
)
 
5,588

 
5,739

 
(3
)
Card fees
1

 
2

 
(50
)
 
2

 
3

 
(33
)
Other fees
4

 
4

 

 
8

 
8

 

Mortgage banking
(3
)
 
(3
)
 

 
(6
)
 
(6
)
 

Net gains (losses) from trading activities
6

 
13

 
(54
)
 
(1
)
 
32

 
NM

Net gains on debt securities

 

 

 

 

 

Net gains (losses) from equity securities
161

 
35

 
360

 
(117
)
 
171

 
NM

Other (1)
143

 
24

 
496

 
289

 
36

 
703

Total noninterest income
2,924

 
3,013

 
(3
)
 
5,772

 
5,991

 
(4
)
 
 
 
 
 
 
 
 
 
 
 
 
Total revenue
3,660

 
4,050

 
(10
)
 
7,375

 
8,129

 
(9
)
 
 
 
 
 
 
 
 
 
 
 
 
Provision (reversal of provision) for credit losses
257

 
(1
)
 
NM

 
265

 
3

 
NM

Noninterest expense:
 
 
 
 
 
 
 
 
 
 
 
Personnel
2,021

 
2,112

 
(4
)
 
3,971

 
4,309

 
(8
)
Technology and equipment (1)
(94
)
 
15

 
NM

 
(86
)
 
27

 
NM

Occupancy
111

 
112

 
(1
)
 
224

 
224

 

Core deposit and other intangibles
3

 
4

 
(25
)
 
6

 
7

 
(14
)
FDIC and other deposit assessments
14

 
12

 
17

 
26

 
26

 

Outside professional services
182

 
210

 
(13
)
 
373

 
394

 
(5
)
Operating losses
15

 
43

 
(65
)
 
24

 
64

 
(63
)
Other (1)
901

 
738

 
22

 
1,718

 
1,498

 
15

Total noninterest expense
3,153

 
3,246

 
(3
)
 
6,256

 
6,549

 
(4
)
Income before income tax expense and noncontrolling interests
250

 
805

 
(69
)
 
854

 
1,577

 
(46
)
Income tax expense
63

 
201

 
(69
)
 
216

 
393

 
(45
)
Less: Net income (loss) from noncontrolling interests
7

 
2

 
250

 
(5
)
 
5

 
NM

Net income
$
180

 
602

 
(70
)
 
$
643

 
1,179

 
(45
)
Average loans
$
78.7

 
75.0

 
5

 
$
78.6

 
74.7

 
5

Average deposits
171.8

 
143.5

 
20

 
161.6

 
148.3

 
9

NM – Not meaningful
(1)
In second quarter 2020, insurance income was reclassified to other noninterest income, and expenses for cloud computing services were reclassified from contract services expense (within other noninterest expense) to technology and equipment expense. Prior period balances have been revised to conform with the current period presentation.
WIM net income decreased $422 million and $536 million in the second quarter and first half of 2020, respectively, compared with the same periods a year ago.
Net interest income decreased $301 million and $535 million in the second quarter and first half of 2020, respectively, compared with the same periods a year ago, driven by lower
 
interest rates, partially offset by higher average deposit balances and higher average loan balances.
Noninterest income decreased $89 million and $219 million in the second quarter and first half of 2020, respectively, compared with the same periods a year ago. The decrease in second quarter 2020, compared with the same period a year ago,

17


was driven by lower asset-based fees and lower brokerage transaction revenue, partially offset by net gains from equity securities driven by an increase in deferred compensation plan investment results (largely offset by lower personnel expense). The decrease in the first half of 2020, compared with the same period a year ago, was driven by net losses from equity securities driven by a decline in deferred compensation plan investment results (largely offset by lower personnel expense) and lower trust and investment management income, partially offset by higher retail brokerage advisory fees (priced at the beginning of the quarter).
The provision for credit losses increased $258 million and $262 million in the second quarter and first half of 2020, respectively, compared with the same periods a year ago, driven by current and forecasted economic conditions due to the impact of the COVID-19 pandemic.
Noninterest expense decreased $93 million and $293 million in the second quarter and first half of 2020, respectively, compared with the same periods a year ago. The decrease in second quarter 2020, compared with the same period a year ago, was driven by lower personnel expense from lower commissions and other incentive compensation, and lower technology and equipment expense related to the reversal of an accrual for software costs, partially offset by higher project spending on regulatory and compliance related initiatives included within other noninterest expense and higher deferred compensation plan expense within personnel expense (largely offset by net gains from equity securities). The decrease in the first half of 2020, compared with the same period a year ago, was due to lower personnel expense driven by lower deferred compensation plan expense (largely offset by net losses from equity securities) and incentive compensation, and lower technology and equipment expense related to the reversal of an accrual for software costs, partially offset by higher project spending on
 
regulatory and compliance related initiatives included within other noninterest expense and higher broker commissions within personnel expense.
Average loans increased $3.7 billion and $3.9 billion in the second quarter and first half of 2020, respectively, compared with the same periods a year ago, driven by growth in real estate 1-4 first mortgage loans.
Average deposits increased $28.3 billion and $13.3 billion in the second quarter and first half of 2020, respectively, compared with the same periods a year ago, primarily due to growth in brokerage clients’ cash balances.
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 4d shows advisory account client assets as a percentage of total retail brokerage client assets at June 30, 2020 and 2019.
Table 4d: Retail Brokerage Client Assets
 
June 30,
 
($ in billions)
2020

 
2019

Retail brokerage client assets
$
1,561.2

 
1,620.5

Advisory account client assets
569.4

 
561.3

Advisory account client assets as a percentage of total client assets
36
%
 
35

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 second quarter 2020 and 2019, the average fee rate by account type ranged from 80 to 120 basis points. Table 4e presents retail brokerage advisory account client assets activity by account type for the second quarter and first half of 2020 and 2019.

18

Earnings Performance (continued)




Table 4e: Retail Brokerage Advisory Account Client Assets
 
Quarter ended
 
 
Six months ended
 
(in billions)
Balance, beginning of period

Inflows (1)

Outflows (2)

Market impact (3)

Balance, end of period

 
Balance,
beginning of period

Inflows (1)

Outflows (2)

Market impact (3)

Balance,
end of period

June 30, 2020
 
 
 
 
 
 
 
 
 
 
 
Client directed (4)
$
142.7

7.3

(7.8
)
20.0

162.2

 
$
169.4

17.4

(17.4
)
(7.2
)
162.2

Financial advisor directed (5)
152.4

8.4

(6.6
)
22.6

176.8

 
176.3

19.1

(15.2
)
(3.4
)
176.8

Separate accounts (6)
134.2

5.0

(5.8
)
18.1

151.5

 
160.1

11.8

(14.3
)
(6.1
)
151.5

Mutual fund advisory (7)
69.5

2.2

(2.7
)
9.9

78.9

 
83.7

5.4

(7.2
)
(3.0
)
78.9

Total advisory client assets
$
498.8

22.9

(22.9
)
70.6

569.4

 
$
589.5

53.7

(54.1
)
(19.7
)
569.4

June 30, 2019
 
 
 
 
 
 
 
 
 
 
 
Client directed (4)
$
163.6

8.6

(9.7
)
3.7

166.2

 
$
151.5

16.5

(19.0
)
17.2

166.2

Financial advisor directed (5)
156.9

8.6

(8.7
)
6.4

163.2

 
141.9

16.1

(16.4
)
21.6

163.2

Separate accounts (6)
148.3

6.2

(8.0
)
5.4

151.9

 
136.4

11.8

(14.9
)
18.6

151.9

Mutual fund advisory (7)
77.9

2.9

(3.5
)
2.7

80.0

 
71.3

5.7

(6.7
)
9.7

80.0

Total advisory client assets
$
546.7

26.3

(29.9
)
18.2

561.3

 
$
501.1

50.1

(57.0
)
67.1

561.3

(1)
Inflows include new advisory account assets, contributions, dividends and interest.
(2)
Outflows include closed advisory account assets, withdrawals, and client management fees.
(3)
Market impact reflects gains and losses on portfolio investments.
(4)
Investment advice and other services are provided to client, but decisions are made by the client and the fees earned are based on a percentage of the advisory account assets, not the number and size of transactions executed by the client.
(5)
Professionally managed portfolios with fees earned based on respective strategies and as a percentage of certain client assets.
(6)
Professional advisory portfolios managed by Wells Fargo Asset Management or third-party asset managers. Fees are earned based on a percentage of certain client assets.
(7)
Program with portfolios constructed of load-waived, no-load and institutional share class mutual funds. Fees are earned based on a percentage of certain client assets.
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, which manages assets for high net worth clients. Generally, 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 and AUA, see the “Earnings Performance – Noninterest Income” section in this Report. Table 4f presents AUM activity for the second quarter and first half of 2020 and 2019.
Table 4f: WIM Trust and Investment – Assets Under Management
 
Quarter ended
 

Six months ended
 
(in billions)
Balance, beginning of period

Inflows (1)

Outflows (2)

Market impact (3)

Balance, end of period

 
Balance,
beginning of period

Inflows (1)

Outflows (2)

Market impact (3)

Balance,
end of period

June 30, 2020
 
 
 
 
 
 
 
 
 
 
 
Assets managed by WFAM (4):
 
 
 
 


 
 
 
 
 
 
Money market funds (5)
$
166.2

35.7



201.9

 
$
130.6

71.3



201.9

Other assets managed
351.6

26.9

(26.5
)
24.4

376.4

 
378.2

53.1

(55.1
)
0.2

376.4

Assets managed by Wealth and IRT (6)
162.8

8.5

(10.6
)
15.8

176.5

 
187.4

16.3

(21.2
)
(6.0
)
176.5

Total assets under management
$
680.6

71.1

(37.1
)
40.2

754.8

 
$
696.2

140.7

(76.3
)
(5.8
)
754.8

June 30, 2019
 
 
 
 
 
 
 
 
 
 
 
Assets managed by WFAM (4):

 

 

 
 
 
 
 
 
Money market funds (5)
$
109.5

10.3



119.8

 
$
112.4

7.4



119.8

Other assets managed
367.0

22.2

(23.0
)
9.1

375.3

 
353.5

41.5

(44.9
)
25.2

375.3

Assets managed by Wealth and IRT (6)
181.4

8.2

(11.2
)
3.5

181.9

 
170.7

17.4

(21.6
)
15.4

181.9

Total assets under management
$
657.9

40.7

(34.2
)
12.6

677.0

 
$
636.6

66.3

(66.5
)
40.6

677.0

(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 and $4.5 billion as of June 30, 2020 and 2019, respectively, of client assets invested in proprietary funds managed by WFAM.


19


Balance Sheet Analysis 
At June 30, 2020, our assets totaled $1.97 trillion, up $41.2 billion from December 31, 2019. Asset growth reflected an increase in cash, cash equivalents and restricted cash of $121.3 billion, partially offset by declines in debt securities and loans of $24.5 billion and $27.1 billion, respectively, as well as a $22.9 billion decrease in federal funds sold and securities purchased under resale agreements and a $15.7 billion decrease in equity 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 23 (Regulatory and Agency Capital Requirements) to Financial Statements in this Report.

Available-for-Sale and Held-to-Maturity Debt Securities
Table 5: Available-for-Sale and Held-to-Maturity Debt Securities
 
June 30, 2020
 
 
December 31, 2019
 
(in millions)
Amortized
cost, net (1)

 
Net
 unrealized
gain (loss)

 
Fair value

 
Amortized cost

 
Net
unrealized
gain (loss)

 
Fair value

Available-for-sale (2)
224,467

 
4,432

 
228,899

 
260,060

 
3,399

 
263,459

Held-to-maturity (3)
169,002

 
7,880

 
176,882

 
153,933

 
2,927

 
156,860

Total
$
393,469

 
12,312

 
405,781

 
413,993

 
6,326

 
420,319

(1)
Represents amortized cost of the securities, net of the allowance for credit losses, of $114 million related to available-for-sale debt securities and $20 million related to held-to-maturity debt securities at June 30, 2020. The allowance for credit losses related to available-for-sale and held-to-maturity debt securities was $0 at December 31, 2019, due to our adoption of CECL on January 1, 2020. For more information, see Note 1 (Summary of Significant Accounting Policies) to Financial Statements in this Report.
(2)
Available-for-sale debt securities are carried on the balance sheet at fair value, which includes the allowance for credit losses, subsequent to the adoption of CECL on January 1, 2020.
(3)
Held-to-maturity debt securities are carried on the balance sheet at amortized cost, net of allowance for credit losses, subsequent to the adoption of CECL on January 1, 2020.
Table 5 presents a summary of our available-for-sale and held-to-maturity debt securities, which decreased $19.5 billion in balance sheet carrying value from December 31, 2019, as purchases were more than offset by runoff and sales.
The total net unrealized gains on available-for-sale debt securities were $4.4 billion at June 30, 2020, up from net unrealized gains of $3.4 billion at December 31, 2019, driven by lower interest rates, partially offset by wider credit spreads. For a discussion of our investment management objectives and practices, see the “Balance Sheet Analysis” section in our 2019 Form 10-K. Also, see the “Risk Management – Asset/Liability Management” section in this Report for information on our use of investments to manage liquidity and interest rate risk.
After adoption of CECL, we recorded an allowance for credit losses on available-for-sale and held-to-maturity debt securities. Total provision/(reversal of provision) for credit losses on debt securities was $(31) million and $141 million in the second quarter and first half of 2020. For a discussion of our accounting policies relating to the allowance for credit losses on debt securities 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 June 30, 2020, debt securities included $47.3 billion of municipal bonds, of which 97.7% 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 evaluation of the appropriateness of the allowance for credit losses on debt securities.
The weighted-average expected maturity of debt securities available-for-sale was 4.3 years at June 30, 2020. The expected
 
remaining maturity is shorter than the remaining contractual maturity for the 65% of this portfolio that is mortgage-backed securities (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 6.
Table 6: Mortgage-Backed Securities Available-for-Sale
(in billions)
Fair value

 
Net unrealized gain (loss)

 
Expected remaining maturity
(in years)
At June 30, 2020
 
 
 
 
 
Actual
$
148.9

 
5.4

 
3.6
Assuming a 200 basis point:
 
 
 
 
 
Increase in interest rates
136.0

 
(7.5
)
 
5.5
Decrease in interest rates
151.5

 
8.0

 
3.2
The weighted-average expected remaining maturity of debt securities held-to-maturity (HTM) was 4.4 years at June 30, 2020. 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 7 provides a summary of total outstanding loans by portfolio segment. Total loans decreased $27.1 billion from December 31, 2019, predominantly due to a decrease in consumer loans.
Commercial loans decreased $2.5 billion from December 31, 2019, driven by paydowns of commercial and industrial loans

20

Balance Sheet Analysis (continued)

following increased loan draws in first quarter 2020, partially offset by growth in commercial real estate loans driven by new originations and construction loan fundings.
Consumer loans decreased $24.6 billion from December 31,
 
2019, due to paydowns exceeding originations. Also, in second quarter 2020, we designated $10.4 billion of real estate 1-4 family first lien mortgage loans as MLHFS.
Table 7: Loan Portfolios
(in millions)
June 30, 2020

 
December 31, 2019

Commercial
$
513,187

 
515,719

Consumer
421,968

 
446,546

Total loans
$
935,155

 
962,265

Change from prior year-end
$
(27,110
)
 
9,155


Average loan balances and a comparative detail of average loan balances is included in Table 1 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 Related Allowance for Credit Losses) to Financial Statements in this Report. 
See the “Balance Sheet Analysis – Loan Portfolios” section in our 2019 Form 10-K for information regarding contractual loan maturities and the distribution of loans to changes in interest rates.

Deposits
Deposits were $1.4 trillion at June 30, 2020, up $88.1 billion from December 31, 2019, reflecting strong growth across our deposit gathering businesses driven by impacts from the COVID-19 pandemic including customers’ preferences for liquidity, loan payment deferrals, tax payment deferrals, stimulus checks, and lower consumer spending. The increase in deposits was partially offset by actions taken to manage to the asset cap resulting in
 
declines in other time deposits driven by lower brokered certificates of deposit (CDs) and declines in deposits in non-U.S. offices.
Table 8 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 1 earlier in this Report. 
Table 8: Deposits
($ in millions) 
Jun 30,
2020

 
% of
total
deposits

 
Dec 31,
2019

 
% of
total
deposits

 

% Change

Noninterest-bearing
$
432,857

 
31
%
 
$
344,496

 
26
%
 
26

Interest-bearing checking
54,477

 
4

 
62,814

 
5

 
(13
)
Market rate and other savings
809,232

 
57

 
751,080

 
57

 
8

Savings certificates
26,118

 
2

 
31,715

 
2

 
(18
)
Other time deposits
53,203

 
4

 
78,609

 
6

 
(32
)
Deposits in non-U.S. offices (1)
34,824

 
2

 
53,912

 
4

 
(35
)
Total deposits
$
1,410,711

 
100
%
 
$
1,322,626

 
100
%
 
7

(1)
Includes Eurodollar sweep balances of $21.5 billion and $34.2 billion at June 30, 2020, and December 31, 2019, respectively.

21


Fair Value of Financial Instruments
We use fair value measurements to record fair value adjustments to certain financial instruments and to determine fair value disclosures. See the “Critical Accounting Policies” section in our 2019 Form 10-K and Note 16 (Fair Values of Assets and Liabilities) to Financial Statements in this Report for a description of our critical accounting policy related to fair value of financial instruments and a discussion of our fair value measurement techniques.
Table 9 presents the summary of the fair value of financial instruments recorded at fair value on a recurring basis, and the amounts measured using significant Level 3 inputs (before derivative netting adjustments). The fair value of the remaining assets and liabilities were measured using valuation methodologies involving market-based or market-derived information (collectively Level 1 and 2 measurements).
Table 9: Fair Value Level 3 Summary
 
June 30, 2020
 
 
December 31, 2019
 
($ in billions)
Total
balance

 
Level 3 (1)

 
Total
balance

 
Level 3 (1)

Assets carried
at fair value
$
380.5

 
20.4

 
428.6

 
24.3

As a percentage
of total assets
19
%
 
1

 
22

 
1

Liabilities carried
at fair value
$
31.6

 
1.6

 
26.5

 
1.8

As a percentage of
total liabilities
2
%
 
*

 
2

 
*

* Less than 1%.
(1)
Before derivative netting adjustments.

 
See Note 16 (Fair Values of Assets and Liabilities) to Financial Statements in this Report for additional information on fair value measurements and a description of the Level 1, 2 and 3 fair value hierarchy.

Equity
Total equity was $180.1 billion at June 30, 2020, compared with $188.0 billion at December 31, 2019. The decrease was driven by common stock repurchases of $3.4 billion (substantially all of which occurred in first quarter 2020), preferred stock redemptions of $2.5 billion, dividends of $4.8 billion, and a net loss of $1.8 billion, partially offset by the issuance of common and preferred stock of $4.0 billion.

22



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. For additional information on our contractual obligations that may require future cash payments, see the “Off-Balance Sheet Arrangements – Contractual Cash Obligations” section in our 2019 Form 10-K.
 
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 Related 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 13 (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.

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 13 (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 15 (Derivatives) to Financial Statements in this Report.



23


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. For more information about how we manage risk, see the “Risk Management” section in our 2019 Form 10-K. The discussion that follows supplements our discussion of the management of certain risks contained in the “Risk Management” section in our 2019 Form 10-K.
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 the Company’s Independent Risk Management (IRM) organization, has primary oversight responsibility for credit risk. Credit Risk reports to the Chief Risk Officer (CRO) and also provides periodic reports related to credit risk to the Board’s Credit Committee.

Coronavirus Aid, Relief, and Economic Security Act
On March 25, 2020, the U.S. Senate approved the Coronavirus Aid, Relief, and Economic Security Act (the CARES Act), a bill designed to provide a wide range of economic relief to consumers and businesses in the U.S.

PAYCHECK PROTECTION PROGRAM The CARES Act created funding for the Small Business Administration’s (SBA) loan program providing forgiveness of up to the full principal amount of qualifying loans guaranteed under a new program called the Paycheck Protection Program (PPP). The intent of the PPP is to provide loans to small businesses in order to keep their employees on the payroll and make certain other eligible payments. Loans granted under the PPP are guaranteed by the SBA and are fully forgivable if used for qualifying expenses such as payroll, mortgage interest, rent and utilities. If the loans are not forgiven, they must be repaid over a term not to exceed five years. Under the PPP, through June 30, 2020, we funded $10.1 billion in loans to more than 179,000 borrowers. As of June 30, 2020, $9.8 billion of principal remained outstanding on these PPP loans. We deferred $397 million of SBA processing fees that will be recognized as interest income over the term of the loans. We have committed to donating the gross processing fees received from funding PPP loans to non-profit organizations that support small businesses as the fees are recognized in earnings. We did not donate any processing fees during second quarter 2020.

PPP LIQUIDITY FACILITY The FRB established the Paycheck Protection Program Liquidity Facility which is intended to provide liquidity to financial institutions participating in PPP lending. Under this program, we act as a correspondent between the Federal Reserve Banks and community development financial institutions (CDFIs) to facilitate cash flows between the two entities. We do not receive any fees for our participation in this program.

SBA SIX MONTH PAYMENT ASSISTANCE Under the CARES Act, the SBA will make principal and interest payments on behalf of
 
certain borrowers for six months. As of June 30, 2020, over 20,000 of our lending customers were eligible for SBA payment assistance, and we had received $193 million in payments from the SBA.

MAIN STREET LENDING PROGRAM The Federal Reserve Board (FRB) established the Main Street Lending Program to provide additional financial support for small and medium sized businesses. Under the terms of the program, eligible lenders will perform underwriting and originate loans to eligible borrowers and subsequently sell 95% of the loan to a special purpose vehicle established by the FRB. We have registered as an eligible lender under the program and anticipate that we will begin funding customer loans in third quarter 2020.

Loan Portfolios
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 10 presents our total loans outstanding by portfolio segment and class of financing receivable.
Table 10: Total Loans Outstanding by Portfolio Segment and Class of Financing Receivable
(in millions)
Jun 30, 2020

 
Dec 31, 2019

Commercial:
 
 
 
Commercial and industrial
$
350,116

 
354,125

Real estate mortgage
123,967

 
121,824

Real estate construction
21,694

 
19,939

Lease financing
17,410

 
19,831

Total commercial
513,187

 
515,719

Consumer:
 
 
 
Real estate 1-4 family first mortgage
277,945

 
293,847

Real estate 1-4 family junior lien mortgage
26,839

 
29,509

Credit card
36,018

 
41,013

Automobile
48,808

 
47,873

Other revolving credit and installment
32,358

 
34,304

Total consumer
421,968

 
446,546

Total loans
$
935,155

 
962,265

We manage our credit risk by establishing what we believe are sound credit policies for underwriting new business, while monitoring and reviewing the performance of our existing loan portfolios. We employ various credit risk management and monitoring activities to mitigate risks associated with multiple risk factors affecting loans we hold, could acquire or originate including:
Loan concentrations and related credit quality
Counterparty credit risk
Economic and market conditions
Legislative or regulatory mandates
Changes in interest rates
Merger and acquisition activities
Reputation risk

Our credit risk management oversight process is governed centrally, but provides for decentralized management and accountability by our lines of business. Our overall credit process

24

Risk Management - Credit Risk Management (continued)

includes comprehensive credit policies, disciplined credit underwriting, frequent and detailed risk measurement and modeling, extensive credit training programs, and a continual loan review and audit process.
A key to our credit risk management is adherence to a well-controlled underwriting process, which we believe is appropriate for the needs of our customers as well as investors who purchase the loans or securities collateralized by the loans.
Credit Quality Overview  Credit quality in second quarter 2020 continued to decline due to the economic impact that the COVID-19 pandemic had on our customer base. Second quarter 2020 results reflected:
Nonaccrual loans were $7.6 billion at June 30, 2020, up from $5.3 billion at December 31, 2019, predominantly due to a $2.0 billion increase in commercial nonaccrual loans driven by increases in the commercial and industrial and commercial real estate portfolios as the economic impact of the COVID-19 pandemic continued to impact our customer base. Commercial nonaccrual loans increased to $4.3 billion at June 30, 2020, compared with $2.3 billion at December 31, 2019, and consumer nonaccrual loans increased to $3.3 billion at June 30, 2020, compared with $3.1 billion at December 31, 2019. Nonaccrual loans represented 0.81% of total loans at June 30, 2020, compared with 0.56% at December 31, 2019.
Net loan charge-offs (annualized) as a percentage of our average commercial and consumer loan portfolios were 0.44% and 0.48% in the second quarter and 0.35% and 0.51% in the first half of 2020, respectively, compared with 0.13% and 0.45% in the second quarter and 0.12% and 0.48% in the first half of 2019.
Loans that are not government insured/guaranteed and 90 days or more past due and still accruing were $145 million and $672 million in our commercial and consumer portfolios, respectively, at June 30, 2020, compared with $78 million and $855 million at December 31, 2019.
Our provision for credit losses for loans was $9.6 billion and $13.4 billion in the second quarter and first half of 2020, respectively, compared with $503 million and $1.3 billion for the same periods a year ago. The increase in provision for credit losses for loans in the second quarter and first half of 2020, compared with the same periods a year ago, reflected an increase in the allowance for credit losses for loans driven by current and forecasted economic conditions due to the COVID-19 pandemic, and higher net loan charge-offs driven by higher losses in our commercial real estate portfolio and continued weakness in our oil and gas portfolio.
The allowance for credit losses for loans totaled $20.4 billion, or 2.19% of total loans, at June 30, 2020, up from $10.5 billion, or 1.09%, at December 31, 2019.
Additional information on our loan portfolios and our credit quality trends follows.
TROUBLED DEBT RESTRUCTURING RELIEF The CARES Act provides banks optional, temporary relief from accounting for certain loan modifications as troubled debt restructurings (TDRs). The modifications must be related to the adverse effects of COVID-19, and certain other criteria are required to be met in order to apply the relief. In first quarter 2020, we elected to apply the TDR relief provided by the CARES Act, which expires no later than December 31, 2020.
On April 7, 2020, federal banking regulators issued the Interagency Statement on Loan Modifications and Reporting for
 
Financial Institutions Working with Customers Affected by the Coronavirus (Revised) (the Interagency Statement). The Interagency Statement provides additional TDR relief as it clarifies that it is not necessary to consider the impact of COVID-19 on the financial condition of a borrower in connection with short-term (e.g., six months or less) loan modifications related to COVID-19 provided the borrower is current at the date the modification program is implemented. For additional information regarding the TDR relief provided by the CARES Act and the clarifying TDR accounting guidance from the Interagency Statement, see Note 1 (Summary of Significant Accounting Policies) to Financial Statements in this Report.
The TDR relief provided under the CARES Act, as well as from the Interagency Statement, does not change our processes for monitoring the credit quality of our loan portfolios or for updating our measurement of the allowance for credit losses for loans based on expected losses.
Additionally, our election to apply the TDR relief provided by the CARES Act and the Interagency Statement impacts our regulatory capital ratios as these loan modifications related to COVID-19 are not adjusted to a higher risk-weighting normally required with TDR classification.

COVID-Related Lending Accommodations
During second quarter 2020, we continued to provide accommodations to our customers in response to the COVID-19 pandemic, including fee reversals for consumer and small business banking customers, and payment deferrals, fee waivers, covenant waivers, and other expanded assistance for mortgage, credit card, automobile, small business, personal and commercial lending customers. Foreclosure, collection and credit bureau reporting activities have also been suspended. Additionally, we deferred rental payments on certain leased assets for which we are the lessor. Customer payment deferral activities instituted in response to the COVID-19 pandemic could delay the recognition of net charge-offs, delinquencies, and nonaccrual status for those customers who would have otherwise moved into past due or nonaccrual status.
Table 11 and Table 11a summarize the unpaid principal balance (UPB) of commercial and consumer loans at June 30, 2020, that received accommodations under loan modification programs established to assist customers with the economic impact of the COVID-19 pandemic (COVID-related modifications), and exclude accommodations made for customers with loans that we service for others. COVID-related modifications primarily included payment deferrals of principal, interest or both as well as interest and fee waivers. As of June 30, 2020, the unpaid principal balance of loans with COVID-related modifications represented 7% and 13% of our total commercial and consumer loan portfolios, respectively, and included customers that continued to make payments after receiving a modification and those that were no longer in a deferral period.
If the COVID-19 pandemic continues to cause economic uncertainty, customers may request additional or extended accommodations. During second quarter 2020, we provided certain extensions of prior modifications for up to an additional 90 days. As of June 30, 2020, the unpaid principal balance of commercial and consumer loans that received extensions of prior modifications was $9.7 billion and $876 million, respectively.
Of the loans that received COVID-related modifications, $38 billion and $50 billion of unpaid principal balance of commercial and consumer loans, respectively, were not classified as TDRs as of June 30, 2020, of which 5% for both commercial and consumer loans qualified for TDR designation relief under the CARES Act or Interagency Statement. Additionally, the tables

25


include $241 million and $3 billion of unpaid principal balance of commercial and consumer loans, respectively, that were already classified as TDRs when the COVID-related modification was granted.
 
For information related to loans that are classified as TDRs, see Note 6 (Loans and Allowance for Credit Losses) to Financial Statements this Report.
Table 11: Commercial Loan Modifications Related to COVID-19
(in millions)
Unpaid
principal
balance of modified loans (1)

 
% of loan class (2)

 
General program description
Six months ended June 30, 2020
 
 
 
 
 
Commercial:
 
 
 
 
 
Commercial and industrial
$
20,656

 
6
%
 
Initial deferral of scheduled principal and/or interest up to 90 days, with available extensions up to 90 days
Real estate mortgage and construction
16,229

 
11

 
Initial deferral of scheduled principal and/or interest up to 90 days, with available extensions up to 90 days
Lease financing
1,287

 
7

 
Initial deferral of lease payments up to 90 days, with available extensions up to 90 days
Total commercial
$
38,172

 
7
%
 
 
(1)
Includes all COVID-related modifications provided since the inception of the loan modification programs in first quarter 2020. COVID-related modifications are at the loan facility level.
(2)
Based on total loans outstanding at June 30, 2020.
Table 11a: Consumer Loan Modifications Related to COVID-19
(in millions)
Unpaid principal balance of modified loans (1)

 
% of loan class (2)

% current at time of deferral (3)
 
% with payment during deferral (4)

 
Unpaid principal balance of modified loans still in deferral period

% of loan class (2)

 
General program description
Six months ended June 30, 2020
 
 
 
 
 
 
 
 
 
 
 
Consumer:
 
 
 
 
 
 
 
 
 
 
 
Real estate 1-4 family first mortgage (5)
$
38,022

 
14
%
79
 
34

 
$
32,253

12
%
 
Initial deferral up to 90 days of scheduled principal and interest; with available extensions up to 90 days
Real estate 1-4 family junior lien mortgage
3,123

 
12

88
 
62

 
2,812

10

 
Initial deferral up to 90 days of scheduled principal and interest; with available extensions up to 90 days
Credit card
3,173

 
9

91
 
48

 
2,616

7

 
Initial 90 day deferral of minimum payment and waiver of interest and fees; modifications subsequent to June 3, 2020, including extensions, were 60 day deferral of minimum payment only
Automobile
6,560

 
13

87
 
24

 
4,880

10

 
Initial 90 day deferral of scheduled principal and interest, with available extensions of 90 days
Other revolving credit and installment
1,968

 
6

89
 
20

 
1,673

5

 
Revolving lines: Initial 90 day deferral of minimum payment and waiver of interest and fees; with available extensions of 60 days
Installment loans: Initial 90 day deferral of scheduled principal and interest, with available extensions of 90 days
Total consumer
$
52,846

 
13
%
82
 
35

 
$
44,234

10
%
 
 
(1)
Includes all COVID-related modifications provided since the inception of the loan modification programs in first quarter 2020.
(2)
Based on total loans outstanding at June 30, 2020.
(3)
Represents loans that were less than 30 days past due at the date of the initial COVID-related modification, based on the outstanding balance of modified loans at June 30, 2020.
(4)
Represents loans for which at least a partial payment was collected during the deferral period, based on the outstanding balance of modified loans at June 30, 2020.
(5)
Unpaid principal balance includes approximately $7.4 billion of real estate 1-4 family first mortgage loans insured by the Federal Housing Administration (FHA) or guaranteed by the Department of Veterans Affairs (VA) that were repurchased from GNMA loan securitization pools. FHA/VA loans are entitled to payment deferrals of scheduled principal and interest up to a total of 12 months. Excluding these loans, the percentage current at time of deferral was 95%.
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 loan portfolios. See Note 6 (Loans and Related 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 federal banking regulators’ definitions of pass and criticized categories with the criticized category including special mention, substandard, doubtful, and loss categories.
The commercial and industrial loans and lease financing portfolio totaled $367.5 billion, or 39% of total loans, at June 30, 2020. The net charge-off rate (annualized) of average loans for this portfolio was 0.54% and 0.45% in the second quarter and first

26

Risk Management - Credit Risk Management (continued)

half of 2020, respectively, compared with 0.18% and 0.17% for the same periods a year ago. At June 30, 2020, 0.83% of this portfolio was nonaccruing, compared with 0.44% at December 31, 2019. Nonaccrual loans in this portfolio increased $1.4 billion from December 31, 2019, primarily in the oil, gas and pipelines category due to the economic impact of the COVID-19 pandemic. Also, $27.8 billion of the commercial and industrial loan and lease financing portfolio was internally classified as criticized in accordance with regulatory guidance at June 30, 2020, compared with $16.6 billion at December 31, 2019, reflecting increases primarily in the oil, gas and pipelines, real estate and construction, entertainment and recreation, and retail categories due to the economic impact of the COVID-19 pandemic.
The majority 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.
Table 12 provides our commercial and industrial loans and lease financing by industry, and includes non-U.S. loans of $68.2 billion and $71.7 billion at June 30, 2020, and December 31, 2019, respectively. Significant industry concentrations of non-U.S. loans included $32.7 billion and $31.2 billion in the financials except banks category, and $15.5 billion and $19.9 billion in the banks category, at June 30, 2020, and December 31, 2019, respectively. The oil, gas and pipelines category included $1.6 billion of non-U.S. loans at both June 30, 2020, and December 31, 2019. The industry categories are based on the North American Industry Classification System.
Loans to financials except banks, our largest industry concentration, were $112.1 billion, or 12% of total outstanding
 
loans, at June 30, 2020, compared with $117.3 billion, or 12% of total outstanding loans, at December 31, 2019. This industry category is comprised of 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 had $72.4 billion and $75.2 billion of loans originated by our Asset Backed Finance (ABF) lines of business at June 30, 2020, and December 31, 2019, respectively. These ABF loans are limited to a percentage of the value of the underlying financial assets considering underlying credit risk, asset duration, and ongoing performance. These ABF loans may also have other features to manage credit risk such as cross-collateralization, credit enhancements, and contractual re-margining of collateral supporting the loans. Loans to financials except banks included collateralized loan obligations (CLOs) in loan form of $7.7 billion and $7.0 billion at June 30, 2020, and December 31, 2019, respectively.
Oil, gas and pipelines loans totaled $12.6 billion, or 1% of total outstanding loans, at June 30, 2020, compared with $13.6 billion, or 1% of total outstanding loans, at December 31, 2019. Oil, gas and pipelines loans included $8.9 billion and $9.2 billion of senior secured loans outstanding at June 30, 2020 and December 31, 2019, respectively. Oil, gas and pipelines nonaccrual loans increased to $1.4 billion at June 30, 2020, compared with $615 million at December 31, 2019, due to new downgrades to nonaccrual status in second quarter 2020.
In addition to the oil, gas and pipelines category, industries with escalated credit monitoring include retail, entertainment and recreation, transportation services, and commercial real estate.
Table 12: Commercial and Industrial Loans and Lease Financing by Industry
 
June 30, 2020
 
 
December 31, 2019
 
($ in millions)
Nonaccrual
loans

 
Loans outstanding

 
% of
total
loans

 
Total commitments (1)

 
Nonaccrual
loans

 
Loans outstanding

 
% of
total
loans

 
Total commitments (1)

Financials except banks
$
219

 
112,130

 
12
%
 
$
197,152

 
$
112

 
117,312

 
12
%
 
$
200,848

Equipment, machinery and parts manufacturing
98

 
21,622

 
2

 
41,771

 
36

 
23,457

 
2

 
42,040

Technology, telecom and media
61

 
24,912

 
3

 
54,894

 
28

 
22,447

 
2

 
53,343

Real estate and construction
290

 
25,245

 
3

 
49,925

 
47

 
22,011

 
2

 
48,217

Banks

 
15,548

 
2

 
16,598

 

 
20,070

 
2

 
20,728

Retail
216

 
23,149

 
2

 
43,212

 
105

 
19,923

 
2

 
41,938

Materials and commodities
46

 
15,877

 
2

 
37,877

 
33

 
16,375

 
2

 
39,369

Automobile related
24

 
13,103

 
1

 
25,162

 
24

 
15,996

 
2

 
26,310

Food and beverage manufacturing
12

 
13,082

 
1

 
29,284

 
9

 
14,991

 
2

 
29,172

Health care and pharmaceuticals
76

 
17,144

 
2

 
32,481

 
28

 
14,920

 
2

 
30,168

Oil, gas and pipelines
1,414

 
12,598

 
1

 
32,679

 
615

 
13,562

 
1

 
35,445

Entertainment and recreation
62

 
11,820

 
1

 
18,134

 
44

 
13,462

 
1

 
19,854

Transportation services
319

 
10,849

 
1

 
17,040

 
224

 
10,957

 
1

 
17,660

Commercial services
98

 
12,095

 
1

 
24,548

 
50

 
10,455

 
1

 
22,713

Agribusiness
54

 
7,362

 
*

 
12,984

 
35

 
7,539

 
*

 
12,901

Utilities
1

 
6,486

 
*

 
20,615

 
224

 
5,995

 
*

 
19,390

Insurance and fiduciaries
2

 
6,032

 
*

 
17,069

 
1

 
5,525

 
*

 
15,596

Government and education
6

 
5,741

 
*

 
12,128

 
6

 
5,363

 
*

 
12,267

Other (2)
36

 
12,731

 
1

 
32,843

 
19

 
13,596

 
*

 
32,988

Total
$
3,034

 
367,526

 
39
%
 
$
716,396

 
$
1,640

 
373,956

 
39
%
 
$
720,947

*
Less than 1%.
(1)
Total commitments consist of loans outstanding plus unfunded credit commitments, excluding issued letters of credit.
(2)
No other single industry had total loans in excess of $4.4 billion and $4.7 billion at June 30, 2020, and December 31, 2019, respectively.

27


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 federal banking regulators' definitions of pass and criticized categories with criticized segmented among special mention, substandard, doubtful and loss categories. The CRE portfolio, which included $8.2 billion of non-U.S. CRE loans, totaled $145.7 billion, or 16% of total loans, at June 30, 2020, and consisted of $124.0 billion of mortgage loans and $21.7 billion of construction loans.
Table 13 summarizes CRE loans by state and property type with the related nonaccrual totals at June 30, 2020. The portfolio is diversified both geographically and by property type. The largest geographic concentrations of CRE loans are in California, New York, Florida, and Texas, which combined represented 49% of the total CRE portfolio. By property type, the largest
 
concentrations are office buildings at 26% and apartments at 19% of the portfolio. CRE nonaccrual loans totaled 0.86% of the CRE outstanding balance at June 30, 2020, compared with 0.43% at December 31, 2019. The increase in CRE nonaccrual loans was driven by the hotel/motel, shopping center, and office buildings property types and reflected the economic impact of the COVID-19 pandemic. At June 30, 2020, we had $9.1 billion of criticized CRE mortgage loans, compared with $3.8 billion at December 31, 2019, and $1.3 billion of criticized CRE construction loans, compared with $187 million at December 31, 2019. The increase in criticized CRE mortgage and CRE construction loans was driven by the hotel/motel, shopping center, retail (excluding shopping center), and office building property types and reflected the economic impact of the COVID-19 pandemic.
Table 13: CRE Loans by State and Property Type
 
June 30, 2020
 
 
Real estate mortgage
 
 
 
 
Real estate construction
 
 
 
 
Total
 
 
 
 
% of
total
loans

($ in millions)
Nonaccrual
loans

 
Total
portfolio

 
 
 
Nonaccrual
loans

 
Total
portfolio

 
 
 
Nonaccrual
loans

 
Total
portfolio

 
 
 
By state:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
California
$
149

 
32,164

 
 
 
2

 
4,666

 
 
 
151

 
36,830

 
 
 
4
%
New York
96

 
12,952

 
 
 
2

 
2,059

 
 
 
98

 
15,011

 
 
 
2

Florida
27

 
8,295

 
 
 
1

 
1,446

 
 
 
28

 
9,741

 
 
 
1

Texas
341

 
8,047

 
 
 

 
1,226

 
 
 
341

 
9,273

 
 
 
*

Washington
13

 
3,934

 
 
 

 
782

 
 
 
13

 
4,716

 
 
 
*

Georgia
15

 
4,043

 
 
 

 
448

 
 
 
15

 
4,491

 
 
 
*

North Carolina
12

 
3,737

 
 
 

 
648

 
 
 
12

 
4,385

 
 
 
*

Arizona
35

 
3,862

 
 
 

 
318

 
 
 
35

 
4,180

 
 
 
*

Colorado
16

 
3,300

 
 
 

 
587

 
 
 
16

 
3,887

 
 
 
*

Virginia
4

 
3,036

 
 
 

 
664

 
 
 
4

 
3,700

 
 
 
*

Other
509

 
40,597

 
 
 
29

 
8,850

 
 
 
538

 
49,447

 
(1)
 
5

Total
$
1,217

 
123,967

 
 
 
34

 
21,694

 
 
 
1,251

 
145,661

 
 
 
16
%
By property: 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Office buildings
$
160

 
35,280

 
 
 
1

 
3,209

 
 
 
161

 
38,489

 
 
 
4
%
Apartments
11

 
19,284

 
 
 

 
7,694

 
 
 
11

 
26,978

 
 
 
3

Industrial/warehouse
72

 
16,149

 
 
 
1

 
1,674

 
 
 
73

 
17,823

 
 
 
2

Retail (excluding shopping center)
171

 
14,211

 
 
 
2

 
181

 
 
 
173

 
14,392

 
 
 
2

Hotel/motel
170

 
10,637

 
 
 

 
1,610

 
 
 
170

 
12,247

 
 
 
1

Shopping center
399

 
10,878

 
 
 

 
1,055

 
 
 
399

 
11,933

 
 
 
1

Mixed use properties
90

 
5,641

 
 
 

 
640

 
 
 
90

 
6,281

 
 
 
*

Institutional
77

 
3,910

 
 
 
20

 
2,159

 
 
 
97

 
6,069

 
 
 
*

Collateral pool

 
2,336

 
 
 

 
202

 
 
 

 
2,538

 
 
 
*

Agriculture
61

 
2,006

 
 
 

 
9

 
 
 
61

 
2,015

 
 
 
*

Other
6

 
3,635

 
 
 
10

 
3,261

 
 
 
16

 
6,896

 
 
 
*

Total
$
1,217

 
123,967

 
 
 
34

 
21,694

 
 
 
1,251

 
145,661

 
 
 
16
%
*
Less than 1%.
(1)Consists of 40 states, none of which had loans in excess of $3.7 billion.


28

Risk Management - Credit Risk Management (continued)

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 June 30, 2020, non-U.S. loans totaled $76.6 billion, representing approximately 8% of our total consolidated loans outstanding, compared with $80.5 billion, or approximately 8% of total consolidated loans outstanding, at December 31, 2019. Non-U.S. loans were approximately 4% of our consolidated total assets at both June 30, 2020, and December 31, 2019.

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 June 30, 2020, was the United Kingdom, which totaled $36.3 billion, or approximately 2% of our total assets, and included $11.6 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 supplier contracts and staffing arrangements. For additional information on risks associated with Brexit, see the “Risk Factors” section in our 2019 Form 10-K.
Table 14 provides information regarding our top 20 exposures by country (excluding the U.S.), based on our assessment of risk, which gives consideration to the country of any guarantors and/or underlying collateral. With respect to
Table 14:
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.
Table 14: Select Country Exposures
 
June 30, 2020
 
 
Lending
 
 
Securities
 
 
Derivatives and other
 
 
Total exposure
 
(in millions)
Sovereign

 
Non-
sovereign

 
Sovereign

 
Non-
sovereign

 
Sovereign

 
Non-
sovereign

 
Sovereign

 
Non-
sovereign (1)

 
Total

Top 20 country exposures:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
United Kingdom
$
11,579

 
21,649

 

 
1,189

 

 
1,894

 
11,579

 
24,732

 
36,311

Canada
4

 
16,575

 

 
87

 

 
425

 
4

 
17,087

 
17,091

Cayman Islands

 
6,398

 

 

 

 
138

 

 
6,536

 
6,536

Ireland
1,217

 
4,873

 

 
168

 

 
117

 
1,217

 
5,158

 
6,375

Japan
19

 
1,049

 
4,535

 
236

 

 
28

 
4,554

 
1,313

 
5,867

Luxembourg

 
3,745

 

 
102

 

 
64

 

 
3,911

 
3,911

Guernsey

 
3,522

 

 
3

 

 
16

 

 
3,541

 
3,541

China

 
2,838

 
(14
)
 
327

 
49

 
53

 
35

 
3,218

 
3,253

Bermuda

 
3,034

 

 
73

 

 
56

 

 
3,163

 
3,163

Germany

 
2,621

 

 
179

 
6

 
60

 
6

 
2,860

 
2,866

Netherlands

 
2,382

 

 
205

 

 
272

 

 
2,859

 
2,859

South Korea

 
2,573

 
(5
)
 
181

 

 
16

 
(5
)
 
2,770

 
2,765

Switzerland

 
1,924

 

 
(79
)
 

 
121

 

 
1,966

 
1,966

France

 
1,729

 

 
43

 
20

 
15

 
20

 
1,787

 
1,807

Brazil

 
1,626

 

 
4

 
5

 
11

 
5

 
1,641

 
1,646

Chile

 
1,481

 

 
150

 

 
2

 

 
1,633

 
1,633

Australia

 
1,405

 

 
66

 

 
14

 

 
1,485

 
1,485

Singapore

 
1,173

 

 
72

 

 
49

 

 
1,294

 
1,294

India

 
1,185

 

 
94

 

 

 

 
1,279

 
1,279

United Arab Emirates

 
1,029

 

 
3

 

 
2

 

 
1,034

 
1,034

Total top 20 country exposures
$
12,819

 
82,811

 
4,516

 
3,103

 
80

 
3,353

 
17,415

 
89,267

 
106,682

(1)
For countries presented in the table, total non-sovereign exposure comprises $45.9 billion exposure to financial institutions and $43.3 billion to non-financial corporations at June 30, 2020.



29


REAL ESTATE 1-4 FAMILY MORTGAGE LOANS  Our real estate 1-4 family mortgage loan portfolio is comprised of both first and junior lien mortgage loans, which are presented in Table 15.
Table 15: Real Estate 1-4 Family Mortgage Loans
 
June 30, 2020
 
 
December 31, 2019
 
(in millions)
Balance

 
% of
portfolio

 
Balance

 
% of
portfolio

Real estate 1-4 family first mortgage
$
277,945

 
91
%
 
$
293,847

 
91
%
Real estate 1-4 family junior lien mortgage
26,839

 
9

 
29,509

 
9

Total real estate 1-4 family mortgage loans
$
304,784

 
100
%
 
$
323,356

 
100
%

The real estate 1-4 family mortgage loan portfolio includes some loans with an interest-only feature as part of the loan terms and some with adjustable-rate features. Interest-only loans were approximately 3% of total loans at both June 30, 2020, and December 31, 2019. We believe we have manageable adjustable-rate mortgage (ARM) reset risk across our mortgage loan portfolios, including ARM loans that have negative amortizing features that were acquired in prior business combinations. 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. In connection with our adoption of CECL on January 1, 2020, our real estate 1-4 family mortgage purchased credit-impaired (PCI) loans, which had a carrying value of $568 million, were reclassified as purchased credit-deteriorated (PCD) loans. PCD loans are generally accounted for in the same manner as non-PCD loans. For more information on PCD loans, see Note 1 (Summary of Significant Accounting Policies) to Financial Statements in this Report.
We continue to modify real estate 1-4 family mortgage loans to assist homeowners and other borrowers experiencing financial difficulties. For more information on our modification programs, see the “Risk Management – Credit Risk Management – Real Estate 1-4 Family Mortgage Loans” section in our 2019
Form 10-K. For more information on customer accommodations, including loan modifications, in response to the COVID-19 pandemic, see the “Risk Management – Credit Risk Management – COVID-Related Lending Accommodations” section in this Report.
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 mortgage portfolio exclude government insured/guaranteed loans. Loans 30 days or more delinquent at June 30, 2020, totaled $2.9 billion, or 1% of total mortgages, compared with $3.0 billion, or 1%, at December 31, 2019. Loans with FICO scores lower than 640 totaled $6.8 billion, or 2% of total mortgages at June 30, 2020, compared with $7.6 billion, or 2%, at December 31, 2019. Mortgages with a LTV/CLTV greater than 100% totaled $2.3 billion at June 30, 2020, or 1% of total mortgages, compared with $2.5 billion, or 1%, at December 31, 2019. Information regarding credit quality indicators can be found in Note 6 (Loans and Related Allowance for Credit Losses) to Financial Statements in this Report.
 
Real estate 1-4 mortgage loans by state are presented in Table 16. Our real estate 1-4 family mortgage loans to borrowers in California represented 13% of total loans at June 30, 2020, 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. Additional information about appraisals and AVMs and our policy for their use can be found in Note 6 (Loans and Related Allowance for Credit Losses) to Financial Statements in this Report and the “Risk Management – Credit Risk Management – Real Estate 1-4 Family Mortgage Loans” section in our 2019 Form 10-K.
Table 16: Real Estate 1-4 Family Mortgage Loans by State
 
June 30, 2020
 
(in millions)
Real estate
1-4 family
first
mortgage

 
Real estate
1-4 family
junior lien
mortgage

 
Total real
estate 1-4
family
mortgage

 
% of
total
loans

Real estate 1-4 family mortgage loans:
 
 
 
 
 
 
 
California
$
112,828

 
7,291

 
120,119

 
13
%
New York
31,163

 
1,406

 
32,569

 
3

New Jersey
13,159

 
2,539

 
15,698

 
2

Florida
11,172

 
2,393

 
13,565

 
2

Washington
10,302

 
603

 
10,905

 
1

Virginia
7,829

 
1,549

 
9,378

 
1

Texas
8,309

 
546

 
8,855

 
1

North Carolina
5,287

 
1,262

 
6,549

 
1

Colorado
5,929

 
595

 
6,524

 
1

Other (1)
59,505

 
8,655

 
68,160

 
7

Government insured/
guaranteed loans (2)
12,462

 

 
12,462

 
1

Total
$
277,945

 
26,839

 
304,784

 
33
%
(1)
Consists of 41 states; none of which had loans in excess of $6.2 billion.
(2)
Represents loans whose repayments are predominantly insured by the Federal Housing Administration (FHA) or guaranteed by the Department of Veterans Affairs (VA).


30

Risk Management - Credit Risk Management (continued)

First Lien Mortgage Portfolio  Our total real estate 1-4 family first lien mortgage portfolio (first mortgage) decreased $15.0 billion and $15.9 billion in the second quarter and first half of 2020, respectively. Mortgage loan originations of $16.4 billion and $30.7 billion in the second quarter and first half of 2020, respectively, were more than offset by paydowns. In addition, in second quarter 2020 we designated $10.4 billion of first mortgage loans as MLHFS.
Net loan charge-offs (annualized) as a percentage of average first mortgage loans were 0.00% in both the second quarter and first half of 2020, compared with a net recovery of 0.04% and
 
0.03% for the same periods a year ago. Nonaccrual loans were $2.4 billion at June 30, 2020, up $243 million from December 31, 2019. The increase in nonaccrual loans from December 31, 2019 was driven by the implementation of CECL, which required PCI loans to be classified as nonaccruing based on performance. For additional information, see the “Risk Management – Credit Risk Management – Nonperforming Assets (Nonaccrual Loans and Foreclosed Assets)” section in this Report.
Table 17 shows certain delinquency and loss information for the first mortgage portfolio and lists the top five states by outstanding balance.
Table 17: First Mortgage Portfolio Performance
 
Outstanding balance
 
 
% of loans 30 days
or more past due
 
Loss (recovery) rate (annualized) quarter ended
 
(in millions)
Jun 30,
2020

Dec 31,
2019

 
Jun 30,
2020

Dec 31,
2019
 
Jun 30,
2020

Mar 31,
2020

Dec 31,
2019

Sep 30,
2019

Jun 30,
2019

California
$
112,828

118,256

 
0.59
%
0.48
 
(0.01
)
(0.01
)
(0.02
)
(0.01
)
(0.04
)
New York
31,163

31,336

 
0.95

0.83
 
0.02

(0.01
)
0.02

0.01


New Jersey
13,159

14,113

 
1.38

1.40
 
0.03


0.02

0.02

(0.06
)
Florida
11,172

11,804

 
2.07

1.81
 
(0.01
)
(0.03
)
(0.06
)
(0.07
)
(0.11
)
Washington
10,302

10,863

 
0.37

0.29
 
(0.01
)
(0.02
)
(0.02
)

(0.03
)
Other
86,859

95,750

 
1.21

1.20
 
0.01

0.01

(0.02
)

(0.06
)
Total
265,483

282,122

 
0.93

0.86
 


(0.02
)
(0.01
)
(0.04
)
Government insured/guaranteed loans
12,462

11,170

 
 
 
 
 
 
 
 
 
PCI (1)
N/A

555

 
 
 
 
 
 
 
 
 
Total first lien mortgages
$
277,945

293,847

 
 
 
 
 
 
 
 
 
(1)
In connection with our adoption of CECL on January 1, 2020, PCI loans were reclassified as PCD loans and are therefore included with other non-PCD loans in this table. For more information, see Note 1 (Summary of Significant Accounting Policies) to Financial Statements in this Report.
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 18 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, 2019, predominantly
 
reflected loan paydowns. In second quarter 2020, we suspended the origination of junior lien mortgages. As of June 30, 2020, 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 June 30, 2020. For additional information on consumer loans by LTV/CLTV, see Table 6.12 in Note 6 (Loans and Related Allowance for Credit Losses) to Financial Statements in this Report.
Table 18: Junior Lien Mortgage Portfolio Performance
 
Outstanding balance
 
 
% of loans 30 days
or more past due
 
Loss (recovery) rate (annualized) quarter ended
 
(in millions)
Jun 30,
2020

 
Dec 31,
2019

 
Jun 30,
2020

 
Dec 31,
2019
 
Jun 30,
2020

 
Mar 31,
2020

 
Dec 31,
2019

 
Sep 30,
2019

 
Jun 30,
2019

California
$
7,291

 
8,054

 
1.55
%
 
1.62
 
(0.26
)
 
(0.36
)
 
(0.44
)
 
(0.51
)
 
(0.40
)
New Jersey
2,539

 
2,744

 
2.36

 
2.74
 
(0.12
)
 
0.13

 
0.07

 
0.11

 
(0.07
)
Florida
2,393

 
2,600

 
2.38

 
2.93
 
(0.01
)
 

 
(0.09
)
 
(0.11
)
 
(0.11
)
Virginia
1,549

 
1,712

 
1.79

 
1.97
 
(0.05
)
 
0.09

 
(0.02
)
 
(0.23
)
 
(0.17
)
Pennsylvania
1,540

 
1,674

 
1.78

 
2.16
 
0.05

 
0.11

 
(0.10
)
 
(0.05
)
 
(0.19
)
Other
11,527

 
12,712

 
1.77

 
2.05
 
(0.21
)
 
0.01

 
(0.18
)
 
(0.29
)
 
(0.22
)
Total
26,839

 
29,496

 
1.82

 
2.07
 
(0.17
)
 
(0.07
)
 
(0.21
)
 
(0.28
)
 
(0.24
)
PCI (1)
N/A

 
13

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total junior lien mortgages
$
26,839

 
29,509

 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1)
In connection with our adoption of CECL on January 1, 2020, PCI loans were reclassified as PCD loans and are therefore included with other non-PCD loans in this table. For more information, see Note 1 (Summary of Significant Accounting Policies) to Financial Statements in this Report.

31


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 June 30, 2020, 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 June 2020, excluding borrowers with COVID-19 related loan modification payment deferrals, approximately 44% of borrowers paid only the minimum amount due and approximately 52% 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 28% paid only the minimum amount due and approximately 68% 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 19 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 June 30, 2020, $367 million, or 1%, of lines in their draw period were 30 days or more past due, compared with $344 million, or 4%, of amortizing lines of credit. Included in the amortizing amounts in Table 19 is $61 million of end-of-term balloon payments which were past due. The unfunded credit commitments for junior and first lien lines totaled $57.7 billion at June 30, 2020.
Table 19: Junior Lien Mortgage Line and Loan and First Lien Mortgage Line Portfolios Payment Schedule
 
 
 
 
 
Scheduled end of draw / term
 
 
 
(in millions)
Outstanding balance June 30, 2020

 
Remainder of 2020

 
2021

 
2022

 
2023

 
2024

 
2025 and
thereafter (1)

 
Amortizing

Junior lien lines and loans
$
26,839

 
133

 
739

 
2,982

 
2,055

 
1,646

 
11,101

 
8,183

First lien lines
9,806

 
60

 
367

 
1,501

 
1,128

 
879

 
4,247

 
1,624

Total
$
36,645

 
193

 
1,106

 
4,483

 
3,183

 
2,525

 
15,348

 
9,807

% of portfolios
100
%
 
1

 
3

 
12

 
9

 
7

 
42

 
26

(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 $1.7 billion to $4.3 billion and averaging $2.9 billion per year.
CREDIT CARDS  Our credit card portfolio totaled $36.0 billion at June 30, 2020, which represented 4% of our total outstanding loans. The net charge-off rate (annualized) for our credit card portfolio was 3.60% for second quarter 2020, compared with 3.68% for second quarter 2019, and 3.71% for the first half of both 2020 and 2019. The decrease in the net charge-off rate in second quarter 2020, compared with the same period a year ago, was driven by payment deferral activities in response to the COVID-19 pandemic.
 
AUTOMOBILE  Our automobile portfolio totaled $48.8 billion at June 30, 2020. The net charge-off rate (annualized) for our automobile portfolio was 0.88% for second quarter 2020, compared with 0.46% for second quarter 2019, and 0.78% and 0.64% for the first half of 2020 and 2019, respectively. The increase in the net charge-off rate in the second quarter and first half of 2020, compared with the same periods in 2019, was driven by lower recoveries due to the temporary suspension of involuntary repossessions in response to the COVID-19 pandemic.
 
OTHER REVOLVING CREDIT AND INSTALLMENT Other revolving credit and installment loans totaled $32.4 billion at June 30, 2020, and largely included student and securities-based loans. Our private student loan portfolio totaled $10.3 billion at June 30, 2020. On July 1, 2020, we announced that only customers with an outstanding private student loan balance will be eligible for new loans for the upcoming academic year. The net charge-off rate (annualized) for other revolving credit and installment loans was 1.09% for second quarter 2020, compared with 1.56% for second quarter 2019, and 1.35% and 1.52% for the first half of 2020 and 2019, respectively. The decrease in the net charge-off rate in the second quarter and first half of 2020, compared with the same periods a year ago, was driven by payment deferral activities in response to the COVID-19 pandemic.

32

Risk Management - Credit Risk Management (continued)

NONPERFORMING ASSETS (NONACCRUAL LOANS AND FORECLOSED ASSETS) Table 20 summarizes nonperforming assets (NPAs) for each of the last four quarters. Total NPAs increased $1.4 billion from first quarter 2020 to $7.8 billion. Nonaccrual loans of $7.6 billion increased $1.4 billion from first quarter 2020. The increase in nonaccrual loans was driven by an increase in commercial nonaccrual loans predominantly due to an increase in oil and gas and real estate mortgage nonaccrual loans as the economic impact of the COVID-19 pandemic continued to impact our customer base. Customer payment deferral activities instituted in response to the COVID-19 pandemic may delay recognition of delinquencies for customers who otherwise would have moved into nonaccrual status. Prior to January 1, 2020, PCI loans were excluded from nonaccrual loans because they continued to earn interest income from accretable yield, independent of performance in accordance with their contractual terms. However, as a result of our adoption of CECL on January 1,
 
2020, $275 million of real estate 1-4 family mortgage loans were reclassified from PCI to PCD loans, and as a result, were also classified as nonaccrual loans given their contractual delinquency. For more information on PCD loans, see Note 1 (Summary of Significant Accounting Policies) to Financial Statements in this Report.
For information about when we generally place loans on nonaccrual status, see Note 1 (Summary of Significant Accounting Policies) to Financial Statements in our 2019 Form 10-K. For more information on customer accommodations, including loan modifications, in response to the COVID-19 pandemic, see the “Risk Management – Credit Risk Management – COVID-Related Lending Accommodations” section in this Report.
Foreclosed assets of $195 million were down $57 million from first quarter 2020.
Table 20: Nonperforming Assets (Nonaccrual Loans and Foreclosed Assets)
 
 
June 30, 2020
 
 
March 31, 2020
 
 
December 31, 2019
 
 
September 30, 2019
 
($ in millions)
 
Balance

 
% of
total
loans

 
Balance

 
% of
total
loans

 
Balance

 
% of
total
loans

 
Balance

 
% of
total
loans

Nonaccrual loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
 
$
2,896

 
0.83
%
 
$
1,779

 
0.44
%
 
$
1,545

 
0.44
%
 
$
1,539

 
0.44
%
Real estate mortgage
 
1,217

 
0.98

 
944

 
0.77

 
573

 
0.47

 
669

 
0.55

Real estate construction
 
34

 
0.16

 
21

 
0.10

 
41

 
0.21

 
32

 
0.16

Lease financing
 
138

 
0.79

 
131

 
0.68

 
95

 
0.48

 
72

 
0.37

Total commercial
 
4,285

 
0.83

 
2,875

 
0.51

 
2,254

 
0.44

 
2,312

 
0.45

Consumer:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Real estate 1-4 family first mortgage (1)
 
2,393

 
0.86

 
2,372

 
0.81

 
2,150

 
0.73

 
2,261

 
0.78

Real estate 1-4 family junior lien mortgage (1)
 
753

 
2.81

 
769

 
2.70

 
796

 
2.70

 
819

 
2.66

Automobile
 
129

 
0.26

 
99

 
0.20

 
106

 
0.22

 
110

 
0.24

Other revolving credit and installment
 
45

 
0.14

 
41

 
0.12

 
40

 
0.12

 
43

 
0.12

Total consumer
 
3,320

 
0.79

 
3,281

 
0.74

 
3,092

 
0.69

 
3,233

 
0.73

Total nonaccrual loans
 
7,605

 
0.81

 
6,156

 
0.61

 
5,346

 
0.56

 
5,545

 
0.58

Foreclosed assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Government insured/guaranteed (2)
 
31

 
 
 
43

 
 
 
50

 
 
 
59

 
 
Non-government insured/guaranteed
 
164

 
 
 
209

 
 
 
253

 
 
 
378

 
 
Total foreclosed assets
 
195

 
 
 
252

 
 
 
303

 
 
 
437

 
 
Total nonperforming assets
 
$
7,800

 
0.83
%
 
$
6,408

 
0.63
%
 
$
5,649

 
0.59
%
 
$
5,982

 
0.63
%
Change in NPAs from prior quarter
 
$
1,392

 
 
 
759

 
 
 
(333
)
 
 
 
(317
)
 
 
(1)
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.
(2)
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 residential real estate mortgage loans are excluded from this table and included in Accounts Receivable in Other Assets. For more information on foreclosed assets, see Note 1 (Summary of Significant Accounting Policies) to Financial Statements in our 2019 Form 10-K.

33


Table 21 provides an analysis of the changes in nonaccrual loans.
Table 21: Analysis of Changes in Nonaccrual Loans
 
Quarter ended
 
(in millions)
Jun 30,
2020

 
Mar 31,
2020

 
Dec 31,
2019

 
Sep 30,
2019

 
Jun 30,
2019

Commercial nonaccrual loans
 
 
 
 
 
 
 
 
 
Balance, beginning of period
$
2,875

 
2,254

 
2,312

 
2,470

 
2,797

Inflows
2,741

 
1,479

 
652

 
710

 
621

Outflows:
 
 
 
 
 
 
 
 
 
Returned to accruing
(64
)
 
(56
)
 
(124
)
 
(52
)
 
(46
)
Foreclosures

 

 

 
(78
)
 
(2
)
Charge-offs
(560
)
 
(360
)
 
(201
)
 
(194
)
 
(187
)
Payments, sales and other
(707
)
 
(442
)
 
(385
)
 
(544
)
 
(713
)
Total outflows
(1,331
)
 
(858
)
 
(710
)
 
(868
)
 
(948
)
Balance, end of period
4,285


2,875


2,254


2,312


2,470

Consumer nonaccrual loans
 
 
 
 
 
 
 
 
 
Balance, beginning of period
3,281

 
3,092

 
3,233

 
3,452

 
4,108

Inflows (1)
379

 
749

 
473

 
448

 
437

Outflows:
 
 
 
 
 
 
 
 
 
Returned to accruing
(135
)
 
(254
)
 
(227
)
 
(274
)
 
(250
)
Foreclosures
(6
)
 
(21
)
 
(29
)
 
(32
)
 
(34
)
Charge-offs
(39
)
 
(48
)
 
(45
)
 
(44
)
 
(34
)
Payments, sales and other
(160
)
 
(237
)
 
(313
)
 
(317
)
 
(775
)
Total outflows
(340
)
 
(560
)
 
(614
)
 
(667
)
 
(1,093
)
Balance, end of period
3,320


3,281


3,092


3,233


3,452

Total nonaccrual loans
$
7,605

 
6,156

 
5,346

 
5,545

 
5,922

(1)
In connection with our adoption of CECL on January 1, 2020, we classified $275 million of PCD loans as nonaccruing based on performance.
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 June 30, 2020:
90% 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 89% have a combined LTV (CLTV) ratio of 80% or less.
losses of $708 million and $990 million have already been recognized on 16% of commercial nonaccrual loans and 34% 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.

 
80% of commercial nonaccrual loans were current on interest and 75% of commercial nonaccrual loans were current on both principal and interest, but were on nonaccrual status because the full or timely collection of interest or principal had become uncertain.
of the $1.3 billion of consumer loans in bankruptcy or discharged in bankruptcy, and classified as nonaccrual, $866 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.

34

Risk Management - Credit Risk Management (continued)

Table 22 provides a summary of foreclosed assets and an analysis of changes in foreclosed assets.

Table 22: Foreclosed Assets
(in millions)
Jun 30,
2020

 
Mar 31,
2020

 
Dec 31,
2019

 
Sep 30,
2019

 
Jun 30,
2019

Summary by loan segment
 
 
 
 
 
 
 
 
 
Government insured/guaranteed
$
31

 
43

 
50

 
59

 
68

Commercial
45

 
49

 
62

 
180

 
101

Consumer
119

 
160

 
191

 
198

 
208

Total foreclosed assets
$
195

 
252

 
303

 
437

 
377

Analysis of changes in foreclosed assets
 
 
 
 
 
 
 
 
 
Balance, beginning of period
$
252

 
303

 
437

 
377

 
436

Net change in government insured/guaranteed (1)
(12
)
 
(7
)
 
(9
)
 
(9
)
 
(7
)
Additions to foreclosed assets (2)
51

 
107

 
126

 
235

 
144

Reductions:
 
 
 
 
 
 
 
 
 
Sales
(98
)
 
(154
)
 
(250
)
 
(155
)
 
(199
)
Write-downs and gains (losses) on sales
2

 
3

 
(1
)
 
(11
)
 
3

Total reductions
(96
)
 
(151
)
 
(251
)
 
(166
)
 
(196
)
Balance, end of period
$
195

 
252

 
303

 
437

 
377

(1)
Foreclosed government insured/guaranteed loans are temporarily transferred to and held by us as servicer, until reimbursement is received from FHA or VA.
(2)
Includes loans moved into foreclosed assets from nonaccrual status and repossessed automobiles.
Foreclosed assets at June 30, 2020, included $138 million of foreclosed residential real estate, of which 22% 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 $195 million in foreclosed assets at June 30, 2020, 64% have been in the foreclosed assets portfolio one year or less.
 
As part of our actions to support customers during the COVID-19 pandemic, we have suspended certain mortgage foreclosure activities, which may affect the amount of our foreclosed assets for the remainder of the year. For additional information on loans in process of foreclosure, see Note 6 (Loans and Related Allowance for Credit Losses) to Financial Statements in this Report. 



35


TROUBLED DEBT RESTRUCTURINGS (TDRs)

Table 23: Troubled Debt Restructurings (TDRs)
(in millions)
Jun 30,
2020


Mar 31,
2020


Dec 31,
2019


Sep 30,
2019


Jun 30,
2019

Commercial:
 
 
 
 
 
 
 
 
 
Commercial and industrial
$
1,882

 
1,302

 
1,183

 
1,162

 
1,294

Real estate mortgage
717

 
697

 
669

 
598

 
620

Real estate construction
20

 
33

 
36

 
40

 
43

Lease financing
10

 
10

 
13

 
16

 
31

Total commercial TDRs
2,629

 
2,042

 
1,901

 
1,816

 
1,988

Consumer:
 
 
 
 
 
 
 
 
 
Real estate 1-4 family first mortgage
7,176

 
7,284

 
7,589

 
7,905

 
8,218

Real estate 1-4 family junior lien mortgage
1,309

 
1,356

 
1,407

 
1,457

 
1,550

Credit Card
510

 
527

 
520

 
504

 
486

Automobile
108

 
76

 
81

 
82

 
85

Other revolving credit and installment
173

 
172

 
170

 
167

 
159

Trial modifications
91

 
108

 
115

 
123

 
127

Total consumer TDRs
9,367

 
9,523

 
9,882

 
10,238

 
10,625

Total TDRs
$
11,996

 
11,565

 
11,783

 
12,054

 
12,613

TDRs on nonaccrual status
$
3,475

 
2,846

 
2,833

 
2,775

 
3,058

TDRs on accrual status:
 
 
 
 
 
 
 
 
 
Government insured/guaranteed
1,277

 
1,157

 
1,190

 
1,199

 
1,209

Non-government insured/guaranteed
7,244

 
7,562

 
7,760

 
8,080

 
8,346

Total TDRs
$
11,996

 
11,565

 
11,783

 
12,054

 
12,613

Table 23 provides information regarding the recorded investment of loans modified in TDRs. The allowance for loan losses for TDRs was $607 million and $1.0 billion at June 30, 2020, and December 31, 2019, respectively. See Note 6 (Loans and Related 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. As part of our actions to support customers during the COVID-19 pandemic, we have provided borrowers relief in the form of loan modifications. Under the CARES Act and the Interagency Statement, loan modifications related to the COVID-19 pandemic will not be classified as TDRs if they meet certain eligibility criteria. For more information on the CARES Act and the Interagency Statement, see the “Risk Management – Credit Risk Management – Credit Quality Overview – Troubled Debt Restructuring Relief” section in this Report.
 
For more information on our nonaccrual policies when a restructuring is involved, see the “Risk Management – Credit Risk Management – Troubled Debt Restructurings (TDRs)” section in our 2019 Form 10-K.
Table 24 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 new loans.

36

Risk Management - Credit Risk Management (continued)

Table 24: Analysis of Changes in TDRs
 
 
 
 
 
Quarter ended
 
(in millions)
Jun 30,
2020

 
Mar 31,
2020

 
Dec 31,
2019

 
Sep 30,
2019

 
Jun 30,
2019

Commercial TDRs
 
 
 
 
 
 
 
 
 
Balance, beginning of quarter
$
2,042

 
1,901

 
1,816

 
1,988

 
2,512

Inflows (1)
971

 
452

 
476

 
293

 
232

Outflows
 
 
 
 
 
 
 
 
 
Charge-offs
(60
)
 
(56
)
 
(48
)
 
(66
)
 
(37
)
Foreclosures

 

 
(1
)
 

 

Payments, sales and other (2)
(324
)
 
(255
)
 
(342
)
 
(399
)
 
(719
)
Balance, end of quarter
2,629

 
2,042

 
1,901

 
1,816

 
1,988

Consumer TDRs
 
 
 
 
 
 
 
 
 
Balance, beginning of quarter
9,523

 
9,882

 
10,238

 
10,625

 
12,797

Inflows (1)
425

 
312

 
350

 
360

 
336

Outflows
 
 
 
 
 
 
 
 
 
Charge-offs
(46
)
 
(63
)
 
(57
)
 
(56
)
 
(61
)
Foreclosures
(8
)
 
(57
)
 
(61
)
 
(70
)
 
(74
)
Payments, sales and other (2)
(510
)
 
(544
)
 
(580
)
 
(617
)
 
(2,364
)
Net change in trial modifications (3)
(17
)
 
(7
)
 
(8
)
 
(4
)
 
(9
)
Balance, end of quarter
9,367

 
9,523

 
9,882

 
10,238

 
10,625

Total TDRs
$
11,996

 
11,565

 
11,783

 
12,054

 
12,613

(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 consist of 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 qualify as new loans, which are also included as other outflows.
(3)
Net change in trial modifications includes: inflows of new TDRs entering the trial payment period, net of outflows for modifications that either (i) successfully perform and enter into a permanent modification, or (ii) did not successfully perform according to the terms of the trial period plan and are subsequently charged-off, foreclosed upon or otherwise resolved.


37


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. Prior to January 1, 2020, PCI loans were excluded from loans 90 days or more past due and still accruing because they continued to earn interest income from accretable yield, independent of performance in accordance with their contractual terms. In connection with our adoption of CECL, PCI loans were reclassified as PCD loans and classified as accruing or nonaccruing based on performance.
Loans 90 days or more past due and still accruing, excluding insured/guaranteed loans, at June 30, 2020, were down $116 million, or 12%, from December 31, 2019 due to payoffs and lower delinquencies in consumer loans as payment deferral activities instituted in response to the COVID-19 pandemic
 
delayed recognition of delinquencies for customers who would have otherwise moved into past due status, partially offset by an increase in commercial loans 90 days or more past due and still accruing driven by credit deterioration due to the economic impact of the COVID-19 pandemic.
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 $8.9 billion at June 30, 2020, up from $6.4 billion at December 31, 2019, due to the economic slowdown related to the COVID-19 pandemic affecting our customers.
Table 25 reflects 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 Related Allowance for Credit Losses) to Financial Statements in this Report.
Table 25: Loans 90 Days or More Past Due and Still Accruing
(in millions)
Jun 30, 2020

 
Mar 31, 2020

 
Dec 31, 2019

 
Sep 30, 2019

 
Jun 30, 2019

Total:
$
9,739

 
7,023

 
7,285

 
7,130

 
7,258

Less: FHA insured/VA guaranteed (1)
8,922

 
6,142

 
6,352

 
6,308

 
6,478

Total, not government insured/guaranteed
$
817

 
881

 
933

 
822

 
780

By segment and class, not government insured/guaranteed:
Commercial:
 
 
 
 
 
 
 
 
 
Commercial and industrial
$
101

 
24

 
47

 
6

 
17

Real estate mortgage
44

 
28

 
31

 
28

 
24

Real estate construction

 
1

 

 

 

Total commercial
145


53


78


34


41

Consumer:
 
 
 
 
 
 
 
 
 
Real estate 1-4 family first mortgage
93

 
128

 
112

 
100

 
108

Real estate 1-4 family junior lien mortgage
19

 
25

 
32

 
35

 
27

Credit card
418

 
528

 
546

 
491

 
449

Automobile
54

 
69

 
78

 
75

 
63

Other revolving credit and installment
88

 
78

 
87

 
87

 
92

Total consumer
672

 
828


855


788


739

Total, not government insured/guaranteed
$
817

 
881


933


822


780

(1)
Represents loans whose repayments are predominantly insured by the FHA or guaranteed by the VA.


38

Risk Management - Credit Risk Management (continued)

NET LOAN CHARGE-OFFS

Table 26: Net Loan Charge-offs
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Quarter ended 
 
 
Jun 30, 2020
 
 
Mar 31, 2020
 
 
Dec 31, 2019
 
 
Sep 30, 2019
 
 
Jun 30, 2019
 
($ in millions)
Net loan
charge-
offs

 
% of 
avg. 
loans(1) 

 
Net loan
charge-
offs

 
% of avg. loans (1)

 
Net loan
charge-
offs

 
% of avg. loans (1)

 
Net loan
charge-offs

 
% of
avg. loans (1)

 
Net loan
charge-offs

 
% of
avg.
loans (1)

Commercial:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
$
521

 
0.55
 %
 
$
333

 
0.37
 %
 
$
168

 
0.19
 %
 
$
147

 
0.17
 %
 
$
159

 
0.18
 %
Real estate mortgage
67

 
0.22

 
(2
)
 
(0.01
)
 
4

 
0.01

 
(8
)
 
(0.02
)
 
4

 
0.01

Real estate construction
(1
)
 
(0.02
)
 
(16
)
 
(0.32
)
 

 

 
(8
)
 
(0.14
)
 
(2
)
 
(0.04
)
Lease financing
15

 
0.33

 
9

 
0.19

 
31

 
0.63

 
8

 
0.17

 
4

 
0.09

Total commercial
602

 
0.44

 
324

 
0.25

 
203

 
0.16

 
139

 
0.11

 
165

 
0.13

Consumer:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Real estate 1-4 family first mortgage
2

 

 
(3
)
 

 
(3
)
 

 
(5
)
 
(0.01
)
 
(30
)
 
(0.04
)
Real estate 1-4 family junior lien mortgage
(12
)
 
(0.17
)
 
(5
)
 
(0.07
)
 
(16
)
 
(0.20
)
 
(22
)
 
(0.28
)
 
(19
)
 
(0.24
)
Credit card
327

 
3.60

 
377

 
3.81

 
350

 
3.48

 
319

 
3.22

 
349

 
3.68

Automobile
106

 
0.88

 
82

 
0.68

 
87

 
0.73

 
76

 
0.65

 
52

 
0.46

Other revolving credit and installment
88

 
1.09

 
134

 
1.59

 
148

 
1.71

 
138

 
1.60

 
136

 
1.56

Total consumer
511

 
0.48

 
585

 
0.53

 
566

 
0.51

 
506

 
0.46

 
488

 
0.45

Total
$
1,113

 
0.46
 %
 
$
909

 
0.38
 %
 
$
769

 
0.32
 %
 
$
645

 
0.27
 %
 
$
653

 
0.28
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1)
Quarterly net loan charge-offs (recoveries) as a percentage of average respective loans are annualized.

Table 26 presents net loan charge-offs for second quarter 2020 and the previous four quarters. Net loan charge-offs in second quarter 2020 were $1.1 billion (0.46% of average total loans outstanding), compared with $653 million (0.28%) in second quarter 2019.
The increase in commercial net loan charge-offs in second quarter 2020 from the prior quarter was driven by higher commercial and industrial losses primarily in our oil and gas portfolio, as well as higher commercial real estate mortgage losses. The decrease in consumer net loan charge-offs in second quarter 2020 from the prior quarter was driven by lower losses in credit card, and other revolving credit and installment loans driven by payment deferral activities in response to the COVID-19 pandemic.
The COVID-19 pandemic may continue to impact the credit quality of our loan portfolio. Although the potential impacts were considered in our allowance for credit losses for loans, payment deferral activities instituted in response to the COVID-19 pandemic could delay the recognition of net loan charge-offs. For more information on customer accommodations in response to the COVID-19 pandemic, see the “Risk Management – Credit Risk Management – COVID-Related Lending Accommodations” section in this Report.
ALLOWANCE FOR CREDIT LOSSES We maintain an allowance for credit losses for loans, which is management’s estimate of the expected credit losses in the loan portfolio and unfunded credit commitments, at the balance sheet date, excluding loans and unfunded credit commitments carried at fair value or held for sale. Additionally, we maintain an allowance for credit losses for debt securities classified as either available-for-sale or held-to-maturity, other financial assets measured at amortized cost, net investments in leases, and other off-balance sheet credit exposures.
 
We apply a disciplined process and methodology to establish our allowance for credit losses each quarter. The process for establishing the allowance for credit losses for loans takes into consideration many factors, including historical and forecasted loss trends, loan-level credit quality ratings and loan grade-specific characteristics. The process involves subjective and complex judgments. In addition, we review a variety of credit metrics and trends. These credit metrics and trends, however, do not solely determine the amount of the allowance as we use several analytical tools. 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) to Financial Statements in this Report. For additional information on our allowance for credit losses for loans, see Note 6 (Loans and Related Allowance for Credit Losses) to Financial Statements in this Report, and for additional information on our allowance for credit losses for debt securities, see the “Balance Sheet Analysis – Available-For-Sale and Held-To-Maturity Debt Securities” section and Note 5 (Available-for-Sale and Held-to-Maturity Debt Securities) to Financial Statements in this Report.
Table 27 presents the allocation of the allowance for credit losses for loans by loan segment and class for the most recent quarter end and last four year ends. The detail of the changes in the allowance for credit losses for loans by portfolio segment (including charge-offs and recoveries by loan class) is included in Note 6 (Loans and Related Allowance for Credit Losses) to Financial Statements in this Report.

39


Table 27: Allocation of the Allowance for Credit Losses (ACL) for Loans (1)
 
Jun 30, 2020
 
 
Dec 31, 2019
 
 
Dec 31, 2018
 
 
Dec 31, 2017
 
 
Dec 31, 2016
 
($ in millions)
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

 
Loans
as %
of total
loans

Commercial:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
$
8,109

 
37
%
 
$
3,600

 
37
%
 
$
3,628

 
37
%
 
$
3,752

 
35
%
 
$
4,560

 
34
%
Real estate mortgage
2,395

 
13

 
1,236

 
13

 
1,282

 
13

 
1,374

 
13

 
1,320

 
14

Real estate construction
484

 
2

 
1,079

 
2

 
1,200

 
2

 
1,238

 
3

 
1,294

 
2

Lease financing
681

 
2

 
330

 
2

 
307

 
2

 
268

 
2

 
220

 
2

Total commercial
11,669

 
54

 
6,245

 
54

 
6,417

 
54

 
6,632

 
53

 
7,394

 
52

Consumer:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Real estate 1-4 family first mortgage
1,541

 
30

 
692

 
30

 
750

 
30

 
1,085

 
30

 
1,270

 
29

Real estate 1-4 family
junior lien mortgage
725

 
3

 
247

 
3

 
431

 
3

 
608

 
4

 
815

 
5

Credit card
3,777

 
4

 
2,252

 
4

 
2,064

 
4

 
1,944

 
4

 
1,605

 
4

Automobile
1,174

 
5

 
459

 
5

 
475

 
5

 
1,039

 
5

 
817

 
6

Other revolving credit and installment
1,550

 
4

 
561

 
4

 
570

 
4

 
652

 
4

 
639

 
4

Total consumer
8,767

 
46

 
4,211

 
46

 
4,290

 
46

 
5,328

 
47

 
5,146

 
48

Total
$
20,436

 
100
%
 
$
10,456

 
100
%
 
$
10,707

 
100
%
 
$
11,960

 
100
%
 
$
12,540

 
100
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Jun 30, 2020
 
 
Dec 31, 2019
 
 
Dec 31, 2018
 
 
Dec 31, 2017
 
 
Dec 31, 2016
 
Components:
 
 
 
 
 
 
 
 
 
Allowance for loan losses
$
18,926
 
 
9,551
 
 
9,775
 
 
11,004
 
 
11,419
 
Allowance for unfunded
credit commitments
1,510
 
 
905
 
 
932
 
 
956
 
 
1,121
 
Allowance for credit losses for loans
$
20,436
 
 
10,456
 
 
10,707
 
 
11,960
 
 
12,540
 
Allowance for loan losses as a percentage of total loans
2.02
%
 
0.99
 
 
1.03
 
 
1.15
 
 
1.18
 
Allowance for loan losses as a percentage of total net loan charge-offs (2)
423
 
 
346
 
 
356
 
 
376
 
 
324
 
Allowance for credit losses for loans as a percentage of total loans
2.19
 
 
1.09
 
 
1.12
 
 
1.25
 
 
1.30
 
Allowance for credit losses for loans as a percentage of total nonaccrual loans
269
 
 
196
 
 
165
 
 
156
 
 
126
 
(1)
Disclosure is not comparative due to our adoption of CECL on January 1, 2020. For more information, see Note 1 (Summary of Significant Accounting Policies) to Financial Statements in this Report.
(2)
Total net loan charge-offs are annualized for the quarter ended June 30, 2020.
The ratios for the allowance for loan losses and the allowance for credit losses for loans presented in Table 27 may fluctuate 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 for loans increased $10.0 billion, or 95%, from December 31, 2019, driven by a $11.4 billion increase in the allowance for credit losses for loans in the first half of 2020, partially offset by a $1.3 billion decrease as a result of adopting CECL. The increase in the allowance for credit losses for loans reflected current and forecasted economic conditions due to the COVID-19 pandemic. Total provision for credit losses for loans was $9.6 billion in second quarter 2020, compared with $503 million in second quarter 2019. The increase in the provision for credit losses for loans in second quarter 2020, compared with the same period a year ago, reflected an increase in the allowance for credit losses for loans due to the economic impact of the COVID-19 pandemic.
We consider multiple economic scenarios to develop our estimate of the allowance for credit losses for loans. The scenarios include a base case considered to be the most likely economic forecast, along with an optimistic (upside) and a
 
pessimistic (downside) economic forecast. Our estimate of the allowance for credit losses for loans at June 30, 2020, was based on a weighting of the base case and downside economic scenarios of 80% and 20%, respectively, with no weighting applied to the upside scenario. The base case economic forecast assumed near-term economic stress recovering into late 2021. The downside scenario assumed more sustained adverse economic impacts resulting from the COVID-19 pandemic compared with the base case. The downside scenario assumed U.S. real GDP increasing slowly and not fully recovering during the remainder of 2020 and 2021, and a sustained elevation in the U.S. unemployment rate until mid-2022. We considered expectations for the impact of government economic stimulus programs in effect on June 30, 2020; however, we did not consider the impact of future government economic stimulus programs. In addition, we considered expectations for the impact of customer accommodation activity, as well as the estimated impact on certain industries that we consider to be directly and most adversely affected by the COVID-19 pandemic.
In addition to quantitative estimates, we consider qualitative factors that represent risks inherent in our processes and assumptions such as economic environmental factors, modeling

40

Risk Management - Credit Risk Management (continued)

assumptions and performance, and other subjective factors, including industry trends and emerging risk assessments. At June 30, 2020, the qualitative portion of our allowance for credit losses for loans included adjustments for model performance relative to management's loss expectations, including specific incremental risks from the oil and gas, commercial real estate, and home lending portfolios due to the continued economic impact of the COVID-19 pandemic.
The forecasted key economic variables inherent in our estimate of the allowance for credit losses for loans at June 30, 2020, are presented in Table 28.

Table 28: Forecasted Key Economic Variables
 
4Q 2020

 
2Q 2021

 
4Q 2021

Blend of 80% base case and 20% downside scenario (1):
 
 
 
 
 
U.S. unemployment rate (2)
11.0

 
9.2

 
7.5

U.S. real GDP (3)
4.3

 
6.3

 
3.5

Home price index (4)
0.7

 
(3.0
)
 
(0.9
)
Commercial real estate asset prices (4)
(2.5
)
 
(7.6
)
 
(5.1
)
(1)
Represents a weighted average of the forecasted economic variable inputs.
(2)
Quarterly average.
(3)
Seasonally adjusted annualized rate.
(4)
Percentage change year over year of national average; outlook differs by geography and property type.
Future amounts of the allowance for credit losses for loans will be based on a variety of factors, including loan balance changes, portfolio credit quality and mix changes, and changes in general economic conditions and expectations (including for unemployment and GDP), among other factors. Based on economic conditions at the end of second quarter 2020, it was difficult to estimate the length and severity of the economic downturn that may result from the COVID-19 pandemic and the impact of other factors that may influence the level of eventual losses and corresponding requirements for future amounts of the allowance for credit losses, including the impact of economic stimulus programs and customer accommodation activity. The COVID-19 pandemic could continue to result in the recognition of credit losses in our loan portfolios and increases in our allowance for credit losses, particularly if the impact on the economy worsens.
We believe the allowance for credit losses for loans of $20.4 billion at June 30, 2020, was appropriate to cover expected credit losses, including unfunded credit commitments, at that date. The entire allowance is available to absorb expected credit losses from the total loan portfolio. The allowance for credit losses for loans 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 for loans 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.
LIABILITY FOR MORTGAGE LOAN REPURCHASE LOSSES For information on our repurchase liability, see the “Risk Management – Credit Risk Management – Liability For Mortgage Loan Repurchase Losses” section in our 2019 Form 10-K.

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. In connection with our servicing activities, we could become subject to consent orders and settlement agreements with federal and state regulators for alleged servicing issues and practices. In general, these can require us to provide customers with loan modification relief, refinancing relief, and foreclosure prevention and assistance, as well as can impose certain monetary penalties on us.
As a servicer, we are required to advance certain delinquent payments of principal and interest on the mortgage loans we service. The amount and timing of reimbursement of these advances vary by investor and the applicable servicing agreements in place. Due to an increase in customer requests for payment deferrals as a result of the COVID-19 pandemic, the amount of principal and interest advances we were required to make as a servicer increased in second quarter 2020. The amount of these advances may continue to increase if additional payment deferrals are provided. Payment deferrals also delay the collection of contractually specified servicing fees, resulting in lower net servicing income.
In accordance with applicable servicing guidelines, delinquency status continues to advance for loans with COVID-related payment deferrals, which has resulted in an increase in delinquent loans serviced for others and a corresponding increase in loans eligible for repurchase from GNMA loan securitization pools. Our option to repurchase loans from GNMA loan securitization pools becomes exercisable when three scheduled loan payments remain unpaid by the borrower. We generally repurchase these loans for cash and as a result, our total consolidated assets do not change. In July 2020, we repurchased $14.1 billion of these delinquent loans and we expect to repurchase $5.6 billion of these delinquent loans in August 2020.
Loans that regain current status or are otherwise modified in accordance with applicable servicing guidelines may be included in future GNMA loan securitization pools. However, in accordance with guidance issued by GNMA in June 2020, repurchased loans with COVID-related payment deferrals are ineligible for inclusion in future GNMA loan securitization pools until the borrower has timely made six consecutive payments. This requirement may delay our ability to resell loans into the securitization market.
For additional information about the risks related to our servicing activities, see the “Risk Management – Credit Risk Management – Risks Relating to Servicing Activities” section in our 2019 Form 10-K. For additional information on mortgage banking activities, see Note 11 (Mortgage Banking Activities) to Financial Statements in this Report.

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.
 

41


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.

We assess interest rate risk by comparing outcomes under various net interest income simulations using many interest rate scenarios that differ in the direction of interest rate changes, the degree of change over time, the speed of change and the projected shape of the yield curve. These simulations require assumptions regarding drivers of earnings and balance sheet composition such as loan originations, prepayment speeds on loans and debt securities, deposit flows and mix, as well as pricing strategies.
Currently, our profile is such that we project net interest income will benefit from higher interest rates as our assets would reprice faster and to a greater degree than our liabilities, while in the case of lower interest rates, our assets would reprice downward and to a greater degree than our liabilities.
Our most recent simulations estimate net interest income sensitivity over the next two years under a range of both lower and higher interest rates. Measured impacts from standardized ramps (gradual changes) and shocks (instantaneous changes) are summarized in Table 29, 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 29:
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 29: Net Interest Income Sensitivity Over Next Two-Year Horizon Relative to Base Expectation
 
 
 
Lower Rates (1)
 
Higher Rates
($ in billions)
Base
 
100 bps
Ramp
Parallel
 Decrease
 
100 bps Instantaneous
Parallel
Increase
 
200 bps
Ramp
Parallel
Increase
First Year of Forecasting Horizon
 
 
 
 
 
 
 
Net Interest Income Sensitivity to Base Scenario
 
$
(0.9) - (0.4)
 
4.6 - 5.1
 
4.2 - 4.7
Key Rates at Horizon End
 
 
 
 
 
 
 
Fed Funds Target
0.25
%
0.00
 
1.25
 
2.25
10-year CMT (2)
0.76
 
0.00
 
1.76
 
2.76
Second Year of Forecasting Horizon
 
 
 
 
 
 
 
Net Interest Income Sensitivity to Base Scenario
 
$
(2.3) - (1.8)
 
7.2 - 7.7
 
11.2 - 11.7
Key Rates at Horizon End
 
 
 
 
 
 
 
Fed Funds Target
0.25
%
0.00
 
1.25
 
2.25
10-year CMT (2)
0.89
 
0.00
 
1.89
 
2.89
(1)
U.S. interest rates are floored at zero where applicable in this scenario analysis
(2)
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 are 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 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 June 30, 2020, and December 31, 2019, are presented in Note 15 (Derivatives) to Financial Statements in this Report. We use derivatives for asset/liability management in two main ways:

42

Asset/Liability Management (continued)

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. For more information on mortgage banking interest rate and market risk, see the “Risk Management – Asset/Liability Management – Mortgage Banking Interest Rate and Market Risk” section in our 2019 Form 10-K.
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.
The total carrying value of our residential and commercial MSRs was $8.2 billion at June 30, 2020, and $12.9 billion at December 31, 2019. The weighted-average note rate on our portfolio of loans serviced for others was 4.13% at June 30, 2020, and 4.25% at December 31, 2019. The carrying value of our total MSRs represented 0.52% and 0.79% of mortgage loans serviced for others at June 30, 2020 and December 31, 2019, respectively.
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. For more information, including information regarding our monitoring activities, sensitivity analysis and stress testing, see the “Risk Management – Asset/Liability Management – Market Risk – Trading Activities” section in our 2019 Form 10-K.
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.
Table 30 shows the Company’s Trading General VaR by risk category. As presented in Table 30, average Company Trading General VaR was $155 million for the quarter ended June 30, 2020, compared with $33 million for the quarter ended March 31, 2020, and $20 million for the quarter ended June 30, 2019. The increase in average as well as period end Company Trading General VaR for the quarter ended June 30, 2020, compared with the quarter ended June 30, 2019, was driven by recent market volatility, in particular changes in interest rate curves and a significant widening of credit spreads entering the 12-month historical lookback window used to calculate VaR.

43


Table 30: Trading 1-Day 99% General VaR by Risk Category
 
 
 
Quarter ended
 
 
June 30, 2020
 
 
March 31, 2020
 
 
June 30, 2019
 
(in millions)
Period
end

 
Average

 
Low

 
High

 
Period
end

 
Average

 
Low

 
High

 
Period
end

 
Average

 
Low

 
High

Company Trading General VaR Risk Categories
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Credit
$
86

 
82

 
61

 
99

 
62

 
28

 
15

 
75

 
15

 
15

 
11

 
18

Interest rate
155

 
106

 
42

 
161

 
84

 
32

 
5

 
198

 
29

 
37

 
27

 
49

Equity
14

 
10

 
6

 
17

 
6

 
7

 
4

 
10

 
4

 
5

 
4

 
8

Commodity
4

 
4

 
2

 
7

 
2

 
2

 
1

 
6

 
2

 
2

 
1

 
6

Foreign exchange
1

 
2

 
1

 
3

 
2

 
1

 
1

 
6

 
1

 
1

 
1

 
1

Diversification benefit (1)
(51
)
 
(49
)
 


 
 
 
(63
)
 
(37
)
 
 
 
 
 
(32
)
 
(40
)
 
 
 
 
Company Trading General VaR
$
209

 
155

 
 
 
 
 
93

 
33

 
 
 
 
 
19

 
20

 
 
 
 
(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.
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 other-than-temporary impairment (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 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 14 (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 Federal Deposit Insurance Corporation (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 impose enhanced liquidity management standards on large BHCs 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

44

Asset/Liability Management (continued)

funding in relation to their assets, derivative exposures and commitments over a one-year horizon period.
Liquidity Coverage Ratio As of June 30, 2020, the consolidated Company, Wells Fargo Bank, N.A. and Wells Fargo National Bank West 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 31 presents the Company’s quarterly average values for the daily-calculated LCR and its components calculated pursuant to the LCR rule requirements.
Table 31: Liquidity Coverage Ratio
(in millions, except ratio)
Average for Quarter ended June 30, 2020

HQLA (1)(2)
$
409,467

Projected net cash outflows
316,268

LCR
129
%
(1)
Excludes excess HQLA at certain subsidiaries that is not transferable to other Wells Fargo entities.
(2)
Net of applicable haircuts required under the LCR rule.
Liquidity Sources We maintain liquidity in the form of cash, cash equivalents and unencumbered high-quality, liquid debt
 
securities. These assets make up our primary sources of liquidity which are presented in Table 32. 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 our held-to-maturity 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.
Table 32: Primary Sources of Liquidity
 
June 30, 2020
 
 
December 31, 2019
 
(in millions)
Total

 
Encumbered

 
Unencumbered

 
Total

 
Encumbered

 
Unencumbered

Interest-earning deposits with banks
$
237,799

 

 
237,799

 
119,493

 

 
119,493

Debt securities of U.S. Treasury and federal agencies
58,486

 
3,181

 
55,305

 
61,099

 
3,107

 
57,992

Mortgage-backed securities of federal agencies (1)
255,447

 
37,215

 
218,232

 
258,589

 
41,135

 
217,454

Total
$
551,732

 
40,396

 
511,336

 
439,181

 
44,242

 
394,939

(1)
Included in encumbered securities at June 30, 2020, were securities with a fair value of $2.0 billion, which were purchased in June 2020, but settled in July 2020.
In addition to our primary sources of liquidity shown in
Table 32, 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. As of June 30, 2020, we also maintained approximately $276.1 billion of available borrowing capacity at various Federal Home Loan Banks and the Federal Reserve Discount Window.
 
Deposits have historically provided a sizable source of relatively low-cost funds. Deposits were 151% of total loans at June 30, 2020, and 137% at December 31, 2019.
Additional funding is provided by long-term debt and short-term borrowings. Table 33 shows selected information for short-term borrowings, which generally mature in less than 30 days.
Table 33: Short-Term Borrowings
 
Quarter ended
 
(in millions)
Jun 30,
2020

 
Mar 31,
2020

 
Dec 31,
2019

 
Sep 30,
2019

 
Jun 30,
2019

Balance, period end
 
 
 
 
 
 
 
 
 
Federal funds purchased and securities sold under agreements to repurchase
$
49,659

 
79,036

 
92,403

 
110,399

 
102,560

Other short-term borrowings
10,826

 
13,253

 
12,109

 
13,509

 
12,784

Total
$
60,485

 
92,289

 
104,512

 
123,908

 
115,344

Average daily balance for period
 
 
 
 
 
 
 
 
 
Federal funds purchased and securities sold under agreements to repurchase
$
52,868

 
90,722

 
103,614

 
109,499

 
102,557

Other short-term borrowings
10,667

 
12,255

 
12,335

 
12,343

 
12,197

Total
$
63,535

 
102,977

 
115,949

 
121,842

 
114,754

Maximum month-end balance for period
 
 
 
 
 
 
 
 
 
Federal funds purchased and securities sold under agreements to repurchase (1)
$
50,397

 
91,121

 
111,727

 
110,399

 
105,098

Other short-term borrowings (2)
11,220

 
13,253

 
12,708

 
13,509

 
12,784

(1)
Highest month-end balance in each of the last five quarters was in April and February 2020, and October, September and May 2019.
(2)
Highest month-end balance in each of the last five quarters was in April and March 2020, and October, September and June 2019.

45


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. Long-term debt of $230.9 billion at June 30,
 
2020, increased $2.7 billion from December 31, 2019. We issued $18.8 billion and $37.7 billion of long-term debt in the second quarter and first half of 2020, respectively, and $187 million in July 2020. Depending on market conditions, we may purchase our outstanding debt securities from time to time in privately negotiated or open market transactions, by tender offer, or otherwise. Table 34 provides the aggregate carrying value of long-term debt maturities (based on contractual payment dates) for the remainder of 2020 and the following years thereafter, as of June 30, 2020.
Table 34: Maturity of Long-Term Debt
 
June 30, 2020
 
(in millions)
Remaining 2020

 
2021

 
2022

 
2023

 
2024

 
Thereafter

 
Total

Wells Fargo & Company (Parent Only)
 
 
 
 
 
 
 
 
 
 
 
 
 
Senior notes
$
7,665

 
17,999

 
18,411

 
11,573

 
12,346

 
88,248

 
156,242

Subordinated notes

 

 

 
3,789

 
772

 
26,818

 
31,379

Junior subordinated notes

 

 

 

 

 
1,949

 
1,949

Total long-term debt – Parent
$
7,665

 
17,999

 
18,411

 
15,362

 
13,118

 
117,015

 
189,570

Wells Fargo Bank, N.A. and other bank entities (Bank)
 
 
 
 
 
 
 
 
 
 
 
 
 
Senior notes
$
2,109

 
15,207

 
4,897

 
2,943

 
6

 
416

 
25,578

Subordinated notes

 

 

 
1,005

 

 
4,929

 
5,934

Junior subordinated notes

 

 

 

 

 
369

 
369

Securitizations and other bank debt
1,683

 
1,296

 
933

 
268

 
139

 
1,472

 
5,791

Total long-term debt – Bank
$
3,792

 
16,503

 
5,830

 
4,216

 
145

 
7,186

 
37,672

Other consolidated subsidiaries
 
 
 
 
 
 
 
 
 
 
 
 
 
Senior notes
$
131

 
1,843

 
206

 
508

 
123

 
836

 
3,647

Securitizations and other bank debt

 

 

 

 

 
32

 
32

Total long-term debt – Other consolidated subsidiaries
$
131

 
1,843

 
206

 
508

 
123

 
868

 
3,679

Total long-term debt
$
11,588

 
36,345

 
24,447

 
20,086

 
13,386

 
125,069

 
230,921

Credit Ratings Investors in the long-term capital markets, as well as other market participants, generally will consider, among other factors, a company’s debt rating in making investment decisions. Rating agencies base their ratings on many quantitative and qualitative factors, including capital adequacy, liquidity, asset quality, business mix, the level and quality of earnings, and rating agency assumptions regarding the probability and extent of federal financial assistance or support for certain large financial institutions. Adverse changes in these factors could result in a reduction of our credit rating; however, our debt securities do not contain credit rating covenants.
On April 22, 2020, Fitch Ratings, Inc. (Fitch) affirmed the Company’s long-term and short-term issuer default ratings and revised the rating outlook to negative from stable as Fitch expects significant operating environment headwinds from the disruption to economic activity and financial markets as a result of the COVID-19 pandemic. This rating action followed Fitch’s event-driven review of the commercially-oriented U.S. global
 
systemically important banks (G-SIBs). On May 21, 2020, DBRS Morningstar confirmed the Company’s ratings and revised the rating trend to negative from stable, citing the economic disruption caused by the COVID-19 pandemic. On July 22, 2020, Standard & Poor's (S&P) Global Ratings lowered the long-term rating of the Company to BBB+ from A- and revised the rating outlook to stable from negative.
See the “Risk Factors” section in our 2019 Form 10-K 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 15 (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 Company and Wells Fargo Bank, N.A. as of June 30, 2020, are presented in Table 35.
Table 35: Credit Ratings as of June 30, 2020
 
Wells Fargo & Company
 
Wells Fargo Bank, N.A.
 
Senior debt
 
Short-term
borrowings 
 
Long-term
deposits 
 
Short-term
borrowings 
Moody’s
A2
 
P-1
 
Aa1
 
P-1
S&P Global Ratings (1)
A-
 
A-2
 
A+
 
A-1
Fitch Ratings, Inc.
A+
 
F1
 
AA
 
F1+
DBRS Morningstar
AA (low)
 
R-1 (middle)
 
AA
 
R-1 (high)
(1)
On July 22, 2020, S&P Global Ratings lowered the long-term rating of the Company to BBB+ from A- and revised the rating outlook to stable from negative.

46

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.
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 the primary conduit between Wells Fargo and relevant industry groups, such as the Alternative Reference Rates Committee (ARRC).
 
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 are closely monitoring and seeking to follow the recommendations and guidance announced by such organizations, including those announced by the ARRC and the Bank of England’s Working Group on Sterling Risk-Free Reference Rates. We continue to assess the risks and related impacts associated with a transition away from IBORs. See the “Risk Factors” section in the 2019 Form 10-K 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.
On March 12, 2020, the Financial Accounting Standards Board (FASB) issued ASU 2020-04 – Facilitation of the Effects of Reference Rate Reform on Financial Reporting (Update) that provides temporary relief from existing GAAP accounting requirements for entities that perform activities related to reference rate reform. The relief provided by the Update is primarily related to contract modifications and hedge accounting relationships that are impacted by the Company’s reference rate reform activities. For additional information on the Update, see Note 1 (Summary of Significant Accounting Policies) to Financial Statements in this Report.
For additional information on the amount of our IBOR-linked assets and liabilities, as well as the program structure and initiatives created by the LTO, see the “Risk Management – Asset/Liability Management – LIBOR Transition” section in our 2019 Form 10-K.

47


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 decreased $6.7 billion from December 31, 2019, predominantly as a result of common and preferred stock dividends of $4.9 billion and net losses of $1.7 billion. During second quarter 2020, we issued $367 million of common stock, excluding conversions of preferred shares. On March 15, 2020, we suspended our share repurchase activities for the remainder of the first quarter and for second quarter 2020. On June 25, 2020, the FRB announced that it was prohibiting large BHCs subject to the FRB’s capital plan rule, including Wells Fargo, from making any capital distribution (excluding any capital distribution arising from the issuance of a capital instrument eligible for inclusion in the numerator of a regulatory capital ratio), unless otherwise approved by the FRB. Through the end of third quarter 2020, the FRB authorized certain limited exceptions to this prohibition, which are described in the “Capital Planning and Stress Testing” section below. For additional information about capital distributions, see the “Capital Planning and Stress Testing” and “Securities Repurchases” sections below.
In January 2020, we issued $2.0 billion of our Preferred Stock, Series Z. In March 2020, we redeemed the remaining $1.8 billion of our Preferred Stock, Series K, and redeemed $669 million of our Preferred Stock, Series T. For more information, see Note 17 (Preferred Stock) to Financial Statements in this Report.
On July 28, 2020, the Company reduced its third quarter 2020 common stock dividend to $0.10 per share.

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, required on a fully phased-in basis as of June 30, 2020:
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. The difference between RWAs under the Standardized and Advanced Approach has narrowed in recent quarters due to economic conditions from the COVID-19 pandemic impacting our calculation of Advanced Approach RWAs. In particular, downgrades of loans in our loan portfolio, which drive negative credit risk migration, increased our Advanced Approach RWAs at June 30, 2020. We expect this trend to continue if the economic impact of the COVID-19 pandemic continues to affect our customer base.
Effective October 1, 2020, a stress capital buffer will be included in the minimum capital ratio requirements. The stress capital buffer is calculated based on the decrease in a BHC’s risk-based capital ratios under the severely adverse scenario in the FRB’s annual supervisory stress test and related Comprehensive Capital Analysis and Review (CCAR), plus four quarters of planned common stock dividends. The stress capital buffer will replace the current 2.50% capital conservation buffer under the Standardized Approach. On June 29, 2020, following the FRB’s release of the results of the 2020 supervisory stress test and related CCAR, the Company announced that it expects its stress capital buffer to be 2.50%, which is the lowest possible under the new framework and would keep the regulatory minimum for the Company’s CET1 ratio at 9.00%. The FRB has indicated that it will publish the final stress capital buffer for each BHC by August 31, 2020. Because the stress capital buffer is calculated annually as part of the FRB’s supervisory stress test and related CCAR and will be based on data that can differ over time, our stress capital buffer, and thus the regulatory minimums for our capital ratios, are subject to change in future years.
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 (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

48

Capital Management (continued)

over time, the amount of the surcharge is subject to change in future years.
In second quarter 2020, the Company elected to apply a modified transition provision issued by federal banking regulators in March 2020 related to the impact of CECL on regulatory capital. The rule permits certain banking organizations to exclude from regulatory capital the initial adoption impact of CECL, plus 25% of the cumulative changes in the ACL under CECL for each period until December 31, 2021, followed by a three-year phase-out of the benefits.
The tables that follow provide information about our risk-based capital and related ratios as calculated under Basel III
 
capital guidelines. Although we report certain capital amounts and ratios in accordance with Transition Requirements for banking industry regulatory reporting purposes, we manage our capital based on a fully phased-in basis. For information about our capital requirements calculated in accordance with Transition Requirements, see Note 23 (Regulatory and Agency Capital Requirements) to Financial Statements in this Report.
Table 36 summarizes our CET1, tier 1 capital, total capital, RWAs and capital ratios on a fully phased-in basis at June 30, 2020, and December 31, 2019.

Table 36: Capital Components and Ratios (Fully Phased-In) (1)
 
 
 
 
June 30, 2020
 
 
 
December 31, 2019
 
 
(in millions, except ratios)
 
Required Minimum
Capital Ratios

 
Advanced Approach

 
Standardized Approach

 
 
Advanced Approach

 
Standardized Approach

 
Common Equity Tier 1
(A)
 
 
$
133,055

 
133,055

 
 
138,760

 
138,760

 
Tier 1 Capital
(B)
 
 
152,871

 
152,871

 
 
158,949

 
158,949

 
Total Capital (2)
(C)
 
 
182,698

 
192,486

 
 
187,813

 
195,703

 
Risk-Weighted Assets (3)
(D)
 
 
1,195,423

 
1,213,062

 
 
1,165,079

 
1,245,853

 
Common Equity Tier 1 Capital Ratio (3)
(A)/(D)
9.00
%
 
11.13
%
 
10.97

*
 
11.91

 
11.14

*
Tier 1 Capital Ratio (3)
(B)/(D)
10.50

 
12.79

 
12.60

*
 
13.64

 
12.76

*
Total Capital Ratio (2)(3)
(C)/(D)
12.50

 
15.28

*
15.87


 
16.12

 
15.71

*
*Denotes the lowest capital ratio as determined under the Advanced and Standardized Approaches.
(1)
See Table 37 for information regarding the calculation and components of CET1, tier 1 capital, total capital and RWAs.
(2)
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 37 for information regarding the calculation and components of our fully phased-in total capital amounts, including a corresponding reconciliation to GAAP financial measures.
(3)
RWAs and capital ratios for December 31, 2019, have been revised as a result of a decrease in RWAs under the Advanced Approach due to the correction of duplicated operational loss amounts.

49


Table 37 provides information regarding the calculation and composition of our risk-based capital under the Advanced and
 
Standardized Approaches at June 30, 2020, and
December 31, 2019.
Table 37: Risk-Based Capital Calculation and Components

 
June 30, 2020
 
 
December 31, 2019
 
(in millions)
 
Advanced Approach

 
Standardized Approach

 
Advanced Approach

 
Standardized Approach

Total equity
 
$
180,122

 
180,122

 
187,984

 
187,984

Adjustments:
 

 

 
 
 
 
Preferred stock
 
(21,098
)
 
(21,098
)
 
(21,549
)
 
(21,549
)
Additional paid-in capital on preferred stock
 
159

 
159

 
(71
)
 
(71
)
Unearned ESOP shares
 
875

 
875

 
1,143

 
1,143

Noncontrolling interests
 
(736
)
 
(736
)
 
(838
)
 
(838
)
Total common stockholders’ equity

159,322

 
159,322

 
166,669

 
166,669

Adjustments:
 
 
 
 
 
 
 
 
Goodwill
 
(26,385
)
 
(26,385
)
 
(26,390
)
 
(26,390
)
Certain identifiable intangible assets (other than MSRs)
 
(389
)
 
(389
)
 
(437
)
 
(437
)
Goodwill and other intangibles on nonmarketable equity securities (included in other assets)
 
(2,050
)
 
(2,050
)
 
(2,146
)
 
(2,146
)
Applicable deferred taxes related to goodwill and other intangible assets (1)
 
831

 
831

 
810

 
810

CECL transition provision (2)
 
1,857

 
1,857

 

 

Other
 
(131
)
 
(131
)
 
254

 
254

Common Equity Tier 1

133,055

 
133,055

 
138,760

 
138,760

 
 
 
 
 
 
 
 
 
Common Equity Tier 1
 
$
133,055

 
133,055

 
138,760

 
138,760

Preferred stock
 
21,098

 
21,098

 
21,549

 
21,549

Additional paid-in capital on preferred stock
 
(159
)
 
(159
)
 
71

 
71

Unearned ESOP shares
 
(875
)
 
(875
)
 
(1,143
)
 
(1,143
)
Other
 
(248
)
 
(248
)
 
(288
)
 
(288
)
Total Tier 1 capital
(A)
152,871

 
152,871

 
158,949

 
158,949

 
 
 
 
 
 
 
 
 
Long-term debt and other instruments qualifying as Tier 2
 
25,471

 
25,471

 
26,515

 
26,515

Qualifying allowance for credit losses (3)
 
4,591

 
14,379

 
2,566

 
10,456

Other
 
(235
)
 
(235
)
 
(217
)
 
(217
)
Total Tier 2 capital (Fully Phased-In)
(B)
29,827

 
39,615

 
28,864

 
36,754

Effect of Basel III Transition Requirements
 
133

 
133

 
520

 
520

Total Tier 2 capital (Basel III Transition Requirements)
 
$
29,960

 
39,748

 
29,384

 
37,274

 
 
 
 
 
 
 
 
 
Total qualifying capital (Fully Phased-In)
(A)+(B)
$
182,698

 
192,486

 
187,813

 
195,703

Total Effect of Basel IIII Transition Requirements
 
133

 
133

 
520

 
520

Total qualifying capital (Basel III Transition Requirements)
 
$
182,831

 
192,619

 
188,333

 
196,223

 
 
 
 
 
 
 
 
 
Risk-Weighted Assets (RWAs) (4)(5):
 
 
 
 
 
 
 
 
Credit risk (6)
 
$
787,340

 
1,145,141

 
790,784

 
1,210,209

Market risk
 
67,920

 
67,921

 
35,644

 
35,644

Operational risk (7)
 
340,163

 

 
338,651

 

Total RWAs (7)
 
$
1,195,423

 
1,213,062

 
1,165,079

 
1,245,853

(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.
(2)
In second quarter 2020, the Company elected to apply a modified transition provision issued by federal banking regulators in March 2020 related to the impact of CECL on regulatory capital. The rule permits certain banking organizations to exclude from regulatory capital the initial adoption impact of CECL, plus 25% of the cumulative changes in the ACL under CECL for each period until December 31, 2021, followed by a three-year phase-out of the benefits. The impact of the CECL transition provision on our regulatory capital at June 30, 2020, was an increase in capital of $1.9 billion, reflecting a $991 million (post-tax) increase in capital recognized upon our initial adoption of CECL, offset by 25% of the $11.4 billion increase in our ACL under CECL from January 1, 2020, through June 30, 2020.
(3)
Under the Advanced Approach the allowance for credit losses that exceeds expected credit losses is eligible for inclusion in Tier 2 Capital, to the extent the excess allowance does not exceed 0.60% 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, in each case with any excess allowance for credit losses being deducted from the respective total RWAs.
(4)
RWAs calculated under the Advanced Approach utilize a risk-sensitive methodology, which relies upon the use of internal credit models based upon our experience with internal rating grades. Advanced Approach also includes an operational risk component, which reflects the risk of operating loss resulting from inadequate or failed internal processes or systems.
(5)
Under the regulatory guidelines for risk-based capital, on-balance sheet assets and credit equivalent amounts of derivatives and off-balance sheet items are assigned to one of several broad risk categories according to the obligor, or, if relevant, the guarantor or the nature of any collateral. The aggregate dollar amount in each risk category is then multiplied by the risk weight associated with that category. The resulting weighted values from each of the risk categories are aggregated for determining total RWAs.
(6)
Includes an increase of $1.5 billion under both the Advanced Approach and Standardized Approach related to the impact of the CECL transition provision on our excess allowance for credit losses as of June 30, 2020. See footnote (3) to this table.
(7)
Amounts for December 31, 2019, have been revised as a result of a decrease in RWAs under the Advanced Approach due to the correction of duplicated operational loss amounts.

50

Capital Management (continued)

Table 38 presents the changes in Common Equity Tier 1 under the Advanced Approach for the six months ended June 30, 2020.
 

Table 38: Analysis of Changes in Common Equity Tier 1 (Advanced Approach)
(in millions)
 
 
Common Equity Tier 1 at December 31, 2019
 
$
138,760

Net income applicable to common stock
 
(2,652
)
Common stock dividends
 
(4,189
)
Common stock issued, repurchased, and stock compensation-related items
 
(2,189
)
Changes in cumulative other comprehensive income
 
513

Cumulative effect from change in accounting policies (1)
 
991

Goodwill
 
5

Certain identifiable intangible assets (other than MSRs)
 
48

Goodwill and other intangibles on nonmarketable equity securities (included in other assets)
 
96

Applicable deferred taxes related to goodwill and other intangible assets (2)
 
21

CECL transition provision (3)
 
1,857

Other
 
(206
)
Change in Common Equity Tier 1
 
(5,705
)
Common Equity Tier 1 at June 30, 2020
 
$
133,055

(1)
Effective January 1, 2020, we adopted CECL. For more information, see Note 1 (Summary of Significant Accounting Policies) to Financial Statements in this Report.
(2)
Determined by applying the combined federal statutory rate and composite state income tax rates to the difference between book and tax basis of the respective goodwill and intangible assets at period end.
(3)
In second quarter 2020, the Company elected to apply a modified transition provision issued by federal banking regulators in March 2020 related to the impact of CECL on regulatory capital. The rule permits certain banking organizations to exclude from regulatory capital the initial adoption impact of CECL, plus 25% of the cumulative changes in the ACL under CECL for each period until December 31, 2021, followed by a three-year phase-out of the benefits. The impact of the CECL transition provision on our regulatory capital at June 30, 2020, was an increase in capital of $1.9 billion, reflecting a $991 million (post-tax) increase in capital recognized upon our initial adoption of CECL, offset by 25% of the $11.4 billion increase in our ACL under CECL from January 1, 2020, through June 30, 2020.

Table 39 presents net changes in the components of RWAs under the Advanced and Standardized Approaches for the six months ended June 30, 2020.
 


Table 39: Analysis of Changes in RWAs
(in millions)
Advanced Approach

Standardized Approach

RWAs at December 31, 2019 (1)
$
1,165,079

1,245,853

Net change in credit risk RWAs (2)
(3,444
)
(65,068
)
Net change in market risk RWAs
32,276

32,277

Net change in operational risk RWAs
1,512


Total change in RWAs
30,344

(32,791
)
RWAs at June 30, 2020
$
1,195,423

1,213,062

(1)
Amount for December 31, 2019, has been revised as a result of a decrease in RWAs under the Advanced Approach due to the correction of duplicated operational loss amounts.
(2)
Includes an increase of $1.5 billion under both the Advanced Approach and Standardized Approach related to the impact of the CECL transition provision on our excess allowance for credit losses. See Table 37 for more information.

51


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 40 provides a reconciliation of these non-GAAP financial measures to GAAP financial measures.

Table 40: Tangible Common Equity
 
 
 
Balance at period end
 
 
Average balance
 
 
 
 
Quarter ended
 
 
Quarter ended
 
 
Six months ended
 
(in millions, except ratios)
 
 
Jun 30,
2020

Mar 31,
2020

Jun 30,
2019

 
Jun 30,
2020

Mar 31,
2020

Jun 30,
2019

 
Jun 30,
2020

Jun 30,
2019

Total equity
 
 
$
180,122

183,330

200,037

 
184,108

188,170

199,685

 
186,139

199,021

Adjustments:
 
 
 
 
 
 
 
 
 
 
 
 
Preferred stock
 
 
(21,098
)
(21,347
)
(23,021
)
 
(21,344
)
(21,794
)
(23,023
)
 
(21,569
)
(23,118
)
Additional paid-in capital on preferred stock
 
 
159

140

(78
)
 
140

135

(78
)
 
138

(87
)
Unearned ESOP shares
 
 
875

1,143

1,292

 
1,140

1,143

1,294

 
1,141

1,397

Noncontrolling interests
 
 
(736
)
(612
)
(995
)
 
(643
)
(785
)
(939
)
 
(714
)
(919
)
Total common stockholders’ equity
(A)
 
159,322

162,654

177,235

 
163,401

166,869

176,939

 
165,135

176,294

Adjustments:
 
 
 
 
 
 

 

 
 
 
Goodwill
 
 
(26,385
)
(26,381
)
(26,415
)
 
(26,384
)
(26,387
)
(26,415
)
 
(26,386
)
(26,417
)
Certain identifiable intangible assets (other than MSRs)
 
 
(389
)
(413
)
(493
)
 
(402
)
(426
)
(505
)
 
(414
)
(524
)
Goodwill and other intangibles on nonmarketable equity securities (included in other assets)
 
 
(2,050
)
(1,894
)
(2,251
)
 
(1,922
)
(2,152
)
(2,155
)
 
(2,037
)
(2,157
)
Applicable deferred taxes related to goodwill and other intangible assets (1)
 
 
831

821

788

 
828

818

780

 
823

782

Tangible common equity
(B)
 
$
131,329

134,787

148,864

 
135,521

138,722

148,644

 
137,121

147,978

Common shares outstanding
(C)
 
4,119.6

4,096.4

4,419.6

 
N/A

N/A

N/A

 
N/A

N/A

Net income applicable to common stock
(D)
 
N/A

N/A

N/A

 
$
(2,694
)
42

5,848

 
(2,652
)
11,355

Book value per common share
(A)/(C)
 
$
38.67

39.71

40.10

 
N/A

N/A

N/A

 
N/A

N/A

Tangible book value per common share
(B)/(C)
 
31.88

32.90

33.68

 
N/A

N/A

N/A

 
N/A

N/A

Return on average common stockholders’ equity (ROE) (annualized)
(D)/(A)
 
N/A

N/A

N/A

 
(6.63
)%
0.10

13.26

 
(3.23
)
12.99

Return on average tangible common equity (ROTCE) (annualized)
(D)/(B)
 
N/A

N/A

N/A

 
(8.00
)
0.12

15.78

 
(3.89
)
15.47

(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.

52

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 (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. In April 2020, the FRB issued an interim final rule that temporarily allows a BHC to exclude on-balance sheet amounts of U.S. Treasury securities and deposits at Federal Reserve Banks from the calculation of its total leverage exposure in the denominator of the SLR. This interim final rule became effective on April 1, 2020, and expires on March 31, 2021. In May 2020, federal banking regulators issued an interim final rule that permits IDIs to choose to similarly exclude these items from the denominator of their SLRs; however, if an IDI chooses to exclude such amounts from the calculation of its SLR, it will be required to request approval from its primary federal banking regulator before making capital distributions, such as paying dividends, to its parent company. As of June 30, 2020, none of the Company’s IDIs elected to apply this exclusion.
At June 30, 2020, our SLR for the Company was 7.52%, and we also exceeded the applicable SLR requirements for each of our IDIs. See Table 41 for information regarding the calculation and components of the SLR.
Table 41: Supplementary Leverage Ratio
(in millions, except ratio)
 
Quarter ended June 30, 2020

Tier 1 capital
(A)
$
152,871

Total average assets
 
1,950,796

Less: Goodwill and other permitted Tier 1 capital deductions (net of deferred tax liabilities)
 
28,367

Less: Other SLR exclusions
 
218,984

Total adjusted average assets
 
1,703,445

Plus adjustments for off-balance sheet exposures:
 
 
Derivatives (1)
 
74,435

Repo-style transactions (2)
 
3,604

Other (3)
 
250,765

Total off-balance sheet exposures
 
328,804

Total leverage exposure
(B)
$
2,032,249

Supplementary leverage ratio
(A)/(B)
7.52
%
(1)
Adjustment represents derivatives and collateral netting exposures as defined for supplementary leverage ratio determination purposes.
(2)
Adjustment represents counterparty credit risk for repo-style transactions where Wells Fargo & Company is the principal (i.e., principal counterparty facing the client).
(3)
Adjustment represents credit equivalent amounts of other off-balance sheet exposures not already included as derivatives and repo-style transactions exposures.
TOTAL LOSS ABSORBING CAPACITY 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 June 30, 2020, our eligible external TLAC as a percentage of total risk-weighted assets was 25.33% 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.
OTHER REGULATORY CAPITAL AND LIQUIDITY MATTERS 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, changes to the regulatory minimums for our capital ratios (including changes to our stress capital buffer), planned capital actions, changes in our risk profile and other factors.
Under the FRB’s capital plan rule, large BHCs are required to submit capital plans annually for review to determine if the FRB has any objections before making any capital distributions. The rule requires updates to capital plans in the event of material changes in a BHC’s risk profile, including as a result of any significant acquisitions. The FRB assesses, among other things, the overall financial condition, risk profile, and capital adequacy of BHCs when evaluating capital plans.
Our 2020 capital plan, which was submitted on April 3, 2020, 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 2020 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

53


performance. The FRB reviewed the supervisory stress test 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 25, 2020.
On June 25, 2020, the FRB also announced that it is requiring large BHCs, including Wells Fargo, to update and resubmit their capital plans within 45 days after the FRB provides updated scenarios. Requiring resubmission will prohibit each BHC from making any capital distribution (excluding any capital distribution arising from the issuance of a capital instrument eligible for inclusion in the numerator of a regulatory capital ratio), unless otherwise approved by the FRB. Through the end of third quarter 2020, the FRB is authorizing each BHC to (i) make share repurchases relating to issuances of common stock related to employee stock ownership plans; (ii) provided that the BHC does not increase the amount of its common stock dividends, pay common stock dividends that do not exceed an amount equal to the average of the BHC’s net income for the four preceding calendar quarters, unless otherwise specified by the FRB; and (iii) make scheduled payments on additional tier 1 and tier 2 capital instruments. These provisions may be extended by the FRB quarter-by-quarter.
Concurrently with CCAR, federal banking regulators also require large BHCs and banks to conduct their own stress tests to evaluate whether the 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. We submitted the results of our stress test to the FRB and disclosed a summary of the results in June 2020.

Securities Repurchases
From time to time the Board authorizes the Company to repurchase shares of our common stock. Although we announce when the Board authorizes share repurchases, we typically do not give any public notice before we repurchase our shares. Future stock repurchases may be private or open-market repurchases, including block transactions, accelerated or delayed block transactions, forward repurchase transactions, and similar transactions. Additionally, we may enter into plans to purchase stock that satisfy the conditions of Rule 10b5-1 of the Securities Exchange Act of 1934. Various factors determine the amount of our share repurchases, including our capital requirements, the number of shares we expect to issue for employee benefit plans and acquisitions, market conditions (including the trading price of our stock), and regulatory and legal considerations, including the FRB’s response to our capital plan and to changes in our risk profile. Due to the various factors impacting the amount of our share repurchases and the fact that we tend to be in the market regularly to satisfy repurchase considerations under our capital plan, our share repurchases occur at various price levels. We may suspend share repurchase activity at any time. On March 15, 2020, we, along with the other members of the Financial Services Forum, suspended our share repurchase activities for the remainder of the first quarter and for second quarter 2020. On June 25, 2020, the FRB announced that it was prohibiting large BHCs, including Wells Fargo, from making any capital distribution (excluding any capital distribution arising from the issuance of a capital instrument eligible for inclusion in the numerator of a regulatory capital ratio), unless otherwise approved by the FRB. Through the end of third quarter 2020, the FRB authorized
 
certain limited exceptions to this prohibition, which are described in the “Capital Planning and Stress Testing” section above.
At June 30, 2020, we had remaining Board authority to repurchase approximately 168 million shares, subject to regulatory and legal conditions. For more information about share repurchases during second quarter 2020, see Part II, Item 2 in this Report.
Historically, our policy has been to repurchase shares under the “safe harbor” conditions of Rule 10b-18 of the Securities Exchange Act of 1934 including a limitation on the daily volume of repurchases. Rule 10b-18 imposes an additional daily volume limitation on share repurchases during a pending merger or acquisition in which shares of our stock will constitute some or all of the consideration. Our management may determine that during a pending stock merger or acquisition when the safe harbor would otherwise be available, it is in our best interest to repurchase shares in excess of this additional daily volume limitation. In such cases, we intend to repurchase shares in compliance with the other conditions of the safe harbor, including the standing daily volume limitation that applies whether or not there is a pending stock merger or acquisition.
For additional information about share repurchases, see Note 1 (Summary of Significant Accounting Policies) to Financial Statements in this Report.


54

Regulatory Matters (continued)

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.
For a discussion of certain consent orders applicable to the Company, see the “Overview” section in this Report. The following supplements our discussion of the other significant regulations and regulatory oversight initiatives that have affected or may affect our business contained in the “Regulatory Matters” and “Risk Factors” sections in our 2019 Form 10-K and in our 2020 First Quarter Report on Form 10-Q.

REGULATORY DEVELOPMENTS RELATED TO COVID-19 In response to the COVID-19 pandemic and related events, federal banking regulators have undertaken a number of measures to help stabilize the banking sector, support the broader economy, and facilitate the ability of banking organizations like Wells Fargo to continue lending to consumers and businesses. For example, in order to facilitate the Coronavirus Aid, Relief and Economic Security Act (CARES Act), federal banking regulators issued interim final rules designed to encourage financial institutions to participate in stimulus measures, such as the Small Business Administration’s Paycheck Protection Program and the FRB’s Main Street Lending Program. Similarly, the FRB launched a number of lending facilities designed to enhance liquidity and the functioning of markets, including facilities covering money market mutual funds and term asset-backed securities loans. Federal banking regulators have also issued several joint interim final rules amending the regulatory capital and TLAC rules and other prudential regulations to ease certain restrictions on banking organizations and encourage the use of certain FRB-established facilities in order to further promote lending to consumers and businesses.
 
In addition, the OCC and the FRB have issued guidelines for banks and BHCs related to working with customers affected by the COVID-19 pandemic, including guidance with respect to waiving fees, offering repayment accommodations, providing payment deferrals, and increasing daily withdrawal limits at automated teller machines. In addition, the federal government has instituted a moratorium on certain mortgage foreclosure activities. Any current or future rules, regulations, and guidance related to the COVID-19 pandemic and its impacts 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.


55


Critical Accounting Policies
Our significant accounting policies (see Note 1 (Summary of Significant Accounting Policies) to Financial Statements in our 2019 Form 10-K) 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. These policies are described further in the “Financial Review – Critical Accounting Policies” section and Note 1 (Summary of Significant Accounting Policies) to Financial Statements in our 2019 Form 10-K. In connection with our adoption of CECL on January 1, 2020, we have updated our critical accounting policy for the allowance for credit losses.

Allowance for Credit Losses
We maintain an allowance for credit losses (ACL) for loans, which is management’s estimate of the expected credit losses in the loan portfolio and unfunded credit commitments, at the balance sheet date, excluding loans and unfunded credit commitments carried at fair value or held for sale. Additionally, we maintain an allowance for credit losses for debt securities classified as either held-to-maturity (HTM) or available-for-sale (AFS), other financial assets measured at amortized cost, net investments in leases, and other off-balance sheet credit exposures. In connection with our adoption of CECL, we updated our approach for estimating expected credit losses, which includes new areas for management judgment, described more fully below, and updated our accounting policies. For more information, see Note 1 (Summary of Significant Accounting Policies) to Financial Statements in this Report.
For loans and HTM debt securities, the ACL is measured based on the remaining contractual term of the financial asset (including off-balance sheet credit exposures) adjusted, as appropriate, for prepayments and permitted extension options using historical experience, current conditions, and forecasted information. For AFS debt securities, the ACL is measured using a discounted cash flow approach and is limited to the difference between the fair value of the security and its amortized cost.
Changes in the ACL and, therefore, in the related provision for credit losses can materially affect net income. In applying the judgment and review required to determine the ACL, management considerations include the evaluation of past events, historical experience, changes in economic forecasts and conditions, customer behavior, collateral values, and the length of the initial loss forecast period, and other influences. From time to time, changes in economic factors or assumptions, business strategy, products or product mix, or debt security investment strategy, may result in a corresponding increase or decrease in our ACL. While our methodology attributes portions of the ACL to specific financial asset classes (loan and debt security portfolios)
 
or loan portfolio segments (commercial and consumer), the entire ACL is available to absorb credit losses of the company.
Judgment is specifically applied in:
Economic assumptions and the length of the initial loss forecast period. Forecasted economic variables, such as gross domestic product (GDP), unemployment rate or collateral asset prices, are used to estimate expected credit losses. While many of these economic variables are evaluated at the macro-economy level, some economic variables may be forecasted at more granular levels, for example, using the metro statistical area (MSA) level for unemployment rates, home prices and commercial real estate prices. Quarterly, we assess the length of the initial loss forecast period and have currently set the period to one year. Management exercises judgment when assigning weight to the three economic scenarios that are used to estimate future credit losses. The three scenarios include a most likely expectation of economic variables referred to as the base case scenario, as well as an optimistic (upside) scenario and a pessimistic (downside) scenario.
Reversion of losses beyond the initial forecast period. We use a reversion approach to connect the losses estimated for our initial loss forecast period to the period of our historical loss forecast based on economic conditions at the measurement date. Our reversion methodology considers the type of portfolio, point in the credit cycle, expected length of recessions and recoveries, as well as other relevant factors. The length of reversion period varies by asset type – one year for shorter contractual term loans such as commercial loans and two years for longer contractual term loans such as real estate 1-4 family mortgage loans. We assess the reversion approach on a quarterly basis and the length of the reversion period by asset type annually.
Historical loss expectations. At the end of the reversion period, we incorporate the changes in economic variables observed during representative historical time periods that include both recessions and expansions. This analysis is used to compute average losses for any given portfolio and its associated credit characteristics. Annually, we assess the historical time periods and ensure the average loss estimates are representative of our historical loss experience.
Credit risk ratings applied to individual commercial loans, unfunded credit commitments, and debt securities. Individually assessed credit risk ratings are considered key credit variables in our modeled approaches to help assess probability of default and loss given default. Borrower quality ratings are aligned to the borrower’s financial strength and contribute to forecasted probability of default curves. Collateral quality ratings combined with forecasted collateral prices (as applicable) contribute to the forecasted severity of loss in the event of default. These credit risk ratings are reviewed by experienced senior credit officers and subjected to reviews by an internal team of credit risk specialists.
Usage of credit loss estimation models. We use internally developed models that incorporate credit attributes and economic variables to generate estimates of credit losses. Management uses a combination of judgement and quantitative analytics in the determination of segmentation, modeling approach, and variables that are leveraged in the models. These models are validated in accordance with the Company’s policies by an internal model validation group. We routinely assess our model performance and apply

56


adjustments when necessary to improve the accuracy of loss estimation. We also assess our models for limitations against the company-wide risk inventory to help ensure that we appropriately capture known and emerging risks in our estimate of expected credit losses and apply overlays as needed.
Valuation of collateral. The current fair value of collateral is utilized to assess the expected credit losses when a financial asset is considered to be collateral dependent. We apply judgment when valuing the collateral either through appraisals, evaluation of the cash flows of the property, or other quantitative techniques. Decreases in collateral valuations support incremental charge-downs and increases in collateral valuation are included in the allowance for credit losses as a negative allowance when the financial asset has been previously written-down below current recovery value.
Contractual term considerations. The remaining contractual term of a loan is adjusted for expected prepayments and certain expected extensions, renewals, or modifications. We extend the contractual term when we are not able to unconditionally cancel contractual renewals or extension options. We also incorporate into our allowance for credit losses any scenarios where we reasonably expect to provide an extension through a TDR.
Qualitative factors which may not be adequately captured in the loss models. These amounts represent management’s judgment of risks inherent in the processes and assumptions used in establishing the ACL. We also consider economic environmental factors, modeling assumptions and performance, process risk, and other subjective factors, including industry trends and emerging risk assessments.

Sensitivity The ACL for loans is sensitive to changes in key assumptions which requires significant judgment to be used by management. Future amounts of the ACL for loans will be based on a variety of factors, including loan balance changes, portfolio credit quality, and general economic conditions. General economic conditions are forecasted using economic variables, which could have varying impacts on different financial assets or portfolios. Additionally, throughout numerous credit cycles, there are observed changes in economic variables such as the unemployment rate, GDP and real estate prices which may not move in a correlated manner as variables may move in opposite directions or differ across portfolios or geography.
 
In our sensitivity analysis, we applied 50% weight to both the base case scenario and the downside scenario to reflect the potential for further economic deterioration from a COVID-19 resurgence. The outcomes of both scenarios were influenced by the duration, severity, and timing of changes in economic variables within those scenarios. The result of the sensitivity analysis would have increased the ACL for loans by approximately $5.0 billion at June 30, 2020.
This hypothetical increase in our ACL for loans represents changes to our quantitative estimate and does not incorporate the impact of management judgment for qualitative factors applied in the current ACL for loans, which may have a positive or negative effect on the results. Also, if this hypothetical result were to actually materialize, the increase in our ACL for loans may be recognized over time if actual loss expectations exceed our historical loss experience.
This sensitivity analysis does not represent management’s view of expected credit losses at the balance sheet date. The sensitivity analysis excludes the ACL for debt securities given its size relative to the overall ACL. Management believes that the estimate for the ACL for loans was appropriate at the balance sheet date. Because significant judgment is used, it is possible that others performing similar analyses could reach different conclusions.



57


Current Accounting Developments
Table 42 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 42: 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 June 30, 2020, we held $1.1 billion in insurance-related reserves of which $568 million was in scope of the Update. A total of $509 million was associated with products that meet the definition of market risk benefits, and of this amount, $52 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.
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


58

Forward-Looking Statements (continued)

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 Securities and Exchange Commission (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, our allowance for credit losses, and the economic scenarios considered to develop the allowance; (iv) our expectations regarding net interest income and net interest margin; (v) loan growth or the reduction or mitigation of risk in our loan portfolios; (vi) future capital or liquidity levels, ratios or targets; (vii) the performance of our mortgage business and any related exposures; (viii) the expected outcome and impact of legal, regulatory and legislative developments, as well as our expectations regarding compliance therewith; (ix) future common stock dividends, common share repurchases and other uses of capital; (x) our targeted range for return on assets, return on equity, and return on tangible common equity; (xi) expectations regarding our effective income tax rate; (xii) the outcome of contingencies, such as legal proceedings; and (xiii) the Company’s plans, objectives and strategies.
Forward-looking statements are not based on historical facts but instead represent our current expectations and assumptions regarding our business, the economy and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict. Our actual results may differ materially from those contemplated by the forward-looking statements. We caution you, therefore, against relying on any of these forward-looking statements. They are neither statements of historical fact nor guarantees or assurances of future performance. While there is no assurance that any list of risks and uncertainties or risk factors is complete, important factors that could cause actual results to differ materially from those in the forward-looking statements include the following, without limitation:
current and future economic and market conditions, including the effects of declines in housing prices, high unemployment rates, U.S. fiscal debt, budget and tax matters, geopolitical matters, and any slowdown in global economic growth;
the effect of the COVID-19 pandemic, including on our credit quality and business operations, as well as its impact on general economic and financial market conditions;
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 impairments of 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 our Annual Report on Form 10-K for the year ended December 31, 2019, as supplemented by the “Risk Factors” section 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

59


requirements (including under Basel capital standards), common stock issuance requirements, applicable law and regulations (including federal securities laws and federal banking regulations), and other factors deemed relevant by the Company’s Board of Directors, and may be subject to regulatory approval or conditions.
For more information about factors that could cause actual results to differ materially from our expectations, refer to our reports filed with the Securities and Exchange Commission, including the discussion under “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2019, as supplemented by the “Risk Factors” section in this Report, as filed with the Securities and Exchange Commission and available on its website at www.sec.gov1
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.










































1 We do not control this website. Wells Fargo has provided this link for your convenience, but does not endorse and is not responsible for the content, links, privacy policy, or security policy of this website.
 
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.

60


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. For a discussion of risk factors that could adversely affect our financial results and condition, and the value of, and return on, an investment in the Company, we refer you to the “Risk Factors” section in our 2019 Form 10-K.
The following risk factor supplements the “Risk Factors” section in our 2019 Form 10-K.

The COVID-19 pandemic has adversely impacted our business and financial results, and the ultimate impact will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the pandemic and actions taken by governmental authorities in response to the pandemic. The COVID-19 pandemic has negatively impacted the global economy, disrupted global supply chains, lowered equity market valuations, created significant volatility and disruption in financial markets, and increased unemployment levels. In addition, the pandemic has resulted in temporary closures of many businesses and the institution of social distancing and sheltering in place requirements in many states and communities. As a result, the demand for our products and services may continue to be significantly impacted, which could adversely affect our revenue. Furthermore, the pandemic could continue to result in the recognition of credit losses in our loan portfolios and increases in our allowance for credit losses, particularly if businesses remain closed, the impact on the global economy worsens, or more customers draw on their lines of credit or seek additional loans to help finance their businesses. Similarly, because of changing economic and market conditions affecting issuers, we may be required to recognize further impairments on the securities we hold, as well as reductions in other comprehensive income. Moreover, the persistence of adverse economic conditions and reduced revenue may adversely affect the fair value of our operating segments and underlying reporting units which may result in goodwill impairment. Our business operations may be further disrupted if significant portions of our workforce are unable to work effectively, including because of illness, quarantines, government actions, or other restrictions in connection with the pandemic, and we have already temporarily closed certain of our branches and offices.
 
Moreover, the pandemic has created additional operational and compliance risks, including the need to quickly implement and execute new programs and procedures for the products and services we offer our customers, provide enhanced safety measures for our employees and customers, comply with rapidly changing regulatory requirements, address any increased risk of fraudulent activity, and protect the integrity and functionality of our systems and networks as a larger number of our employees work remotely. The pandemic could also result in or contribute to additional downgrades to our credit ratings or credit outlook. In response to the pandemic, we have suspended residential property foreclosure sales and evictions, and are offering fee waivers, payment deferrals, and other expanded assistance for credit card, automobile, mortgage, small business, personal and commercial lending customers, and future governmental actions may require these and other types of customer-related responses. In addition, we have reduced our common stock dividend and temporarily suspended share repurchases, and we could take, or be required to take, other capital actions in the future. The extent to which the COVID-19 pandemic impacts our business, results of operations, and financial condition, as well as our regulatory capital and liquidity ratios, will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the pandemic and actions taken by governmental authorities and other third parties in response to the pandemic.


61


Controls and Procedures
Disclosure Controls and Procedures
The Company’s management evaluated the effectiveness, as of June 30, 2020, 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 June 30, 2020.

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 second quarter 2020 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

62


Wells Fargo & Company and Subsidiaries
Consolidated Statement of Income (Unaudited)
 
Quarter ended June 30,
 
 
Six months ended June 30,
 
(in millions, except per share amounts)
2020

 
2019

 
2020

 
2019

Interest income
 
 
 
 
 
 
 
Debt securities
$
2,946

 
3,781

 
$
6,418

 
7,722

Mortgage loans held for sale
230

 
195

 
427

 
347

Loans held for sale
7

 
20

 
19

 
44

Loans
8,448

 
11,316

 
18,513

 
22,670

Equity securities
116

 
236

 
322

 
446

Other interest income
54

 
1,438

 
829

 
2,760

Total interest income
11,801

 
16,986

 
26,528

 
33,989

Interest expense
 
 
 
 
 
 
 
Deposits
585

 
2,213

 
2,327

 
4,239

Short-term borrowings
(17
)
 
646

 
274

 
1,242

Long-term debt
1,237

 
1,900

 
2,477

 
3,827

Other interest expense
116

 
132

 
258

 
275

Total interest expense
1,921

 
4,891

 
5,336

 
9,583

Net interest income
9,880

 
12,095

 
21,192


24,406

Provision (reversal of provision) for credit losses:
 
 
 
 
 
 
 
Debt securities (1)
(31
)
 

 
141

 

Loans
9,565

 
503

 
13,398

 
1,348

Net interest income after provision for credit losses
346

 
11,592

 
7,653

 
23,058

Noninterest income
 
 
 
 
 
 
 
Service charges on deposit accounts
930

 
1,206

 
2,139

 
2,300

Trust and investment fees
3,351

 
3,568

 
6,925

 
6,941

Card fees
797

 
1,025

 
1,689

 
1,969

Other fees
578

 
800

 
1,210

 
1,570

Mortgage banking
317

 
758

 
696

 
1,466

Net gains from trading activities
807

 
229

 
871

 
586

Net gains on debt securities
212

 
20

 
449

 
145

Net gains (losses) from equity securities
533

 
622

 
(868
)
 
1,436

Lease income
334

 
424

 
686

 
867

Other (2)
97

 
837

 
564

 
1,507

Total noninterest income
7,956

 
9,489

 
14,361

 
18,787

Noninterest expense
 
 
 
 
 
 
 
Personnel (2)
8,911

 
8,474

 
17,225

 
17,682

Technology and equipment (2)
562

 
641

 
1,268

 
1,335

Occupancy
871

 
719

 
1,586

 
1,436

Core deposit and other intangibles
22

 
27

 
45

 
55

FDIC and other deposit assessments
165

 
144

 
283

 
303

Other (2)
4,020

 
3,444

 
7,192

 
6,554

Total noninterest expense
14,551

 
13,449

 
27,599

 
27,365

Income (loss) before income tax expense (benefit)
(6,249
)
 
7,632

 
(5,585
)

14,480

Income tax expense (benefit)
(3,917
)
 
1,294

 
(3,758
)
 
2,175

Net income (loss) before noncontrolling interests
(2,332
)
 
6,338

 
(1,827
)

12,305

Less: Net income (loss) from noncontrolling interests
47

 
132

 
(101
)
 
239

Wells Fargo net income (loss)
$
(2,379
)
 
6,206

 
$
(1,726
)

12,066

Less: Preferred stock dividends and other
315

 
358

 
926

 
711

Wells Fargo net income (loss) applicable to common stock
$
(2,694
)
 
5,848

 
$
(2,652
)
 
11,355

Per share information
 
 
 
 
 
 
 
Earnings (loss) per common share
$
(0.66
)
 
1.31

 
$
(0.65
)
 
2.52

Diluted earnings (loss) per common share (3)
(0.66
)
 
1.30

 
(0.65
)
 
2.50

Average common shares outstanding
4,105.5

 
4,469.4

 
4,105.2

 
4,510.2

Diluted average common shares outstanding (3)
4,105.5

 
4,495.0

 
4,105.2

 
4,540.1


(1)
Prior to our adoption of Accounting Standards Update (ASU) 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (CECL), on January 1, 2020, provision for credit losses from debt securities was not applicable and is therefore presented as $0 for both the second quarter and first half of 2019. For more information, see Note 1 (Summary of Significant Accounting Policies) to Financial Statements in this Report.
(2)
In second quarter 2020, insurance income was reclassified to other noninterest income, personnel-related expenses were combined into a single line item, and expenses for cloud computing services were reclassified from contract services expense (within other noninterest expense) to technology and equipment expense. Prior period balances have been revised to conform with the current period presentation.
(3)
In second quarter 2020, diluted earnings per common share equaled earnings per common share because our securities convertible into common shares had an anti-dilutive effect.

The accompanying notes are an integral part of these statements.

63


Wells Fargo & Company and Subsidiaries
 
 
 
 
 
 
 
 
Consolidated Statement of Comprehensive Income (Unaudited)
 
 
 
 
 
 
Quarter ended June 30,
 
 
Six months ended June 30,
 
(in millions)
 
2020

 
2019

 
2020

 
2019

Wells Fargo net income (loss)
 
$
(2,379
)
 
6,206

 
(1,726
)
 
12,066

Other comprehensive income (loss), before tax:
 
 
 
 
 
 
 
 
Debt securities:
 
 
 
 
 
 
 
 
Net unrealized gains arising during the period
 
1,596

 
1,709

 
1,486

 
4,540

Reclassification of net (gains) losses to net income
 
(90
)
 
39

 
(262
)
 
(42
)
Derivative and hedging activities:
 
 
 
 
 
 
 
 
Net unrealized gains (losses) arising during the period
 
(52
)
 
57

 
72

 
22

Reclassification of net losses to net income
 
55

 
79

 
113

 
158

Defined benefit plans adjustments:
 
 
 
 
 
 
 
 
Net actuarial and prior service losses arising during the period
 
(674
)
 

 
(671
)
 
(4
)
Amortization of net actuarial loss, settlements and other to net income
 
101

 
33

 
137

 
68

Foreign currency translation adjustments:
 
 
 
 
 
 
 
 
Net unrealized gains (losses) arising during the period
 
51

 
14

 
(144
)
 
56

Other comprehensive income, before tax
 
987

 
1,931

 
731

 
4,798

Income tax expense related to other comprehensive income
 
(221
)
 
(473
)
 
(219
)
 
(1,167
)
Other comprehensive income, net of tax
 
766

 
1,458

 
512

 
3,631

Less: Other comprehensive loss from noncontrolling interests
 

 

 
(1
)
 

Wells Fargo other comprehensive income, net of tax
 
766

 
1,458

 
513

 
3,631

Wells Fargo comprehensive income (loss)
 
(1,613
)
 
7,664

 
(1,213
)
 
15,697

Comprehensive income (loss) from noncontrolling interests
 
47

 
132

 
(102
)
 
239

Total comprehensive income (loss)
 
$
(1,566
)
 
7,796

 
(1,315
)
 
15,936



The accompanying notes are an integral part of these statements.

64


Wells Fargo & Company and Subsidiaries
 
 
 
Consolidated Balance Sheet
 
 
 
(in millions, except shares)
Jun 30,
2020

 
Dec 31,
2019

Assets
(Unaudited)

 
 
Cash and due from banks
$
24,704

 
21,757

Interest-earning deposits with banks
237,799

 
119,493

Total cash, cash equivalents, and restricted cash
262,503

 
141,250

Federal funds sold and securities purchased under resale agreements
79,289

 
102,140

Debt securities:
 
 
 
Trading, at fair value
74,679

 
79,733

Available-for-sale, at fair value (includes amortized cost of $224,467 and $260,060, net of allowance for credit losses of $114 and $0) (1)
228,899

 
263,459

Held-to-maturity, at amortized cost, net of allowance for credit losses of $20 and $0 (fair value $176,882 and $156,860) (1)
169,002

 
153,933

Mortgage loans held for sale (includes $18,644 and $16,606 carried at fair value) (2)
32,355

 
23,342

Loans held for sale (includes $1,201 and $972 carried at fair value) (2)
1,339

 
977

Loans (includes $152 and $171 carried at fair value) (2)
935,155

 
962,265

Allowance for loan losses 
(18,926
)
 
(9,551
)
Net loans
916,229

 
952,714

Mortgage servicing rights: 
 
 
 
Measured at fair value
6,819

 
11,517

Amortized
1,361

 
1,430

Premises and equipment, net 
9,025

 
9,309

Goodwill
26,385

 
26,390

Derivative assets
22,776

 
14,203

Equity securities (includes $27,339 and $41,936 carried at fair value) (2)
52,494

 
68,241

Other assets
85,611

 
78,917

Total assets (3)
$
1,968,766

 
1,927,555

Liabilities
 
 
 
Noninterest-bearing deposits 
$
432,857

 
344,496

Interest-bearing deposits 
977,854

 
978,130

Total deposits 
1,410,711

 
1,322,626

Short-term borrowings
60,485

 
104,512

Derivative liabilities
11,368

 
9,079

Accrued expenses and other liabilities
75,159

 
75,163

Long-term debt 
230,921

 
228,191

Total liabilities (4)
1,788,644

 
1,739,571

Equity 
 
 
 
Wells Fargo stockholders’ equity: 
 
 
 
Preferred stock 
21,098

 
21,549

Common stock – $1-2/3 par value, authorized 9,000,000,000 shares; issued 5,481,811,474 shares 
9,136

 
9,136

Additional paid-in capital 
59,923

 
61,049

Retained earnings 
159,952

 
166,697

 Cumulative other comprehensive income (loss)
(798
)
 
(1,311
)
Treasury stock – 1,362,252,882 shares and 1,347,385,537 shares 
(69,050
)
 
(68,831
)
Unearned ESOP shares 
(875
)
 
(1,143
)
Total Wells Fargo stockholders’ equity 
179,386

 
187,146

Noncontrolling interests 
736

 
838

Total equity
180,122

 
187,984

Total liabilities and equity
$
1,968,766

 
1,927,555

(1)
Prior to our adoption of CECL on January 1, 2020, the allowance for credit losses (ACL) related to available-for-sale (AFS) and held-to-maturity (HTM) debt securities was not applicable and is therefore presented as $0 at December 31, 2019. For more information, see Note 1 (Summary of Significant Accounting Policies) to Financial Statements in this Report.
(2)
Parenthetical amounts represent assets and liabilities that we are required to carry at fair value or for which we have elected the fair value option.
(3)
Our consolidated assets at June 30, 2020, and December 31, 2019, 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, $26 million and $16 million; Interest-earning deposits with banks, $0 million and $284 million; Debt securities, $555 million and $540 million; Net loans, $11.6 billion and $13.2 billion; Derivative assets, $1 million and $1 million; Equity securities, $71 million and $118 million; Other assets, $215 million and $239 million; and Total assets, $12.4 billion and $14.4 billion, respectively.
(4)
Our consolidated liabilities at June 30, 2020, and December 31, 2019, include the following VIE liabilities for which the VIE creditors do not have recourse to Wells Fargo: Short-term borrowings, $300 million and $401 million; Derivative liabilities, $1 million and $3 million; Accrued expenses and other liabilities, $212 million and $235 million; Long-term debt, $225 million and $587 million; and Total liabilities, $738 million and $1.2 billion, respectively. 

The accompanying notes are an integral part of these statements.

65



Wells Fargo & Company and Subsidiaries
 
 
 
 
 
 
 
Consolidated Statement of Changes in Equity (Unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
 
Preferred stock
 
 
Common stock
 
(in millions, except shares)
Shares

 
Amount

 
Shares

 
Amount

Balance March 31, 2020
5,743,949

 
$
21,347

 
4,096,410,304

 
$
9,136

Net income (loss)
 
 
 
 
 
 
 
Other comprehensive income (loss), net of tax
 
 
 
 
 
 
 
Noncontrolling interests
 
 
 
 
 
 
 
Common stock issued
 
 
 
 
13,460,720

 
 
Common stock repurchased
 
 
 
 
(45,866
)
 
 
Preferred stock released by ESOP
 
 
 
 
 
 
 
Preferred stock converted to common shares
(249,176
)
 
(249
)
 
9,733,434

 
 
Common stock dividends
 
 
 
 
 
 
 
Preferred stock dividends
 
 
 
 
 
 
 
Stock incentive compensation expense
 
 
 
 
 
 
 
Net change in deferred compensation and related plans
 
 
 
 
 
 
 
Net change
(249,176
)
 
(249
)
 
23,148,288

 

Balance June 30, 2020
5,494,773

 
$
21,098

 
4,119,558,592

 
$
9,136

Balance March 31, 2019
9,377,211

 
$
23,214

 
4,511,947,830

 
$
9,136

Net income
 
 
 
 
 
 
 
Other comprehensive income (loss), net of tax
 
 
 
 
 
 
 
Noncontrolling interests
 
 
 
 
 
 
 
Common stock issued
 
 
 
 
8,491,923

 
 
Common stock repurchased
 
 
 
 
(104,852,744
)
 
 
Preferred stock released by ESOP
 
 
 
 
 
 
 
Preferred stock converted to common shares
(193,042
)
 
(193
)
 
4,004,188

 
 
Common stock dividends
 
 
 
 
 
 
 
Preferred stock dividends
 
 
 
 
 
 
 
Stock incentive compensation expense
 
 
 
 
 
 
 
Net change in deferred compensation and related plans
 
 
 
 
 
 
 
Net change
(193,042
)
 
(193
)
 
(92,356,633
)
 

Balance June 30, 2019
9,184,169

 
$
23,021

 
4,419,591,197

 
$
9,136




66



 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Quarter ended June 30,
 
 
 
 
 
 
 
Wells Fargo stockholders’ equity
 
 
 
 
 
Additional
paid-in
capital

 
Retained
earnings

 
Cumulative
other
comprehensive
income

 
Treasury
stock

 
Unearned
ESOP
shares

 
Total
Wells Fargo
stockholders’
equity

 
Noncontrolling
interests

 
Total
equity

59,849

 
165,308

 
(1,564
)
 
(70,215
)
 
(1,143
)
 
182,718

 
612

 
183,330

 
 
(2,379
)
 
 
 
 
 
 
 
(2,379
)
 
47

 
(2,332
)
 
 
 
 
766

 
 
 
 
 
766

 

 
766



 
 
 
 
 
 
 
 
 

 
77

 
77

224

 
(549
)
 
 
 
692

 
 
 
367

 
 
 
367



 
 
 
 
 
(2
)
 
 
 
(2
)
 
 
 
(2
)

 

 
 
 
 
 
 
 

 
 
 


 
 
 
 
 
 
 

 

 
 
 

(19
)
 
 
 
 
 
 
 
268

 
249

 
 
 
249

(243
)
 
 
 
 
 
492

 
 
 

 
 
 

 
 
 
 
 
 
 
 
 
 

 
 
 

20

 
(2,113
)
 
 
 
 
 
 
 
(2,093
)
 
 
 
(2,093
)

 
(315
)
 
 
 
 
 
 
 
(315
)
 
 
 
(315
)
120

 
 
 
 
 
 
 
 
 
120

 
 
 
120

(28
)
 
 
 
 
 
(17
)
 
 
 
(45
)
 
 
 
(45
)
74

 
(5,356
)
 
766

 
1,165

 
268

 
(3,332
)
 
124

 
(3,208
)
59,923

 
159,952

 
(798
)
 
(69,050
)
 
(875
)
 
179,386

 
736

 
180,122

60,409

 
160,776

 
(3,682
)
 
(50,519
)
 
(1,502
)
 
197,832

 
901

 
198,733

  
 
6,206

 
  

 
  
 
 
 
6,206

 
132

 
6,338

  
 
  
 
1,458

 
  
 
 
 
1,458

 

 
1,458



 
  

 
  

 
  

 
 
 

 
(38
)
 
(38
)
(2
)
 
(38
)
 
  

 
439

 
 
 
399

 
 
 
399



 
 
 
  

 
(4,898
)
 
 
 
(4,898
)
 
 
 
(4,898
)
 
 

 
 
 
 
 
 
 

 
 
 


 
 
 
  

 
 
 

 

 
 
 

(17
)
 
 
 
  

 
 
 
210

 
193

 
 
 
193

(15
)
 
 
 
  

 
208

 
 
 

 
 
 


 
 
 
  

 
  

 
 
 

 
 
 

20

 
(2,035
)
 
  

 
  

 
 
 
(2,015
)
 
 
 
(2,015
)
 
 
(358
)
 
  

 
  

 
 
 
(358
)
 
 
 
(358
)
247

 
 
 
  

 
 
 
 
 
247

 
 
 
247

(17
)
 
  

 
  

 
(5
)
 
 
 
(22
)
 
 
 
(22
)
216

 
3,775

 
1,458

 
(4,256
)
 
210

 
1,210

 
94

 
1,304

60,625

 
164,551

 
(2,224
)
 
(54,775
)
 
(1,292
)
 
199,042

 
995

 
200,037



67



Wells Fargo & Company and Subsidiaries
 
 
 
 
 
 
 
Consolidated Statement of Changes in Equity (Unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
 
Preferred stock
 
 
Common stock
 
(in millions, except shares)
Shares

 
Amount

 
Shares

 
Amount

Balance December 31, 2019
7,492,169

 
$
21,549

 
4,134,425,937

 
$
9,136

Cumulative effect from change in accounting policies (1)
 
 
 
 
 
 
 
Balance January 1, 2020
7,492,169

 
$
21,549

 
4,134,425,937

 
$
9,136

Net income (loss)
 
 
 
 
 
 
 
Other comprehensive income (loss), net of tax
 
 
 
 
 
 
 
Noncontrolling interests
 
 
 
 
 
 
 
Common stock issued
 
 
 
 
50,812,607

 
 
Common stock repurchased
 
 
 
 
(75,413,386
)
 
 
Preferred stock redeemed
(1,828,720
)
 
(2,215
)
 
 
 
 
Preferred stock released by ESOP
 
 
 
 
 
 
 
Preferred stock converted to common shares
(249,176
)
 
(249
)
 
9,733,434

 
 
Preferred stock issued
80,500

 
2,013

 
 
 
 
Common stock dividends
 
 
 
 
 
 
 
Preferred stock dividends
 
 
 
 
 
 
 
Stock incentive compensation expense
 
 
 
 
 
 
 
Net change in deferred compensation and related plans
 
 
 
 
 
 
 
Net change
(1,997,396
)
 
(451
)
 
(14,867,345
)
 

Balance June 30, 2020
5,494,773

 
$
21,098

 
4,119,558,592

 
$
9,136

Balance December 31, 2018
9,377,216

 
$
23,214

 
4,581,253,608

 
$
9,136

Cumulative effect from change in accounting policies (2)
 
 
 
 
 
 
 
Balance January 1, 2019
9,377,216

 
$
23,214

 
4,581,253,608

 
$
9,136

Net income
 
 
 
 
 
 
 
Other comprehensive income (loss), net of tax
 
 
 
 
 
 
 
Noncontrolling interests
 
 
 
 
 
 
 
Common stock issued
 
 
 
 
36,549,824

 
 
Common stock repurchased
 
 
 
 
(202,216,454
)
 
 
Preferred stock redeemed

 

 
 
 
 
Preferred stock released by ESOP
  

 
 
 
 
 
 
Preferred stock converted to common shares
(193,047
)
 
(193
)
 
4,004,219

 
 
Preferred stock issued
 
 
 
 
  

 
 
Common stock dividends
 
 
 
 
 
 
 
Preferred stock dividends
 
 
 
 
 
 
 
Stock incentive compensation expense
 
 
 
 
 
 
 
Net change in deferred compensation and related plans
 
 
 
 
 
 
 
Net change
(193,047
)
 
(193
)
 
(161,662,411
)
 

Balance June 30, 2019
9,184,169

 
$
23,021

 
4,419,591,197

 
$
9,136


(1)
We adopted CECL effective January 1, 2020. For more information, see Note 1 (Summary of Significant Accounting Policies) to Financial Statements in this Report.
(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.


68



 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Six months ended June 30,
 
 
 
 
 
 
 
Wells Fargo stockholders’ equity
 
 
 
 
 
Additional
paid-in
capital

 
Retained
earnings

 
Cumulative
other
comprehensive
income

 
Treasury
stock

 
Unearned
ESOP
shares

 
Total
Wells Fargo
stockholders’
equity

 
Noncontrolling
interests

 
Total
equity

61,049

 
166,697

 
(1,311
)
 
(68,831
)
 
(1,143
)
 
187,146

 
838

 
187,984

 
 
991

 

 
 
 
 
 
991

 
 
 
991

61,049

 
167,688

 
(1,311
)
 
(68,831
)
 
(1,143
)
 
188,137

 
838

 
188,975

 
 
(1,726
)
 
 
 
 
 
 
 
(1,726
)
 
(101
)
 
(1,827
)
 
 
 
 
513

 
 
 
 
 
513

 
(1
)
 
512



 
 
 
 
 
 
 
 
 

 

 

207

 
(857
)
 
 
 
2,694

 
 
 
2,044

 
 
 
2,044



 
 
 
 
 
(3,409
)
 
 
 
(3,409
)
 
 
 
(3,409
)
17

 
(272
)
 
 
 
 
 
 
 
(2,470
)
 
 
 
(2,470
)

 
 
 
 
 
 
 

 

 
 
 

(19
)
 
 
 
 
 
 
 
268

 
249

 
 
 
249

(243
)
 
 
 
 
 
492

 
 
 

 
 
 

(45
)
 
 
 
 
 
 
 
 
 
1,968

 
 
 
1,968

38

 
(4,227
)
 
 
 
 
 
 
 
(4,189
)
 
 
 
(4,189
)
 
 
(654
)
 
 
 
 
 
 
 
(654
)
 
 
 
(654
)
301

 
 
 
 
 
 
 
 
 
301

 
 
 
301

(1,382
)
 
 
 
 
 
4

 
 
 
(1,378
)
 
 
 
(1,378
)
(1,126
)
 
(7,736
)
 
513

 
(219
)
 
268

 
(8,751
)
 
(102
)
 
(8,853
)
59,923

 
159,952

 
(798
)
 
(69,050
)
 
(875
)
 
179,386

 
736

 
180,122

60,685

 
158,163

 
(6,336
)
 
(47,194
)
 
(1,502
)
 
196,166

 
900

 
197,066

 
 
(492
)
 
481

 
 
 
 
 
(11
)
 
 
 
(11
)
60,685

 
157,671

 
(5,855
)
 
(47,194
)
 
(1,502
)
 
196,155

 
900

 
197,055

  
 
12,066

 
  

 
  
 
 
 
12,066

 
239

 
12,305

  
 
  
 
3,631

 
  
 
 
 
3,631

 

 
3,631



 
  

 
  

 
  

 
 
 

 
(144
)
 
(144
)
(2
)
 
(367
)
 
  

 
1,907

 
 
 
1,538

 
 
 
1,538



 
 
 
  

 
(9,718
)
 
 
 
(9,718
)
 
 
 
(9,718
)
 
 

 
 
 
 
 
 
 

 
 
 


 
 
 
  

 
 
 

 

 
 
 

(17
)
 
 
 
  

 
 
 
210

 
193

 
 
 
193

(15
)
 
 
 
  

 
208

 
 
 

 
 
 

 
 
 
 
  

 
  

 
 
 

 
 
 

39

 
(4,108
)
 
  

 
  

 
 
 
(4,069
)
 
 
 
(4,069
)
 
 
(711
)
 
  

 
  

 
 
 
(711
)
 
 
 
(711
)
791

 
 
 
  

 
 
 
 
 
791

 
 
 
791

(856
)
 
  

 
  

 
22

 
 
 
(834
)
 
 
 
(834
)
(60
)
 
6,880

 
3,631

 
(7,581
)
 
210

 
2,887

 
95

 
2,982

60,625

 
164,551

 
(2,224
)
 
(54,775
)
 
(1,292
)
 
199,042

 
995

 
200,037



69



Wells Fargo & Company and Subsidiaries
 
 
 
Consolidated Statement of Cash Flows (Unaudited)
 
 
 
 
Six months ended June 30,
 
(in millions)
2020

 
2019

Cash flows from operating activities:
 
 
 
Net income (loss) before noncontrolling interests
$
(1,827
)
 
12,305

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Provision for credit losses
13,539

 
1,348

Changes in fair value of MSRs, MLHFS and LHFS carried at fair value
4,481

 
2,408

Depreciation, amortization and accretion
4,062

 
3,100

Other net (gains) losses
7,146

 
(1,360
)
Stock-based compensation
953

 
1,388

Originations and purchases of mortgage loans held for sale
(82,713
)
 
(63,836
)
Proceeds from sales of and paydowns on mortgage loans held for sale
68,614

 
39,741

Net change in:
 
 
 
Debt and equity securities, held for trading
36,459

 
14,777

Loans held for sale
(242
)
 
619

Deferred income taxes
(1,358
)
 
(821
)
Derivative assets and liabilities
(6,825
)
 
(2,461
)
Other assets
(5,910
)
 
7,194

Other accrued expenses and liabilities
(2,987
)
 
(7,120
)
Net cash provided by operating activities
33,392

 
7,282

Cash flows from investing activities:
 
 
 
Net change in:
 
 
 
Federal funds sold and securities purchased under resale agreements
22,851

 
(31,912
)
Available-for-sale debt securities:
 
 
 
Proceeds from sales
29,524

 
6,682

Prepayments and maturities
35,340

 
17,657

Purchases
(28,310
)
 
(18,306
)
Held-to-maturity debt securities:
 
 
 
Paydowns and maturities
11,566

 
5,145

Purchases
(25,376
)
 
(154
)
Equity securities, not held for trading:
 
 
 
Proceeds from sales and capital returns
5,584

 
2,320

Purchases
(5,587
)
 
(2,426
)
Loans:
 
 
 
Loans originated by banking subsidiaries, net of principal collected
8,871

 
(7,008
)
Proceeds from sales (including participations) of loans held for investment
5,325

 
8,196

Purchases (including participations) of loans
(775
)
 
(1,001
)
Principal collected on nonbank entities’ loans
5,505

 
1,770

Loans originated by nonbank entities
(5,856
)
 
(2,604
)
Proceeds from sales of foreclosed assets and short sales
753

 
1,405

Other, net
(31
)
 
512

Net cash provided (used) by investing activities
59,384

 
(19,724
)
Cash flows from financing activities:
 
 
 
Net change in:
 
 
 
Deposits
88,085

 
1,938

Short-term borrowings
(44,027
)
 
9,557

Long-term debt:
 
 
 
Proceeds from issuance
37,664

 
33,091

Repayment
(44,574
)
 
(26,357
)
Preferred stock:
 
 
 
Proceeds from issuance
1,968

 

Redeemed
(2,470
)
 

Cash dividends paid
(654
)
 
(711
)
Common stock:
 
 
 
Proceeds from issuance
454

 
242

Stock tendered for payment of withholding taxes
(320
)
 
(272
)
Repurchased
(3,409
)
 
(9,718
)
Cash dividends paid
(4,055
)
 
(3,954
)
Net change in noncontrolling interests
(31
)
 
(124
)
Other, net
(154
)
 
(110
)
Net cash provided by financing activities
28,477

 
3,582

Net change in cash, cash equivalents, and restricted cash
121,253

 
(8,860
)
Cash, cash equivalents, and restricted cash at beginning of period
141,250

 
173,287

Cash, cash equivalents, and restricted cash at end of period
$
262,503

 
164,427

Supplemental cash flow disclosures:
 
 
 
Cash paid for interest
$
5,545

 
9,354

Cash paid for income taxes
2,254

 
2,516


The accompanying notes are an integral part of these statements. See Note 1 (Summary of Significant Accounting Policies) for noncash activities.

70

Note 1: Summary of Significant Accounting Policies (continued)

See the Glossary of Acronyms at the end of this Report for terms used throughout the Financial Statements and related Notes. 
Note 1:  Summary of Significant Accounting Policies
Wells Fargo & Company is a diversified financial services company. We provide banking, trust and investments, mortgage banking, investment banking, retail banking, brokerage, and consumer and commercial finance through banking locations, the internet and other distribution channels to consumers, businesses and institutions in all 50 states, the District of Columbia, and in foreign countries. When we refer to “Wells Fargo,” “the Company,” “we,” “our” or “us,” we mean Wells Fargo & Company and Subsidiaries (consolidated). Wells Fargo & Company (the Parent) is a financial holding company and a bank holding company. We also hold a majority interest in a real estate investment trust, which has publicly traded preferred stock outstanding.
Our accounting and reporting policies conform with U.S. generally accepted accounting principles (GAAP) and practices in the financial services industry. For discussion of our significant accounting policies, see Note 1 (Summary of Significant Accounting Policies) in our Annual Report on Form 10-K for the year ended December 31, 2019 (2019 Form 10-K).
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 Related 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 15 (Derivatives) and Note 16 (Fair Values of Assets and Liabilities));
liabilities for contingent litigation losses (Note 14 (Legal Actions)); and
income taxes.

Actual results could differ from those estimates.
These unaudited interim financial statements reflect all adjustments that are, in the opinion of management, necessary for a fair statement of the results for the periods presented. These adjustments are of a normal recurring nature, unless otherwise disclosed in this Form 10-Q. The results of operations in the interim financial statements do not necessarily indicate the results that may be expected for the full year. The interim financial information should be read in conjunction with our 2019 Form 10-K.
 
Accounting Standards Adopted in 2020
In 2020, we adopted the following new accounting guidance:
Accounting Standards Update (ASU or Update) 2020-04 – Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting
 
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 is included in the discussion for ASU 2016-13 below.
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 Financial Accounting Standards Board (FASB) Emerging Issues Task Force)
ASU 2018-13 – Fair Value Measurement (Topic 820): Disclosure Framework Changes to the Disclosure Requirements for Fair Value Measurement.
ASU 2017-04 – Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment
ASU 2016-13 – Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments and related subsequent Updates

ASU 2020-04 provides optional, temporary relief to ease the burden of accounting for reference rate reform activities that affect contractual modifications of floating rate financial instruments indexed to interbank offering rates (IBORs) and hedge accounting relationships. Modifications of qualifying contracts are accounted for as the continuation of an existing contract rather than as a new contract. Modifications of qualifying hedging relationships will not require discontinuation of the existing hedge accounting relationships. The application of the relief for qualifying existing hedging relationships may be made on a hedge-by-hedge basis and across multiple reporting periods.
We adopted ASU 2020-04 on April 1, 2020, and the guidance will be followed until the Update terminates on December 31, 2022. This guidance is applied on a prospective basis. The Update did not have a material impact on our consolidated financial statements in second quarter 2020.

ASU 2018-17 updates the guidance used by decision-makers of VIEs. Indirect interests held through related parties in common control arrangements will be considered on a proportional basis for determining whether fees paid to decision-makers and service providers are variable interests. This is consistent with how indirect interests held through related parties under common control are considered for determining whether a reporting entity must consolidate a VIE. The Update did not have a material impact on our consolidated financial statements.

ASU 2018-15 clarifies the accounting for implementation costs related to a cloud computing arrangement that is a service contract and enhances disclosures around implementation costs for internal-use software and cloud computing arrangements. The guidance aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use

71


software (and hosting arrangements that include an internal-use software license). It also requires the expense related to the capitalized implementation costs be presented in the same line item in the statement of income as the fees associated with the hosting element of the arrangement and capitalized implementation costs be presented in the balance sheet in the same line item that a prepayment for the fees of the associated hosting arrangement are presented. The Update did not have a material impact on our consolidated financial statements.

ASU 2018-13 clarifies, eliminates and adds certain fair value measurement disclosure requirements for assets and liabilities, which affects our disclosures in Note 16 (Fair Values of Assets and Liabilities). Although the ASU became effective on January 1, 2020, it permitted early adoption of individual requirements without causing others to be early adopted and, as such, we partially adopted the Update during third quarter 2018 and the remainder of the requirements in first quarter 2020. The Update did not have a material impact on our consolidated financial statements.

ASU 2017-04 simplifies the goodwill impairment test by eliminating the requirement to assign the fair value of a reporting unit to all of the assets and liabilities of that unit (including any unrecognized intangible assets) as if the reporting unit had been acquired in a business combination. The Update requires that a goodwill impairment loss is recognized if the fair value of the reporting unit is less than the carrying amount, including goodwill. The goodwill impairment loss is limited to the amount of goodwill allocated to the reporting unit. The guidance did not change the qualitative assessment of goodwill. This guidance is applied on a prospective basis, and accordingly, the Update did not have a material impact on our consolidated financial statements.
 
ASU 2016-13 changes the accounting for the measurement of credit losses on loans and debt securities. For loans and held-to-maturity (HTM) 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. Also, the Update eliminates the existing guidance for purchased credit-impaired (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 (OTTI) model for available-for-sale (AFS) 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. Upon adoption, we recognized an overall decrease in our ACL of approximately $1.3 billion (pre-tax) as a cumulative effect adjustment from a change in accounting policies, which increased our retained earnings and regulatory capital amounts and ratios. Loans previously classified as PCI were automatically transitioned to purchased credit-deteriorated (PCD) classification. We recognized an ACL for these new PCD loans and made a corresponding adjustment to the loan balance, with no impact to net income or transition adjustment to retained earnings. For more information on the impact of CECL by type of financial asset, see Table 1.1 below.

Table 1.1: ASU 2016-13 Adoption Impact to Allowance for Credit Losses (1)
 
 
 
Dec 31, 2019

ASU 2016-13 Adoption Impact

 
Jan 1, 2020

(in billions)
Balance Outstanding

ACL Balance

Coverage

ACL Balance

Coverage

Total commercial (2)
$
515.7

6.2

1.2
%
$
(2.9
)
3.4

0.7
%
 
 
 
 
 
 
 
Real estate 1-4 family mortgage (3)
323.4

0.9

0.3


0.9

0.3

Credit card (4)
41.0

2.3

5.5

0.7

2.9

7.1

Automobile (4)
47.9

0.5

1.0

0.3

0.7

1.5

Other revolving credit and installment (4)
34.3

0.6

1.6

0.6

1.2

3.5

Total consumer
446.5

4.2

0.9

1.5

5.7

1.3

Total loans
962.3

10.5

1.1

(1.3
)
9.1

0.9

Available-for-sale and held-to-maturity debt securities and other assets (5)
420.0

0.1

NM


0.1

NM

Total
$
1,382.3

10.6

NM

$
(1.3
)
9.3

NM

NM – Not meaningful
(1)
Amounts presented in this table may not equal the sum of its components due to rounding.
(2)
Decrease reflecting shorter contractual maturities given limitation to contractual terms.
(3)
Impact reflects an increase due to longer contractual terms, offset by expectation of recoveries in collateral value on mortgage loans previously written down significantly below current recovery value.
(4)
Increase due to longer contractual terms or indeterminate maturities.
(5)
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.
The adoption of ASU 2016-13 did not result in a change to accounting policies, except as noted herein. Our accounting policy for the ACL was updated and is now inclusive of loans, debt securities and other financing receivables. Other than the ACL and the elimination of PCI loans, there were no changes to accounting policies for loans as described in the 2019 Form 10-K. For debt securities, other than the policies with respect to the ACL, all of the current accounting policies, including those that changed as a
 
result of CECL adoption, are included below under Debt Securities.

72

Note 1: Summary of Significant Accounting Policies (continued)

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).
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 other comprehensive income (OCI), net of the allowance for credit losses and applicable income taxes. 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 amortized cost, net of allowance for credit losses.

INTEREST INCOME AND GAIN/LOSS RECOGNITION Unamortized premiums and discounts are recognized in interest income over the contractual life of the security using the 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.
We recognize realized gains and losses on the sale of debt securities in net gains (losses) on debt securities within noninterest income using the specific identification method.
IMPAIRMENT AND CREDIT LOSSES Unrealized losses of AFS debt securities are driven by a number of factors, including changes in interest rates and credit spreads which impact most types of debt securities with additional considerations for certain types of debt securities:
Debt securities of U.S. Treasury and federal agencies, including federal agency MBS, are not impacted by credit movements given the explicit or implicit guarantees provided by the U.S. government.
Debt securities of U.S. states and political subdivisions are most impacted by changes in the relationship between municipal and term funding credit curves rather than by changes in the credit quality of the underlying securities.
Structured securities, such as MBS and collateralized loan obligations (CLO), are also impacted by changes in projected collateral losses of assets underlying the security.

For debt securities where fair value is less than amortized cost basis, we recognize impairment in earnings if we have the intent to sell the security or if it is more likely than not that we will be required to sell the security before recovery of its amortized cost basis. Impairment is recognized equal to the entire difference between the amortized cost basis and the fair value of the security and is classified as net gains (losses) from debt securities within noninterest income. Following the recognition of impairment, the security’s new amortized cost basis is the previous basis less impairment.
For debt securities where fair value is less than amortized cost basis where we did not recognize impairment in earnings, we set up an allowance for credit losses as of the balance sheet date. See “Allowance for Credit Losses” section in this Note.

TRANSFERS BETWEEN CATEGORIES OF DEBT SECURITIES AFS debt securities transferred to the HTM classification are recorded at fair value and the unrealized gains or losses resulting from the transfer of these securities continue to be reported in cumulative
 
OCI. The cumulative OCI balance is amortized into earnings over the same period as the unamortized premiums and discounts using the effective interest method. Any allowance for credit losses previously recorded under the AFS model on securities transferred to HTM is reversed and an allowance for credit losses is subsequently recorded under the HTM debt security model.

NONACCRUAL AND PAST DUE, AND CHARGE-OFF POLICIES We generally place debt securities on nonaccrual status using factors similar to those described for loans. When we place a debt security on nonaccrual status, we reverse the accrued unpaid interest receivable against interest income and suspend the amortization of premiums and accretion of discounts. If the ultimate collectability of the principal is in doubt on a nonaccrual debt security, any cash collected is first applied to reduce the security’s amortized cost basis to zero, followed by recovery of amounts previously charged off, and subsequently to interest income. Generally, we return a debt security to accrual status when all delinquent interest and principal become current under the contractual terms of the security and collectability of remaining principal and interest is no longer doubtful.
Our debt securities are considered past due when contractually required principal or interest payments have not been made on the due dates.
Our charge-off policy for debt securities are similar to those described for loans. Subsequent to charge-off, the debt security will be designated as nonaccrual and follow the process described above for any cash received.

Allowance for Credit Losses
The ACL is management’s estimate of the current expected credit losses in the loan portfolio and unfunded credit commitments, at the balance sheet date, excluding loans and unfunded credit commitments carried at fair value or held for sale. Additionally, we maintain an ACL on AFS and HTM debt securities, other financing receivables measured at amortized cost, and other off-balance sheet credit exposures. While we attribute portions of the allowance to specific financial asset classes (loan and debt security portfolios), loan portfolio segments (commercial and consumer) or major security type, the entire ACL is available to absorb credit losses of the Company.
Our ACL process involves procedures to appropriately consider the unique risk characteristics of our financial asset classes, portfolio segments, and major security types. For each loan portfolio segment and each major HTM debt security type, losses are estimated collectively for groups of loans or securities with similar risk characteristics. For loans and securities that do not share similar risk characteristics with other financial assets, the losses are estimated individually, which primarily includes our impaired large commercial loans and non-accruing HTM debt securities. For AFS debt securities, losses are estimated at the tax-lot level.
Our ACL amounts are influenced by a variety of factors, including changes in loan and debt security volumes, portfolio credit quality, and general economic conditions. General economic conditions are forecasted using economic variables which will create volatility as those variables change over time. See Table 1.2 for key economic variables used for our loan portfolios.

73


Table 1.2: Key Economic Variables
Loan Portfolio
 
Key economic variables
Total commercial
 
• Gross domestic product
• Commercial real estate asset prices, where applicable
• Unemployment rate
• Corporate investment-grade bond spreads
Real estate 1-4 family mortgage
 
• Home price index
• Unemployment rate
Other consumer (including credit card, automobile, and other revolving credit and installment)
 
• Unemployment rate


Our approach for estimating expected life-time credit losses for loans and debt securities includes the following key components:
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 expected prepayments and certain expected extensions, renewals, or modifications, by portfolio segment and class of financing receivables based on the changes in key historical economic variables during representative historical expansionary and recessionary periods.
A reversion period of up to two years to connect the losses estimated for our initial loss forecast period to the period of our historical loss forecast based on economic conditions at the measurement date. Our reversion methodology considers the type of portfolio, point in the credit cycle, expected length of recessions and recoveries, as well as other relevant factors.
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 the collateral. The DCF methods obtain estimated life-time credit losses using the initial and historical mean loss forecast periods described above.
For AFS debt securities and certain beneficial interests classified as HTM, we utilize the DCF methods to measure the ACL, which incorporate expected credit losses using the conceptual components described above. The ACL on AFS debt securities is subject to a limitation based on the fair value of the debt securities (fair value floor).

The ACL for financial assets held at amortized cost and AFS debt securities will be reversible with immediate recognition of recovery in earnings if credit improves. The ACL for financial assets held at amortized cost is a valuation account that is deducted from, or added to, the amortized cost basis of the financial assets to present the net amount expected to be collected, which can include a negative allowance limited to the cumulative amounts previously charged off. For financial assets with an ACL estimated using DCF methods, changes in the ACL due to the passage of time are recorded in interest income. The ACL for AFS debt securities reflects the amount of unrealized loss related to expected credit losses, limited by the amount that fair value is less than the amortized cost basis, and cannot have an associated negative allowance.
For certain financial assets, such as residential real estate loans guaranteed by the Government National Mortgage Association (GNMA), an agency of the federal government, U. S. Treasury and Agency mortgage backed debt securities, as well as certain sovereign debt securities, the Company has not
 
recognized an ACL as our expectation of nonpayment of the amortized cost basis, based on historical losses, adjusted for current conditions and reasonable and supportable forecasts, is zero.
A financial asset is collateral-dependent when the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the sale or operation of the collateral. When a collateral-dependent financial asset is probable of foreclosure, we will measure the ACL based on the fair value of the collateral. If we intend to sell the underlying collateral, we will measure the ACL based on the collateral’s net realizable value (fair value of collateral, less estimated costs to sell). In most situations, based on our charge-off policies, we will immediately write-down the financial asset to the fair value of the collateral or net realizable value. For consumer loans, collateral-dependent financial assets may have collateral in the form of residential real estate, automobiles or other personal assets. For commercial loans, collateral-dependent financial assets may have collateral in the form of commercial real estate or other business assets.
We do not generally record an ACL for accrued interest receivables because uncollectible accrued interest is reversed through interest income in a timely manner in line with our non-accrual and past due policies for loans and debt securities. For consumer credit card and certain consumer lines of credit, we include an ACL for accrued interest and fees since these loans are not placed on nonaccrual status and written off until the loan is 180 days past due. Accrued interest receivables are included in other assets, except for certain revolving loans, such as credit card loans.

COMMERCIAL LOAN PORTFOLIO SEGMENT ACL METHODOLOGY Generally, commercial loans, which include net investments in lease financing, 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 with 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.

CONSUMER LOAN PORTFOLIO SEGMENT ACL METHODOLOGY For consumer loans, we determine the allowance at the individual loan level. When developing historical loss experience, we pool loans, generally by product types with similar risk characteristics, such as residential real estate mortgages and credit cards. As

74

Note 1: Summary of Significant Accounting Policies (continued)

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. We use pooled loan data such as historic delinquency and default and loss severity in the development of our consumer loan models, in addition to home price trends, unemployment trends, and other economic variables that may influence the frequency and severity of losses in the consumer portfolio.

AFS PORTFOLIO ACL METHODOLOGY We develop our ACL estimate for AFS debt securities by utilizing a security-level multi-scenario, probability-weighted discounted cash flow model based on a combination of past events, current conditions, as well as reasonable and supportable forecasts. The projected cash flows are discounted at the security’s effective interest rate, except for certain variable rate securities which are discounted using projections of future changes in interest rates, prepayable securities which are adjusted for estimated prepayments, and securities part of a fair value hedge which use hedge-adjusted assumptions. The ACL on an AFS debt security is limited to the difference between its amortized cost basis and fair value (fair value floor) and reversals of the allowance are permitted up to the amount previously recorded.
HTM PORTFOLIO ACL METHODOLOGY For most HTM debt securities, the ACL is measured using an expected loss model, similar to the methodology used for loans. Unlike AFS debt securities, the ACL on an HTM debt security is not limited to the fair value floor.
Certain beneficial interests categorized as HTM debt securities utilize a similar discounted cash flow model as described for AFS debt securities, without the limitation of the fair value floor.

OTHER QUALITATIVE FACTORS  The ACL includes amounts for qualitative factors which may not be adequately reflected in our loss models. These amounts represent management’s judgment of risks in the processes and assumptions used in establishing the ACL. Generally, these amounts are established at a granular level below our loan portfolio segments. We also consider economic environmental factors, modeling assumptions and performance, process risk, and other subjective factors, including industry trends and emerging risk assessments.

OFF-BALANCE SHEET CREDIT EXPOSURES Our off-balance sheet credit exposures include unfunded loan commitments (generally in the form of revolving lines of credit), financial guarantees not accounted for as insurance contracts or derivatives, including standby letters of credit, and other similar instruments. For off-balance sheet credit exposures, we recognize an ACL associated with the unfunded amounts. We do not recognize an ACL for commitments that are unconditionally cancelable at our discretion. Additionally, we recognize an ACL for financial guarantees that create off-balance sheet credit exposure, such as loans sold with credit recourse and factoring guarantees. ACL for off-balance sheet credit exposures are reported as a liability in accrued expenses and other liabilities on our consolidated balance sheet.

OTHER FINANCIAL ASSETS Other financial assets are evaluated for expected credit losses. These other financial assets include accounts receivable for fees, receivables from government-sponsored entities, such as Federal National Mortgage Association (FNMA) and Federal Home Loan Mortgage
 
Corporation (FHLMC), and GNMA, and other accounts receivable from high-credit quality counterparties, such as central clearing counterparties. Many of these financial assets are generally not expected to have an ACL as there is a zero loss expectation (for example, government guarantee) or no historical credit losses. Some financial assets, such as loans to employees, maintain an ACL that is presented on a net basis with the related amortized cost amounts in other assets on our consolidated balance sheet. Given the nature of these financial assets, provision for credit losses is not recognized separately from the regular income or expense associated with these financial assets.
Securities purchased under resale agreements are generally over-collateralized by securities or cash and are generally short-term in nature. We have elected the practical expedient for these financial assets given collateral maintenance provisions. These provisions require that we monitor the collateral value and customers are required to replenish collateral, if needed. Accordingly, we generally do not maintain an ACL for these financial assets.

PURCHASED CREDIT DETERIORATED FINANCIAL ASSETS Financial assets acquired that are of poor credit quality and with more than an insignificant evidence of credit deterioration since their origination or issuance are PCD assets. PCD assets are recorded at their purchase price plus an ACL estimated at the time of acquisition. Under this approach, there is no provision for credit losses recognized at acquisition; rather, there is a gross-up of the purchase price of the financial asset for the estimate of expected credit losses and a corresponding ACL recorded. Changes in estimates of expected credit losses after acquisition are recognized as provision for credit losses (or reversal of provision for credit losses) in subsequent periods. In general, interest income recognition for PCD financial assets is consistent with interest income recognition for the similar non-PCD financial asset.

Troubled Debt Restructuring and Other Relief Related to COVID-19
On March 25, 2020, the U.S. Senate approved the Coronavirus, Aid, Relief, and Economic Security Act (the CARES Act) providing optional, temporary relief from accounting for certain loan modifications as troubled debt restructurings (TDRs). Under the CARES Act, TDR relief is available to banks for loan modifications related to the adverse effects of Coronavirus Disease 2019 (COVID-19) (COVID-related modifications) granted to borrowers that are current as of December 31, 2019. TDR relief applies to COVID-related modifications made from March 1, 2020, until the earlier of December 31, 2020, or 60 days following the termination of the national emergency declared by the President of the United States. In first quarter 2020, we elected to apply the TDR relief provided by the CARES Act.
On April 7, 2020, federal banking regulators issued the Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus (Revised) (the Interagency Statement). The guidance in the Interagency Statement provides additional TDR relief as it clarifies that it is not necessary to consider the impact of the COVID-19 pandemic on the financial condition of a borrower in connection with a short-term (e.g., six months or less) COVID-related modification provided the borrower is current at the date the modification program is implemented.
For COVID-related modifications in the form of payment deferrals, delinquency status will not advance and loans that were accruing at the time the relief is provided will generally not be placed on nonaccrual status during the deferral period. COVID-

75


related modifications that do not meet the provisions of the CARES Act or the Interagency Statement will be assessed for TDR classification.
On April 10, 2020, the FASB Staff issued Accounting for Lease Concessions Related to the Effects of the COVID-19 Pandemic, a question and answer guide. The guide provided an election for leases accounted for under Accounting Standards Codification (ASC) 842, Leases, that were modified due to COVID-19 and met certain criteria in order to not require a new lease classification test upon modification. In second quarter 2020, we elected to apply the lease modification relief provided by the guide.

Share Repurchases
During the first quarter of 2020 and 2019, we repurchased shares of our common stock under Rule 10b5-1 repurchase plans. On March 15, 2020, we, along with the other members of the Financial Services Forum, suspended our share repurchase activities for the remainder of the first quarter and for second quarter 2020. On June 25, 2020, the Board of Governors of the Federal Reserve System (FRB) announced that it was prohibiting large bank holding companies (BHCs) subject to the FRB’s capital
 
plan rule, including Wells Fargo, from making any capital distribution (excluding any capital distribution arising from the issuance of a capital instrument eligible for inclusion in the numerator of a regulatory capital ratio), unless otherwise approved by the FRB. Through the end of third quarter 2020, the FRB is authorizing each BHC to (i) make share repurchases relating to issuances of common stock related to employee stock ownership plans; (ii) provided that the BHC does not increase the amount of its common stock dividends, pay common stock dividends that do not exceed an amount equal to the average of the BHC’s net income for the four preceding calendar quarters, unless otherwise specified by the FRB; and (iii) make scheduled payments on additional tier 1 and tier 2 capital instruments. These provisions may be extended by the FRB quarter-by-quarter. For more information about share repurchases, see Note 1 (Summary of Significant Accounting Policies) in our 2019 Form 10-K.

Supplemental Cash Flow Information
Significant noncash activities are presented in Table 1.3.


Table 1.3: Supplemental Cash Flow Information
 
Six months ended June 30,
 
(in millions)
2020

 
2019

Trading debt securities retained from securitization of mortgage loans held for sale (MLHFS)
$
16,953

 
19,131

Transfers from loans to MLHFS
12,430

 
4,419

Transfers from available-for-sale debt securities to held-to-maturity debt securities

 
6,071

Operating lease ROU assets acquired with operating lease liabilities (1)
345

 
5,302

(1)
Includes amounts attributable to new leases and changes from modified leases. The six months ended June 30, 2019, balance also includes $4.9 billion from adoption of ASU 2016-02 – Leases (Topic 842).

Subsequent Events
We have evaluated the effects of events that have occurred subsequent to June 30, 2020, and there have been no material
 
events that would require recognition in our second quarter 2020 consolidated financial statements or disclosure in the Notes to the consolidated financial statements.
Note 2:  Business Combinations
There were no acquisitions during the first half of 2020. As of June 30, 2020, we had no pending acquisitions.


76



Note 3:  Cash, Loan and Dividend Restrictions
Cash and cash equivalents may be restricted as to usage or withdrawal. Federal Reserve Board (FRB) regulations require that each of our subsidiary banks maintain reserve balances on deposit with the Federal Reserve Banks. Table 3.1 provides a summary of restrictions on cash equivalents in addition to the FRB reserve cash balance requirements.
Table 3.1: Nature of Restrictions on Cash Equivalents
(in millions)
Jun 30,
2020

 
Dec 31,
2019

Required reserve balance for the FRB (1)
$

 
11,374

Reserve balance for non-U.S. central banks
200

 
460

Segregated for benefit of brokerage customers under federal and other brokerage regulations
703

 
733

Related to consolidated variable interest entities (VIEs) that can only be used to settle liabilities of VIEs
26

 
300

(1)
Effective March 26, 2020, the FRB reduced reserve requirement ratios to 0%. The amount for December 31, 2019 represents an average for the year ended December 31, 2019.

Federal laws and regulations limit the dividends that a national bank may pay. Our national bank subsidiaries could have declared additional dividends of $1.0 billion at June 30, 2020, without obtaining prior regulatory approval. We have elected to retain higher capital at our national bank subsidiaries 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 June 30, 2020, our nonbank subsidiaries could have declared additional dividends of $26.5 billion at June 30, 2020, without obtaining prior regulatory approval. For additional information see Note 3 (Cash, Loan and Dividend Restrictions) in our 2019 Form 10-K.
 
The FRB’s Capital Plan Rule (codified at 12 CFR 225.8 of Regulation Y) establishes capital planning and other requirements that govern 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 Parent’s ability to make certain capital distributions is subject to review by the FRB as part of the Parent’s capital plan in connection with the FRB’s annual Comprehensive Capital Analysis and Review (CCAR). Once the FRB’s stress capital buffer requirement becomes effective on October 1, 2020, the Parent’s ability to take certain capital actions will be subject to the Parent meeting or exceeding certain regulatory capital minimums, which include the stress capital buffer established by the FRB as part of the FRB’s annual supervisory stress test and related CCAR.
On July 28, 2020, the Company reduced its third quarter 2020 common stock dividend to $0.10 per share.
On June 25, 2020, the FRB announced that it is requiring large BHCs, including Wells Fargo, to update and resubmit their capital plans within 45 days after the FRB provides updated scenarios. Requiring resubmission will prohibit each BHC from making any capital distribution (excluding any capital distribution arising from the issuance of a capital instrument eligible for inclusion in the numerator of a regulatory capital ratio), unless otherwise approved by the FRB. Through the end of third quarter 2020, the FRB is authorizing each BHC to (i) make share repurchases relating to issuances of common stock related to employee stock ownership plans; (ii) provided that the BHC does not increase the amount of its common stock dividends, pay common stock dividends that do not exceed an amount equal to the average of the BHC’s net income for the four preceding calendar quarters, unless otherwise specified by the FRB; and (iii) make scheduled payments on additional tier 1 and tier 2 capital instruments. These provisions may be extended by the FRB quarter-by-quarter.

77



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
 
Jun 30,

 
Dec 31,

(in millions)
2020

 
2019

Trading assets:
 
 
 
Debt securities
$
74,679

 
79,733

Equity securities
12,591

 
27,440

Loans held for sale
1,201

 
972

Gross trading derivative assets
60,644

 
34,825

Netting (1)
(39,885
)
 
(21,463
)
Total trading derivative assets
20,759

 
13,362

Total trading assets
109,230

 
121,507

Trading liabilities:
 
 
 
Short sale
20,213

 
17,430

Gross trading derivative liabilities
54,985

 
33,861

Netting (1)
(44,901
)
 
(26,074
)
Total trading derivative liabilities
10,084

 
7,787

Total trading liabilities
$
30,297

 
25,217

(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
 
Quarter ended June 30,
 
 
Six months ended June 30,
 
(in millions)
2020

 
2019

 
2020

 
2019

Interest income:
 
 
 
 
 
 
 
Debt securities
$
659

 
740

 
$
1,425

 
1,533

Equity securities
68

 
143

 
205

 
258

Loans held for sale
6

 
20

 
18

 
43

Total interest income
733

 
903

 
1,648

 
1,834

Less: Interest expense
116

 
127

 
257

 
263

Net interest income
617

 
776

 
1,391

 
1,571

Net gains (losses) from trading activities (1):
 
 
 
 
 
 
 
Debt securities
329

 
401

 
2,684

 
1,089

Equity securities
2,329

 
1,236

 
(2,072
)
 
3,303

Loans held for sale
24

 
(4
)
 
12

 
10

Derivatives (2)
(1,875
)
 
(1,404
)
 
247

 
(3,816
)
Total net gains from trading activities
807

 
229

 
871

 
586

Total trading-related net interest and noninterest income
$
1,424

 
1,005

 
$
2,262

 
2,157

(1)
Represents realized gains (losses) from our trading activities and unrealized gains (losses) due to changes in fair value of our trading positions.
(2)
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.

78

Note 5: Available-for-Sale and Held-to-Maturity Debt Securities (continued)

Note 5:  Available-for-Sale and Held-to-Maturity Debt Securities
Table 5.1 provides the amortized cost, net of the allowance for credit losses, 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, net of allowance for credit losses. The net unrealized gains (losses) for available-for-sale debt securities are reported as a component of cumulative OCI, net of the allowance for credit losses and applicable income taxes. Information on debt securities held for trading is included in Note 4 (Trading Activities).
 
Outstanding balances exclude accrued interest receivable on available-for-sale and held-to-maturity debt securities which are included in other assets. During the first half of 2020, we reversed accrued interest receivable on our available-for-sale and held-to-maturity debt securities by reversing interest income of $6 million. See Note 9 (Other Assets) for additional information on accrued interest receivable.
Table 5.1: Available-for-Sale and Held-to-Maturity Debt Securities Outstanding
(in millions)
 Amortized cost, net (1)

 
Gross
unrealized gains 

 
Gross
unrealized losses

 
Fair value

June 30, 2020
 
 
 
 
 
 
 
Available-for-sale debt securities:
 
 
 
 
 
 
 
Securities of U.S. Treasury and federal agencies
$
7,923

 
69

 
(9
)
 
7,983

Securities of U.S. states and political subdivisions (2)
33,259

 
200

 
(448
)
 
33,011

Mortgage-backed securities:

 

 

 
 
Federal agencies
139,326

 
5,533

 
(24
)
 
144,835

Residential
542

 
2

 
(3
)
 
541

Commercial
3,663

 
9

 
(113
)
 
3,559

Total mortgage-backed securities
143,531

 
5,544

 
(140
)
 
148,935

Corporate debt securities
4,972

 
95

 
(92
)
 
4,975

Collateralized loan obligations
25,727

 
1

 
(729
)
 
24,999

Other
9,055

 
69

 
(128
)
 
8,996

Total available-for-sale debt securities
224,467

 
5,978

 
(1,546
)
 
228,899

Held-to-maturity debt securities:
 
 
 
 
 
 
 
Securities of U.S. Treasury and federal agencies
48,578

 
1,972

 
(47
)
 
50,503

Securities of U.S. states and political subdivisions
14,277

 
622

 
(7
)
 
14,892

Federal agency and other mortgage-backed securities (3)
106,133

 
5,350

 
(10
)
 
111,473

Other debt securities
14

 

 

 
14

Total held-to-maturity debt securities
169,002

 
7,944

 
(64
)
 
176,882

Total (4)
$
393,469

 
13,922

 
(1,610
)
 
405,781

December 31, 2019
 
 
 
 
 
 
 
Available-for-sale debt securities:
 
 
 
 
 
 
 
Securities of U.S. Treasury and federal agencies
$
14,948

 
13

 
(1
)
 
14,960

Securities of U.S. states and political subdivisions (2)
39,381

 
992

 
(36
)
 
40,337

Mortgage-backed securities:
 
 
 
 
 
 
 
Federal agencies
160,318

 
2,299

 
(164
)
 
162,453

Residential
814

 
14

 
(1
)
 
827

Commercial
3,899

 
41

 
(6
)
 
3,934

Total mortgage-backed securities
165,031

 
2,354

 
(171
)
 
167,214

Corporate debt securities
6,343

 
252

 
(32
)
 
6,563

Collateralized loan obligations
29,153

 
25

 
(123
)
 
29,055

Other
5,204

 
150

 
(24
)
 
5,330

Total available-for-sale debt securities
260,060

 
3,786

 
(387
)
 
263,459

Held-to-maturity debt securities:
 
 
 
 
 
 
 
Securities of U.S. Treasury and federal agencies
45,541

 
617

 
(19
)
 
46,139

Securities of U.S. states and political subdivisions
13,486

 
286

 
(13
)
 
13,759

Federal agency and other mortgage-backed securities (3)
94,869

 
2,093

 
(37
)
 
96,925

Other debt securities
37

 

 

 
37

Total held-to-maturity debt securities
153,933

 
2,996

 
(69
)
 
156,860

Total (4)
$
413,993

 
6,782

 
(456
)
 
420,319

(1)
Represents amortized cost of the securities, net of the allowance for credit losses of $114 million related to available-for-sale debt securities and $20 million related to held-to-maturity debt securities at June 30, 2020. Prior to our adoption of CECL on January 1, 2020, the allowance for credit losses related to available-for-sale and held-to-maturity debt securities was not applicable and is therefore presented as $0 at December 31, 2019. For more information, see Note 1 (Summary of Significant Accounting Policies).
(2)
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 net of allowance for credit losses and fair value of these types of securities was $5.8 billion at both June 30, 2020, and December 31, 2019.
(3)
Predominantly consists of federal agency mortgage-backed securities at both June 30, 2020 and December 31, 2019.
(4)
We held available-for-sale and held-to-maturity debt securities from Federal National Mortgage Association (FNMA) and Federal Home Loan Mortgage Corporation (FHLMC) that each exceeded 10% of stockholders’ equity, with an amortized cost of $93.6 billion and $80.1 billion and a fair value of $98.1 billion and $83.8 billion at June 30, 2020 and an amortized cost of $98.5 billion and $84.1 billion and a fair value of $100.3 billion and $85.5 billion at December 31, 2019, respectively.

79


Table 5.2 details the breakout of purchases of and transfers to held-to-maturity debt securities by major category of security.
 

Table 5.2: Held-to-Maturity Debt Securities Purchases and Transfers
 
Quarter ended June 30,
 
 
Six months ended June 30,
 
(in millions)
2020

 
2019

 
2020

 
2019

Purchases of held-to-maturity debt securities:
 
 
 
 
 
 
 
Securities of U.S. Treasury and federal agencies
$

 

 
$
3,016

 

Securities of U.S. states and political subdivisions
15

 
243

 
881

 
243

Federal agency and other mortgage-backed securities
6,970

 
37

 
22,895

 
53

Total purchases of held-to-maturity debt securities
6,985

 
280

 
26,792

 
296

Transfers from available-for-sale debt securities to held-to-maturity debt securities:
 
 
 
 
 
 
 
Securities of U.S. states and political subdivisions

 
1,558

 

 
1,558

Federal agency and other mortgage-backed securities

 
2,106

 

 
4,513

Total transfers from available-for-sale debt securities to held-to-maturity debt securities
$

 
3,664

 
$

 
6,071


Table 5.3 shows the composition of interest income, provision for credit losses, and gross realized gains and losses
from sales and impairment write-downs included in earnings related to available-for-sale and held-to-maturity debt securities (pre-tax).
 



Table 5.3: Income Statement Impacts for Available-for-Sale and Held-to-Maturity Debt Securities
 
Quarter ended June 30,
 
 
Six months ended June 30,
 
(in millions)
2020

 
2019

 
2020

 
2019

Interest income:
 
 
 
 
 
 
 
Available-for-sale
$
1,349

 
2,110

 
$
3,075

 
4,311

Held-to-maturity
938

 
931

 
1,918

 
1,878

Total interest income (1)
2,287

 
3,041

 
4,993

 
6,189

Provision (reversal of provision) for credit losses (2):
 
 
 
 
 
 
 
Available-for-sale
(40
)
 

 
128

 

Held-to-maturity
9

 

 
13

 

Total provision (reversal of provision) for credit losses
(31
)
 

 
141

 

Realized gains and losses (3):
 
 
 
 
 
 
 
Gross realized gains
248

 
29

 
504

 
202

Gross realized losses
(36
)
 
(2
)
 
(40
)
 
(5
)
Impairment write-downs included in earnings:
 
 
 
 
 
 
 
Credit-related (4)

 
(7
)
 

 
(23
)
Intent-to-sell

 

 
(15
)
 
(29
)
Total impairment write-downs included in earnings

 
(7
)
 
(15
)
 
(52
)
Net realized gains
$
212

 
20

 
$
449

 
145

(1)
Total interest income from debt securities excludes interest income from trading debt securities, which is disclosed in Note 4 (Trading Activities).
(2)
Prior to our adoption of CECL on January 1, 2020, the provision for credit losses from debt securities was not applicable and is therefore presented as $0 for the prior period. For more information, see Note 1 (Summary of Significant Accounting Policies).
(3)
Realized gains and losses relate to available-for-sale debt securities. There were no realized gains or losses from held-to-maturity debt securities in all periods presented.
(4)
For the second quarter and first half of 2020, credit-related impairment recognized in earnings is classified as provision for credit losses due to our adoption of CECL on January 1, 2020. For more information, see Note 1 (Summary of Significant Accounting Policies).
Credit Quality
We monitor credit quality of debt securities by evaluating various attributes and utilize such information in our evaluation of the appropriateness of the allowance for credit losses. The credit quality indicators that we most closely monitor include credit ratings and delinquency status and are based on information as of our financial statement date.

CREDIT RATINGS Credit ratings express opinions about the credit quality of a debt security. We determine the credit rating of a security according to the lowest credit rating made available by national recognized statistical rating organizations (NRSRO). Debt securities rated investment grade, that is those with ratings
 
similar to BBB-/Baa3 or above, as defined by NRSRO, 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.
For debt securities not rated by the NRSRO, we determine an internal credit grade of the debt securities (used for credit risk management purposes) equivalent to the credit ratings assigned by major credit agencies. The fair value of available-for-sale debt securities categorized as investment grade based on internal credit grades was $1.3 billion at June 30, 2020, and $2.2 billion at December 31, 2019. Held-to-maturity debt securities

80

Note 5: Available-for-Sale and Held-to-Maturity Debt Securities (continued)

categorized as investment grade based on internal credit grades are not significant. If an internal credit grade was not assigned, we categorized the debt security as non-investment grade.
Table 5.4 shows the percentage of fair value of available-for-sale debt securities and amortized cost of held-to-maturity debt
 
securities determined by those rated investment grade, inclusive of those based on internal credit grades.
Table 5.4: Investment Grade Debt Securities
 
Available-for-Sale
 
 
Held-to-Maturity
 
($ in millions)
Fair value

 % investment grade

 
Amortized cost

% investment grade

June 30, 2020
 
 
 
 
 
Total portfolio
$
228,899

99
%
 
169,022

99
%
 
 
 
 
 
 
Breakdown by category:
 
 
 
 
 
Securities of U.S. Treasury and federal agencies (1)
$
152,818

100
%
 
153,863

100
%
Securities of U.S. states and political subdivisions
33,011

99

 
14,286

100

Collateralized loan obligations
24,999

100

 
N/A

N/A

All other debt securities (2)
18,071

87

 
873

6

December 31, 2019
 
 
 
 
 
Total portfolio
$
263,459

99
%
 
153,933

99
%
 
 
 
 
 
 
Breakdown by category:
 
 
 
 
 
Securities of U.S. Treasury and federal agencies (1)
$
177,413

100
%
 
139,619

100
%
Securities of U.S. states and political subdivisions
40,337

99

 
13,486

100

Collateralized loan obligations
29,055

100

 
N/A

N/A

All other debt securities (2)
16,654

82

 
828

4

(1)
Includes federal agency mortgage-backed securities.
(2)
Includes non-agency mortgage-backed, corporate, and all other debt securities.
DELINQUENCY STATUS AND NONACCRUAL DEBT SECURITIES Debt security issuers that are delinquent in payment of amounts due under contractual debt agreements have a higher probability of recognition of credit losses. As such, as part of our monitoring of the credit quality of the debt security portfolio, we consider whether debt securities we own are past due in payment of principal or interest payments and whether any securities have been placed into nonaccrual status.
We had no debt securities that were past due and still accruing at June 30, 2020 or December 31, 2019. The fair value of available-for-sale debt securities in nonaccrual status was $153 million and $110 million as of June 30, 2020, and
 
December 31, 2019, respectively. There were no held-to-maturity debt securities in nonaccrual status as of June 30, 2020, or December 31, 2019. Purchased debt securities with credit deterioration (PCD) are not considered to be in nonaccrual status, as payments from issuers of these securities remain current.
Table 5.5 presents detail of available-for-sale debt securities purchased with credit deterioration during the period. There were no available-for-sale debt securities purchased with credit deterioration during second quarter 2020. There were no held-to-maturity debt securities purchased with credit deterioration during the second quarter and first half of 2020. The amounts presented are as of the date of the PCD assets were purchased.

Table 5.5: Debt Securities Purchased with Credit Deterioration
(in millions)
Six months ended June 30, 2020

Available-for-sale debt securities purchased with credit deterioration (PCD):
 
Par value
$
164

Allowance for credit losses at acquisition
(11
)
Discount (or premiums) attributable to other factors
3

Purchase price of available-for-sale debt securities purchased with credit deterioration
$
156



81


Unrealized Losses of Available-for-Sale Debt Securities
Table 5.6 shows the gross unrealized losses and fair value of available-for-sale 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 recorded credit impairment 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 (1) for the current period presented, amortized cost basis net of allowance for credit losses, or the (2) for the prior period presented, amortized cost basis.
Table 5.6: Gross Unrealized Losses and Fair Value – Available-for-Sale Debt Securities
 
Less than 12 months 
 
 
12 months or more 
 
 
Total 
 
(in millions)
Gross unrealized losses 

 
Fair value 

 
Gross unrealized losses 

 
Fair value 

 
Gross unrealized losses 

 
Fair value 

June 30, 2020
 
 
 
 
 
 
 
 
 
 
 
Available-for-sale debt securities:
 
 
 
 
 
 
 
 
 
 
 
Securities of U.S. Treasury and federal agencies
$
(9
)
 
608

 

 

 
(9
)
 
608

Securities of U.S. states and political subdivisions
(372
)
 
17,219

 
(76
)
 
2,539

 
(448
)
 
19,758

Mortgage-backed securities:
 
 
 
 
 
 
 
 


 


Federal agencies
(22
)
 
4,129

 
(2
)
 
512

 
(24
)
 
4,641

Residential
(2
)
 
302

 
(1
)
 
58

 
(3
)
 
360

Commercial
(84
)
 
2,895

 
(29
)
 
343

 
(113
)
 
3,238

Total mortgage-backed securities
(108
)
 
7,326

 
(32
)
 
913

 
(140
)
 
8,239

Corporate debt securities
(79
)
 
1,308

 
(13
)
 
93

 
(92
)
 
1,401

Collateralized loan obligations
(478
)
 
18,215

 
(251
)
 
6,640

 
(729
)
 
24,855

Other
(82
)
 
4,185

 
(46
)
 
905

 
(128
)
 
5,090

Total available-for-sale debt securities
$
(1,128
)
 
48,861

 
(418
)
 
11,090

 
(1,546
)
 
59,951

December 31, 2019
 
 
 
 
 
 
 
 
 
 
 
Available-for-sale debt securities:
 
 
 
 
 
 
 
 
 
 
 
Securities of U.S. Treasury and federal agencies
$

 

 
(1
)
 
2,423

 
(1
)
 
2,423

Securities of U.S. states and political subdivisions
(10
)
 
2,776

 
(26
)
 
2,418

 
(36
)
 
5,194

Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
Federal agencies
(50
)
 
16,807

 
(114
)
 
10,641

 
(164
)
 
27,448

Residential
(1
)
 
149

 

 

 
(1
)
 
149

Commercial
(3
)
 
998

 
(3
)
 
244

 
(6
)
 
1,242

Total mortgage-backed securities
(54
)
 
17,954

 
(117
)
 
10,885

 
(171
)
 
28,839

Corporate debt securities
(9
)
 
303

 
(23
)
 
216

 
(32
)
 
519

Collateralized loan obligations
(13
)
 
5,001

 
(110
)
 
16,789

 
(123
)
 
21,790

Other
(12
)
 
1,656

 
(12
)
 
492

 
(24
)
 
2,148

Total available-for-sale debt securities
$
(98
)
 
27,690

 
(289
)
 
33,223

 
(387
)
 
60,913


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. In prior periods, credit impairment was recorded as a write-down to the amortized cost basis of the security. In the current period, credit impairment is recorded as an allowance for credit losses.
For descriptions of the factors we consider when analyzing debt securities for impairment as well as methodology and significant inputs used to measure credit losses, see Note 1 (Summary of Significant Accounting Policies).

82

Note 5: Available-for-Sale and Held-to-Maturity Debt Securities (continued)

Allowance for Credit Losses for Debt Securities
Table 5.7 presents the allowance for credit losses on available-for-sale and held-to-maturity debt securities.
Table 5.7: Allowance for Credit Losses for Debt Securities
 
Quarter ended June 30, 2020
 
 
Six months ended June 30, 2020
 
(in millions)
Available-for-Sale

Held-to-Maturity

 
Available-for-Sale

Held-to-Maturity

Balance, beginning of period (1)
$
161

11

 
$


Cumulative effect from change in accounting policies (2)


 
24

7

Balance, beginning of period, adjusted
161

11

 
24

7

Provision (reversal of provision) for credit losses
(40
)
9

 
128

13

Securities purchased with credit deterioration


 
11


Reduction due to sales
(8
)

 
(8
)

Reduction due to intent to sell


 
(11
)

Charge-offs
(1
)

 
(33
)

Interest income (3)
2


 
3


Balance, end of period (4)
$
114

20

 
$
114

20

(1)
Prior to our adoption of CECL on January 1, 2020, the allowance for credit losses related to available-for-sale and held-to-maturity debt securities was not applicable and is therefore presented as $0 at December 31, 2019. For more information, see Note 1 (Summary of Significant Accounting Policies).
(2)
Represents the impact of adoption of CECL on January 1, 2020. For more information, see Note 1 (Summary of Significant Accounting Policies).
(3)
Certain debt securities with an allowance for credit losses calculated by discounting expected cash flows using the securities’ effective interest rate over its remaining life, recognize changes in the allowance for credit losses attributable to the passage of time as interest income.
(4)
The allowance for credit losses for debt securities largely relates to corporate debt securities as of June 30, 2020.


83


Contractual Maturities
Table 5.8 shows the remaining contractual maturities, amortized cost net of allowance for credit losses, fair value and weighted-average effective yields 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 5.8: Contractual Maturities – Available-for-Sale Debt Securities
By remaining contractual maturity ($ in millions)
Total

 
Within one year

 
After one year
through five years

 
After five years
through ten years

 
After ten years

June 30, 2020
 
 
 
 
 
 
 
 
 
Available-for-sale debt securities (1): 
 
 
 
 
 
 
 
 
 
Securities of U.S. Treasury and federal agencies
 
 
 
 
 
 
 
 
 
Amortized cost, net
$
7,923

 
3,671

 
1,280

 
10

 
2,962

Fair value
7,983

 
3,672

 
1,283

 
11

 
3,017

Weighted average yield
1.84
%
 
2.66

 
0.27

 
2.34

 
1.49

Securities of U.S. states and political subdivisions
 
 
 
 
 
 
 
 
 
Amortized cost, net
33,259

 
2,687

 
3,094

 
3,990

 
23,488

Fair value
33,011

 
2,687

 
3,134

 
3,996

 
23,194

Weighted average yield
2.37

 
1.17

 
2.00

 
1.51

 
2.70

Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
Federal agencies
 
 
 
 
 
 
 
 
 
Amortized cost, net
139,326

 
2

 
119

 
2,418

 
136,787

Fair value
144,835

 
2

 
125

 
2,505

 
142,203

Weighted average yield
3.18

 
2.09

 
3.18

 
2.38

 
3.20

Residential
 
 
 
 
 
 
 
 
 
Amortized cost, net
542

 

 

 

 
542

Fair value
541

 

 

 

 
541

Weighted average yield
2.26

 

 

 

 
2.26

Commercial
 
 
 
 
 
 
 
 
 
Amortized cost, net
3,663

 

 
33

 
194

 
3,436

Fair value
3,559

 

 
30

 
193

 
3,336

Weighted average yield
2.20

 

 
2.49

 
2.50

 
2.18

Total mortgage-backed securities
 
 
 
 
 
 
 
 
 
Amortized cost, net
143,531

 
2

 
152

 
2,612

 
140,765

Fair value
148,935

 
2

 
155

 
2,698

 
146,080

Weighted average yield
3.16

 
2.09

 
3.03

 
2.39

 
3.17

Corporate debt securities
 
 
 
 
 
 
 
 
 
Amortized cost, net
4,972

 
260

 
1,579

 
2,332

 
801

Fair value
4,975

 
262

 
1,585

 
2,360

 
768

Weighted average yield
4.86

 
6.17

 
4.79

 
4.92

 
4.40

Collateralized loan obligations
 
 
 
 
 
 
 
 
 
Amortized cost, net
25,727

 

 
193

 
11,565

 
13,969

Fair value
24,999

 

 
191

 
11,291

 
13,517

Weighted average yield
2.44

 

 
2.85

 
2.56

 
2.34

Other
 
 
 
 
 
 
 
 
 
Amortized cost, net
9,055

 
4,690

 
476

 
1,116

 
2,773

Fair value
8,996

 
4,682

 
462

 
1,098

 
2,754

Weighted average yield
0.89

 
(0.14
)
 
2.51

 
1.34

 
2.18

Total available-for-sale debt securities
 
 
 
 
 
 
 
 
 
Amortized cost, net
$
224,467

 
11,310

 
6,774

 
21,625

 
184,758

Fair value
228,899

 
11,305

 
6,810

 
21,454

 
189,330

Weighted average yield
2.86
%
 
1.23

 
2.43

 
2.54

 
3.01

(1)
Weighted-average yields displayed by maturity bucket are weighted based on amortized cost without effect for any related hedging derivatives and are shown pre-tax.


84

Note 5: Available-for-Sale and Held-to-Maturity Debt Securities (continued)

Table 5.9 shows the remaining contractual maturities, amortized cost net of allowance for credit losses, fair value, and weighted-average effective yields of held-to-maturity debt securities.
 

Table 5.9: Contractual Maturities – Held-to-Maturity Debt Securities
By remaining contractual maturity ($ in millions)
Total

 
Within one year

 
After one year
through five years

 
After five years
through ten years

 
After ten years

June 30, 2020
 
 
 
 
 
 
 
 
 
Held-to-maturity debt securities (1): 
 
 
 
 
 
 
 
 
 
Securities of U.S. Treasury and federal agencies
 
 
 
 
 
 
 
 
 
Amortized cost, net
$
48,578

 
21,011

 
23,787

 

 
3,780

Fair value
50,503

 
21,349

 
25,164

 

 
3,990

Weighted average yield
2.14
%
 
2.21

 
2.18

 

 
1.56

Securities of U.S. states and political subdivisions
 
 
 
 
 
 
 
 
 
Amortized cost, net
14,277

 
143

 
640

 
1,864

 
11,630

Fair value
14,892

 
145

 
669

 
1,960

 
12,118

Weighted average yield
2.71

 
1.61

 
2.43

 
2.88

 
2.72

Federal agency and other mortgage-backed securities
 
 
 
 
 
 
 
 
 
Amortized cost, net
106,133

 

 
15

 
703

 
105,415

Fair value
111,473

 

 
13

 
755

 
110,705

Weighted average yield
2.90

 

 
1.52

 
1.41

 
2.91

Other debt securities
 
 
 
 
 
 
 
 
 
Amortized cost, net
14

 

 

 
14

 

Fair value
14

 

 

 
14

 

Weighted average yield
2.40

 

 

 
2.40

 

Total held-to-maturity debt securities
 
 
 
 
 
 
 
 
 
Amortized cost, net
$
169,002

 
21,154

 
24,442

 
2,581

 
120,825

Fair value
176,882

 
21,494

 
25,846

 
2,729

 
126,813

Weighted average yield
2.66
%
 
2.20

 
2.19

 
2.47

 
2.85

(1)
Weighted-average yields displayed by maturity bucket are weighted based on amortized cost and are shown pre-tax.


85


Note 6: Loans and Related 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 June 30, 2020, and December 31, 2019.
Outstanding balances exclude accrued interest receivable on loans, except for certain revolving loans, such as credit card loans.
 
During the first half of 2020, we reversed accrued interest receivable by reversing interest income of $21 million for our commercial portfolio segment and $114 million for our consumer portfolio segment. See Note 9 (Other Assets) for additional information on accrued interest receivable.
Table 6.1: Loans Outstanding
(in millions)
Jun 30,
2020

 
Dec 31,
2019

Commercial:
 
 
 
Commercial and industrial
$
350,116

 
354,125

Real estate mortgage
123,967

 
121,824

Real estate construction
21,694

 
19,939

Lease financing
17,410

 
19,831

Total commercial
513,187

 
515,719

Consumer:
 
 
 
Real estate 1-4 family first mortgage
277,945

 
293,847

Real estate 1-4 family junior lien mortgage
26,839

 
29,509

Credit card
36,018

 
41,013

Automobile
48,808

 
47,873

Other revolving credit and installment
32,358

 
34,304

Total consumer
421,968

 
446,546

Total loans
$
935,155

 
962,265

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
(in millions)
Jun 30,
2020

 
Dec 31,
2019

Non-U.S. Commercial Loans
 
 
 
Commercial and industrial
$
67,015

 
70,494

Real estate mortgage
6,460

 
7,004

Real estate construction
1,697

 
1,434

Lease financing
1,146

 
1,220

Total non-U.S. commercial loans
$
76,318

 
80,152




86

Note 6: Loans and Related Allowance for Credit Losses (continued)


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. The table excludes 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 the first half of 2020, we sold $1.2 billion of 1-4 family first mortgage loans for a gain of $724 million, which is included in other noninterest income on our consolidated income statement. These whole loans were designated as MLHFS in 2019.
Table 6.3: Loan Purchases, Sales, and Transfers
 
2020
 
 
2019
 
(in millions)
Commercial

 
Consumer

 
Total

 
Commercial

 
Consumer

 
Total

Quarter ended June 30,
 
 
 
 
 
 
 
 
 
 
 
Purchases
$
332

 
2

 
334

 
670

 
5

 
675

Sales
(1,957
)
 
(1
)
 
(1,958
)
 
(535
)
 
(153
)
 
(688
)
Transfers (to) from MLHFS/LHFS
(8
)
 
(10,379
)
 
(10,387
)
 
(89
)
 
(1,852
)
 
(1,941
)
Six months ended June 30,
 
 
 
 
 
 
 
 
 
 
 
Purchases
$
673

 
3

 
676

 
999

 
8

 
1,007

Sales
(2,770
)
 
(27
)
 
(2,797
)
 
(956
)
 
(332
)
 
(1,288
)
Transfers (to) from MLHFS/LHFS
69

 
(10,377
)
 
(10,308
)
 
(92
)
 
(1,852
)
 
(1,944
)


Commitments to Lend
A commitment to lend is a legally binding agreement to lend funds to a customer, usually at a stated interest rate, if funded, and for specific purposes and time periods. We generally require a fee to extend such commitments. Certain commitments are subject to loan agreements with covenants regarding the financial performance of the customer or borrowing base formulas on an ongoing basis that must be met before we are required to fund the commitment. We may reduce or cancel consumer commitments, including home equity lines and credit card lines, in accordance with the contracts and applicable law.
We may, as a representative for other lenders, advance funds or provide for the issuance of letters of credit under syndicated loan or letter of credit agreements. Any advances are generally repaid in less than a week and would normally require default of both the customer and another lender to expose us to loss. The unfunded amount of these temporary advance arrangements totaled approximately $77.8 billion at June 30, 2020.
We issue commercial letters of credit to assist customers in purchasing goods or services, typically for international trade. At June 30, 2020, and December 31, 2019, we had $922.6 million and $862 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 13 (Guarantees, Pledged Assets and Collateral, and Other Commitments) for additional information on standby letters of credit. 
When we make commitments, we are exposed to credit risk. The maximum credit risk for these commitments will generally be lower than the contractual amount because a significant portion of these commitments are 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)
Jun 30,
2020

 
Dec 31,
2019

Commercial:
 
 
 
Commercial and industrial
$
348,870

 
346,991

Real estate mortgage
8,394

 
8,206

Real estate construction
17,316

 
17,729

Total commercial
374,580

 
372,926

Consumer:
 
 
 
Real estate 1-4 family first mortgage
32,845

 
34,391

Real estate 1-4 family junior lien mortgage
35,932

 
36,916

Credit card
121,237

 
114,933

Other revolving credit and installment
23,357

 
25,898

Total consumer
213,371

 
212,138

Total unfunded credit commitments
$
587,951

 
585,064



87


Allowance for Credit Losses for Loans
Table 6.5 presents the allowance for credit losses for loans, which consists of the allowance for loan losses and the allowance for unfunded credit commitments. On January 1, 2020, we adopted CECL. Additional information on our adoption of CECL is included in Note 1 (Summary of Significant Accounting Policies). In second quarter 2020, ACL for loans increased $8.4 billion driven by
 
current and forecasted economic conditions due to the COVID-19 pandemic. These expected impacts were most significantly affected by anticipated changes to economic variables, as well as higher expected losses in the commercial real estate and consumer real estate mortgage loan portfolios and expected impacts of lower oil prices and deteriorating credit trends on the oil and gas portfolio.
Table 6.5: Allowance for Credit Losses for Loans
 
Quarter ended June 30,
 
 
Six months ended June 30,
 
(in millions)
2020

 
2019

 
2020

 
2019

Balance, beginning of period
$
12,022

 
10,821

 
10,456

 
10,707

Cumulative effect from change in accounting policies (1)

 

 
(1,337
)
 

Allowance for purchased credit-deteriorated (PCD) loans (2)

 

 
8

 

Balance, beginning of period, adjusted
12,022

 
10,821

 
9,127

 
10,707

Provision for credit losses
9,565

 
503

 
13,398

 
1,348

Interest income on certain loans (3)
(38
)
 
(39
)
 
(76
)
 
(78
)
Loan charge-offs:
 
 
 
 
 
 
 
Commercial:
 
 
 
 
 
 
 
Commercial and industrial
(556
)
 
(205
)
 
(933
)
 
(381
)
Real estate mortgage
(72
)
 
(14
)
 
(75
)
 
(26
)
Real estate construction

 

 

 
(1
)
Lease financing
(19
)
 
(12
)
 
(32
)
 
(23
)
Total commercial
(647
)
 
(231
)
 
(1,040
)
 
(431
)
Consumer:
 
 
 
 
 
 
 
Real estate 1-4 family first mortgage
(20
)
 
(27
)
 
(43
)
 
(70
)
Real estate 1-4 family junior lien mortgage
(18
)
 
(29
)
 
(48
)
 
(63
)
Credit card
(415
)
 
(437
)
 
(886
)
 
(874
)
Automobile
(158
)
 
(142
)
 
(314
)
 
(329
)
Other revolving credit and installment
(113
)
 
(167
)
 
(278
)
 
(329
)
Total consumer
(724
)
 
(802
)
 
(1,569
)
 
(1,665
)
Total loan charge-offs
(1,371
)
 
(1,033
)
 
(2,609
)
 
(2,096
)
Loan recoveries:
 
 
 
 
 
 
 
Commercial:
 
 
 
 
 
 
 
Commercial and industrial
35

 
46

 
79

 
89

Real estate mortgage
5

 
10

 
10

 
16

Real estate construction
1

 
2

 
17

 
5

Lease financing
4

 
8

 
8

 
11

Total commercial
45

 
66

 
114

 
121

Consumer:
 
 
 
 
 
 
 
Real estate 1-4 family first mortgage
18

 
57

 
44

 
112

Real estate 1-4 family junior lien mortgage
30

 
48

 
65

 
91

Credit card
88

 
88

 
182

 
173

Automobile
52

 
90

 
126

 
186

Other revolving credit and installment
25

 
31

 
56

 
65

Total consumer
213

 
314

 
473

 
627

Total loan recoveries
258

 
380

 
587

 
748

Net loan charge-offs
(1,113
)
 
(653
)
 
(2,022
)
 
(1,348
)
Other

 
(29
)
 
9

 
(26
)
Balance, end of period
$
20,436

 
10,603

 
20,436

 
10,603

Components:
 
 
 
 
 
 
 
Allowance for loan losses
$
18,926

 
9,692

 
18,926

 
9,692

Allowance for unfunded credit commitments
1,510

 
911

 
1,510

 
911

Allowance for credit losses for loans
$
20,436

 
10,603

 
20,436

 
10,603

Net loan charge-offs (annualized) as a percentage of average total loans
0.46
%
 
0.28

 
0.42

 
0.29

Allowance for loan losses as a percentage of total loans
2.02

 
1.02

 
2.02

 
1.02

Allowance for credit losses for loans as a percentage of total loans
2.19

 
1.12

 
2.19

 
1.12

(1)
Represents the overall decrease in our allowance for credit losses for loans as a result of our adoption of CECL on January 1, 2020.
(2)
Represents the allowance estimated for PCI loans that automatically became PCD loans with the adoption of CECL. For more information, see Note 1 (Summary of Significant Accounting Policies).
(3)
Loans with an allowance measured 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.

88

Note 6: Loans and Related Allowance for Credit Losses (continued)


Table 6.6 summarizes the activity in the allowance for credit losses for loans by our commercial and consumer portfolio segments.
Table 6.6: Allowance for Credit Losses for Loans Activity by Portfolio Segment
 
 
 
 
 
2020

 
 
 
 
 
2019

(in millions)
Commercial

 
Consumer

 
Total

 
Commercial

 
Consumer

 
Total

Quarter ended June 30,
 
 
 
 
 
 
 
 
 
 
 
Balance, beginning of period
$
5,279

 
6,743

 
12,022

 
6,428

 
4,393

 
10,821

Provision for credit losses
6,999

 
2,566

 
9,565

 
46

 
457

 
503

Interest income on certain loans (1)
(12
)
 
(26
)
 
(38
)
 
(14
)
 
(25
)
 
(39
)
Loan charge-offs
(647
)
 
(724
)
 
(1,371
)
 
(231
)
 
(802
)
 
(1,033
)
Loan recoveries
45

 
213

 
258

 
66

 
314

 
380

Net loan charge-offs
(602
)
 
(511
)
 
(1,113
)
 
(165
)
 
(488
)
 
(653
)
Other
5

 
(5
)
 

 
3

 
(32
)
 
(29
)
Balance, end of period
$
11,669

 
8,767

 
20,436

 
6,298

 
4,305

 
10,603

Six months ended June 30,
 
 
 
 
 
 
 
 
 
 
 
Balance, beginning of period
$
6,245

 
4,211

 
10,456

 
6,417

 
4,290

 
10,707

Cumulative effect from change in accounting policies (1)
(2,861
)
 
1,524

 
(1,337
)
 

 

 

Allowance for purchased credit-deteriorated (PCD) loans (2)

 
8

 
8

 

 

 

Balance, beginning of period, adjusted
3,384

 
5,743

 
9,127

 
6,417

 
4,290

 
10,707

Provision for credit losses
9,239

 
4,159

 
13,398

 
210

 
1,138

 
1,348

Interest income on certain loans (3)
(26
)
 
(50
)
 
(76
)
 
(25
)
 
(53
)
 
(78
)
Loan charge-offs
(1,040
)
 
(1,569
)
 
(2,609
)
 
(431
)
 
(1,665
)
 
(2,096
)
Loan recoveries
114

 
473

 
587

 
121

 
627

 
748

Net loan charge-offs
(926
)
 
(1,096
)
 
(2,022
)
 
(310
)
 
(1,038
)
 
(1,348
)
Other
(2
)
 
11

 
9

 
6

 
(32
)
 
(26
)
Balance, end of period
$
11,669

 
8,767

 
20,436

 
6,298

 
4,305

 
10,603


(1)
Represents the overall decrease in our allowance for credit losses for loans as a result of our adoption of CECL on January 1, 2020.
(2)
Represents the allowance estimated for PCI loans that automatically became PCD loans with the adoption of CECL. For more information, see Note 1 (Summary of Significant Accounting Policies).
(3)
Loans with an allowance measured 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.
Table 6.7 disaggregates our allowance for credit losses for loans and recorded investment in loans by impairment methodology. This information is no longer relevant after
 
December 31, 2019, given our adoption of CECL on January 1, 2020, which has a single impairment methodology.
Table 6.7: Allowance for Credit Losses for Loans by Impairment Methodology
 
Allowance for credit losses for loans
 
 
Recorded investment in loans
 
(in millions)
Commercial

 
Consumer

 
Total

 
Commercial

 
Consumer

 
Total

December 31, 2019
 
Collectively evaluated (1)
$
5,778

 
3,364

 
9,142

 
512,586

 
436,081

 
948,667

Individually evaluated (2)
467

 
847

 
1,314

 
3,133

 
9,897

 
13,030

PCI (3)

 

 

 

 
568

 
568

Total
$
6,245

 
4,211

 
10,456

 
515,719

 
446,546

 
962,265

(1)
Represents non-impaired loans evaluated collectively for impairment.
(2)
Represents impaired loans evaluated individually for impairment.
(3)
Represents the allowance for loan losses and related loan carrying value for PCI loans.


89


Credit Quality
We monitor credit quality by evaluating various attributes and utilize such information in our evaluation of the appropriateness of the allowance for credit losses. The following sections provide the credit quality indicators we most closely monitor. The credit quality indicators are generally based on information as of our financial statement date, with the exception of updated Fair Isaac Corporation (FICO) scores and updated loan-to-value (LTV)/combined LTV (CLTV). We obtain FICO scores at loan origination and the scores are generally updated at least quarterly, except in limited circumstances, including compliance with the Fair Credit Reporting Act (FCRA). Generally, the LTV and CLTV indicators are updated in the second month of each quarter, with updates no older than March 31, 2020. Amounts disclosed in the credit quality tables that follow are not comparative between reported periods due to our adoption of CECL on January 1, 2020. For more information, see Note 1 (Summary of Significant Accounting Policies).
 
COMMERCIAL CREDIT QUALITY INDICATORS  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, which is our primary credit quality indicator. Our ratings are aligned to federal banking regulators’ definitions of pass and criticized categories with the criticized category including special mention, substandard, doubtful, and loss categories.
Table 6.8 provides a breakdown of outstanding commercial loans by risk category. In connection with our adoption of CECL, credit quality information is provided with the year of origination for term loans. Revolving loans may convert to term loans as a result of a contractual provision in the original loan agreement or if modified in a TDR. At June 30, 2020, we had $475.0 billion and $38.2 billion of pass and criticized loans respectively.

Table 6.8: Commercial Loans Categories by Risk Categories and Vintage (1)
 
Term loans by origination year
 
Revolving loans

 
Revolving loans converted to term loans

 
Total

(in millions)
2020

 
2019

 
2018

 
2017

 
2016

 
Prior

 
June 30, 2020
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Pass
$
46,042

 
46,198

 
20,195

 
10,082

 
6,048

 
6,347

 
189,019

 
215

 
324,146

Criticized
1,461

 
1,886

 
2,170

 
1,367

 
592

 
510

 
17,863

 
121

 
25,970

Total commercial and industrial
47,503

 
48,084

 
22,365

 
11,449

 
6,640

 
6,857

 
206,882

 
336

 
350,116

Real estate mortgage
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Pass
12,781

 
29,006

 
21,842

 
13,270

 
13,973

 
18,728

 
5,134

 
104

 
114,838

Criticized
789

 
1,609

 
1,440

 
1,306

 
1,217

 
2,358

 
410

 

 
9,129

Total real estate mortgage
13,570

 
30,615

 
23,282

 
14,576

 
15,190

 
21,086

 
5,544

 
104

 
123,967

Real estate construction
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Pass
2,970

 
6,823

 
5,319

 
2,432

 
879

 
396

 
1,592

 
8

 
20,419

Criticized
26

 
329

 
500

 
144

 
265

 
10

 
1

 

 
1,275

Total real estate construction
2,996

 
7,152

 
5,819

 
2,576

 
1,144

 
406

 
1,593

 
8

 
21,694

Lease financing
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Pass
2,068

 
4,626

 
2,786

 
2,063

 
1,595

 
2,480

 

 

 
15,618

Criticized
178

 
562

 
485

 
264

 
174

 
129

 

 

 
1,792

Total lease financing
2,246

 
5,188

 
3,271

 
2,327

 
1,769

 
2,609

 

 

 
17,410

Total commercial loans
$
66,315

 
91,039

 
54,737

 
30,928

 
24,743

 
30,958

 
214,019

 
448

 
513,187

 
 
 
 
 
 
 
 
 
Commercial
and
industrial

 
Real
estate
mortgage

 
Real
estate
construction

 
Lease
financing

 
Total

December 31, 2019
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
By risk category:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Pass
 
 
 
 
 
 
 
 
$
338,740

 
118,054

 
19,752

 
18,655

 
495,201

Criticized
 
 
 
 
 
 
 
 
15,385

 
3,770

 
187

 
1,176

 
20,518

Total commercial loans
 
 
 
 
 
 
 
 
$
354,125

 
121,824

 
19,939

 
19,831

 
515,719


(1)
Disclosure is not comparative due to our adoption of CECL on January 1, 2020. For more information, see Note 1 (Summary of Significant Accounting Policies).


90

Note 6: Loans and Related Allowance for Credit Losses (continued)


Table 6.9 provides past due information for commercial loans, which we monitor as part of our credit risk management practices; however, delinquency is not a primary credit quality indicator for commercial loans. Payment deferral activities instituted in response to the COVID-19 pandemic may delay recognition of delinquencies for customers who otherwise would have moved into past due status.
Table 6.9: Commercial Loan Categories by Delinquency Status
(in millions)
Commercial
and
industrial

 
Real
estate
mortgage

 
Real
estate
construction

 
Lease
financing

 
Total

June 30, 2020
 
 
 
 
 
 
 
 
 
By delinquency status:
 
 
 
 
 
 
 
 
 
Current-29 days past due (DPD) and still accruing
$
346,680

 
122,136

 
21,580

 
17,045

 
507,441

30-89 DPD and still accruing
439

 
570

 
80

 
227

 
1,316

90+ DPD and still accruing
101

 
44

 

 

 
145

Nonaccrual loans
2,896

 
1,217

 
34

 
138

 
4,285

Total commercial loans
$
350,116

 
123,967

 
21,694

 
17,410

 
513,187

December 31, 2019
 
 
 
 
 
 
 
 
 
By delinquency status:
 
 
 
 
 
 
 
 
 
Current-29 DPD and still accruing
$
352,110

 
120,967

 
19,845

 
19,484

 
512,406

30-89 DPD and still accruing
423

 
253

 
53

 
252

 
981

90+ DPD and still accruing
47

 
31

 

 

 
78

Nonaccrual loans
1,545

 
573

 
41

 
95

 
2,254

Total commercial loans
$
354,125

 
121,824

 
19,939

 
19,831

 
515,719



CONSUMER CREDIT QUALITY INDICATORS  We have various classes of consumer loans that present unique credit risks. Loan delinquency, FICO credit scores and LTV for 1-4 family mortgage loans are the primary credit quality indicators that we monitor and utilize in our evaluation of the appropriateness of the allowance for credit losses for the consumer portfolio segment.
Many of our loss estimation techniques used for the allowance for credit losses rely on delinquency-based models; therefore, delinquency is an important indicator of credit quality and the establishment of our allowance for credit losses.
Table 6.10 provides the outstanding balances of our consumer portfolio by delinquency status. Payment deferral activities instituted in response to the COVID-19 pandemic may delay recognition of delinquencies for customers who otherwise would have moved into past due status.
 
In connection with our adoption of CECL, credit quality information is provided with the year of origination for term loans. Revolving loans may convert to term loans as a result of a contractual provision in the original loan agreement or if modified in a TDR. The revolving loans converted to term loans in the credit card loan category represent credit card loans with modified terms that require payment over a specific term.



91


Table 6.10: Consumer Loan Categories by Delinquency Status and Vintage (1)
 
Term loans by origination year
 
Revolving loans

 
Revolving loans converted to term loans

 
 
(in millions)
2020

 
2019

 
2018

 
2017

 
2016

 
Prior

 
 
 
Total

June 30, 2020
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Real estate 1-4 family first mortgage
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
By delinquency status:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Current-29 DPD
$
30,155

 
54,199

 
21,265

 
32,823

 
38,466

 
76,491

 
7,644

 
1,994

 
263,037

30-59 DPD
25

 
37

 
30

 
26

 
60

 
771

 
23

 
39

 
1,011

60-89 DPD
1

 
2

 
6

 
8

 
14

 
370

 
14

 
25

 
440

90-119 DPD

 

 
1

 
4

 
6

 
166

 
8

 
15

 
200

120-179 DPD

 

 

 
2

 
3

 
127

 
9

 
20

 
161

180+ DPD

 

 
3

 
6

 
9

 
482

 
9

 
125

 
634

Government insured/guaranteed loans (2)
5

 
73

 
206

 
334

 
669

 
11,175

 

 

 
12,462

Total real estate 1-4 family first mortgage
30,186

 
54,311

 
21,511

 
33,203

 
39,227

 
89,582

 
7,707

 
2,218

 
277,945

Real estate 1-4 family junior mortgage
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
By delinquency status:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Current-29 DPD
12

 
39

 
47

 
42

 
36

 
1,382

 
18,052

 
6,730

 
26,340

30-59 DPD
1

 
1

 

 

 

 
26

 
47

 
79

 
154

60-89 DPD

 
2

 
2

 
4

 
2

 
13

 
23

 
49

 
95

90-119 DPD

 

 

 

 

 
8

 
12

 
30

 
50

120-179 DPD

 

 

 

 

 
4

 
10

 
34

 
48

180+ DPD
1

 

 

 
1

 
1

 
14

 
13

 
122

 
152

Total real estate 1-4 family junior mortgage
14

 
42

 
49

 
<