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WFC Wells Fargo & Co.

Filed: 4 Aug 20, 9:53am
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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 ClassTrading SymbolName of Each Exchange
on Which Registered
Common Stock, par value $1-2/3WFCNYSE
7.5% Non-Cumulative Perpetual Convertible Class A Preferred Stock, Series LWFC.PRLNYSE
Depositary Shares, each representing a 1/1000th interest in a share of Non-Cumulative Perpetual Class A Preferred Stock, Series NWFC.PRNNYSE
Depositary Shares, each representing a 1/1000th interest in a share of Non-Cumulative Perpetual Class A Preferred Stock, Series OWFC.PRONYSE
Depositary Shares, each representing a 1/1000th interest in a share of Non-Cumulative Perpetual Class A Preferred Stock, Series PWFC.PRPNYSE
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 QWFC.PRQNYSE
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 RWFC.PRRNYSE
Depositary Shares, each representing a 1/1000th interest in a share of Non-Cumulative Perpetual Class A Preferred Stock, Series TWFC.PRTNYSE
Depositary Shares, each representing a 1/1000th interest in a share of Non-Cumulative Perpetual Class A Preferred Stock, Series VWFC.PRVNYSE
Depositary Shares, each representing a 1/1000th interest in a share of Non-Cumulative Perpetual Class A Preferred Stock, Series WWFC.PRWNYSE
Depositary Shares, each representing a 1/1000th interest in a share of Non-Cumulative Perpetual Class A Preferred Stock, Series XWFC.PRXNYSE
Depositary Shares, each representing a 1/1000th interest in a share of Non-Cumulative Perpetual Class A Preferred Stock, Series YWFC.PRYNYSE
Depositary Shares, each representing a 1/1000th interest in a share of Non-Cumulative Perpetual Class A Preferred Stock, Series ZWFC.PRZNYSE
Guarantee of 5.80% Fixed-to-Floating Rate Normal Wachovia Income Trust Securities of Wachovia Capital Trust IIIWFC/TPNYSE
Guarantee of Medium-Term Notes, Series A, due October 30, 2028 of Wells Fargo Finance LLCWFC/28ANYSE
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 IFinancial Information 
Item 1.Financial StatementsPage
 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 IIOther 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 share0.51
 0.51
 0.45
 
 13
 1.02
 0.90
 13
Average common shares outstanding4,105.5
 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 assets1,948,939
 1,950,659
 1,900,627
 
 3
 1,949,799
 1,891,907
 3
Average total deposits1,386,656
 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 margin2.25 % 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)
Loans935,155
 1,009,843
 949,878
 (7) (2) 935,155
 949,878
 (2)
Allowance for loan losses18,926
 11,263
 9,692
 68
 95
 18,926
 9,692
 95
Goodwill26,385
 26,381
 26,415
 
 
 26,385
 26,415
 
Equity securities52,494
 54,047
 61,537
 (3) (15) 52,494
 61,537
 (15)
Assets1,968,766
 1,981,349
 1,923,388
 (1) 2
 1,968,766
 1,923,388
 2
Deposits1,410,711
 1,376,532
 1,288,426
 2
 9
 1,410,711
 1,288,426
 9
Common stockholders’ equity159,322
 162,654
 177,235
 (2) (10) 159,322
 177,235
 (10)
Wells Fargo stockholders’ equity179,386
 182,718
 199,042
 (2) (10) 179,386
 199,042
 (10)
Total equity180,122
 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 assets9.15 % 9.25
 10.40
 (1) (12) 9.15 % 10.40
 (12)
Risk-based capital:        

       

Common Equity Tier 110.97
 10.67
 11.97
 3
 (8) 10.97
 11.97
 (8)
Tier 1 capital12.60
 12.22
 13.69
 3
 (8) 12.60
 13.69
 (8)
Total capital15.29
 15.21
 16.75
 1
 (9) 15.29
 16.75
 (9)
Tier 1 leverage7.95
 8.03
 9.12
 (1) (13) 7.95
 9.12
 (13)
Common shares outstanding4,119.6
 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 agreements76,384
 0.01
 2
 98,130
 2.44
 598
Debt securities (2):            
Trading debt securities96,049
 2.76
 663
 86,514
 3.45
 746
Available-for-sale debt securities:           
Securities of U.S. Treasury and federal agencies9,452
 0.83
 19
 15,402
 2.21
 85
Securities of U.S. states and political subdivisions35,728
 2.98
 267
 45,769
 4.02
 460
Mortgage-backed securities:           
Federal agencies143,600
 2.33
 837
 149,761
 2.99
 1,120
Residential and commercial4,433
 2.27
 25
 5,562
 4.02
 56
Total mortgage-backed securities148,033
 2.33
 862
 155,323
 3.03
 1,176
Other debt securities39,231
 2.75
 268
 45,063
 4.40
 494
Total available-for-sale debt securities232,444
 2.44
 1,416
 261,557
 3.39
 2,215
Held-to-maturity debt securities:           
Securities of U.S. Treasury and federal agencies48,574
 2.14
 258
 44,762
 2.19
 244
Securities of U.S. states and political subdivisions14,168
 3.81
 135
 6,958
 4.06
 71
Federal agency and other mortgage-backed securities104,047
 2.21
 575
 95,506
 2.64
 632
Other debt securities15
 2.58
 
 58
 3.86
 
Total held-to-maturity debt securities166,804
 2.33
 968
 147,284
 2.57
 947
Total debt securities495,297
 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 mortgage123,525
 3.03
 930
 121,869
 4.58
 1,390
Real estate construction21,361
 3.37
 179
 21,568
 5.36
 288
Lease financing18,087
 4.34
 196
 19,133
 4.71
 226
Total commercial loans545,318
 2.76
 3,740
 510,559
 4.47
 5,691
Consumer loans:           
Real estate 1-4 family first mortgage280,878
 3.44
 2,414
 286,169
 3.88
 2,776
Real estate 1-4 family junior lien mortgage27,700
 4.24
 292
 32,609
 5.75
 468
Credit card36,539
 10.78
 979
 38,154
 12.65
 1,204
Automobile48,441
 4.99
 601
 45,179
 5.23
 589
Other revolving credit and installment32,390
 5.45
 440
 34,790
 7.12
 617
Total consumer loans425,948
 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 securities27,417
 1.70
 117
 35,215
 2.70
 237
Other7,715
 (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 savings799,949
 0.16
 311
 690,677
 0.59
 1,009
Savings certificates27,051
 1.11
 75
 30,620
 1.62
 124
Other time deposits59,920
 1.01
 149
 96,887
 2.61
 630
Deposits in non-U.S. offices37,682
 0.44
 41
 51,875
 1.86
 240
Total interest-bearing deposits978,194
 0.24
 585
 927,608
 0.96
 2,213
Short-term borrowings63,535
 (0.10) (17) 114,754
 2.26
 646
Long-term debt232,395
 2.13
 1,237
 236,734
 3.21
 1,900
Other liabilities29,947
 1.53
 116
 24,314
 2.18
 132
Total interest-bearing liabilities1,304,071
 0.59
 1,921
 1,303,410
 1.50
 4,891
Portion of noninterest-bearing funding sources477,945
 
 
 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
      
Goodwill26,384
       26,415
      
Other119,312
     112,733
    
Total noninterest-earning assets$166,923
     158,623
    
Noninterest-bearing funding sources            
Deposits$408,462
     341,371
    
Other liabilities52,298
     56,161
    
Total equity184,108
     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 agreements91,969
 0.84
 382
 90,875
 2.42
 1,093
Debt securities (2):           
Trading debt securities98,556
 2.91
 1,433
 87,938
 3.52
 1,544
Available-for-sale debt securities:            
Securities of U.S. Treasury and federal agencies10,116
 1.14
 57
 14,740
 2.18
 159
Securities of U.S. states and political subdivisions37,340
 3.22
 601
 47,049
 4.02
 946
Mortgage-backed securities:           
Federal agencies151,119
 2.51
 1,899
 150,623
 3.04
 2,293
Residential and commercial4,540
 2.55
 58
 5,772
 4.17
 120
Total mortgage-backed securities155,659
 2.51
 1,957
 156,395
 3.09
 2,413
Other debt securities39,386
 3.11
 611
 45,920
 4.43
 1,011
Total available-for-sale debt securities242,501
 2.66
 3,226
 264,104
 3.44
 4,529
Held-to-maturity debt securities:           
Securities of U.S. Treasury and federal agencies47,255
 2.17
 509
 44,758
 2.20
 487
Securities of U.S. states and political subdivisions13,852
 3.82
 265
 6,560
 4.05
 133
Federal agency and other mortgage-backed securities101,221
 2.38
 1,203
 95,753
 2.69
 1,288
Other debt securities20
 2.90
 
 60
 3.91
 1
Total held-to-maturity debt securities162,348
 2.44
 1,977
 147,131
 2.60
 1,909
Total debt securities503,405
 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 mortgage122,656
 3.47
 2,117
 121,644
 4.58
 2,763
Real estate construction20,819
 3.94
 408
 21,999
 5.40
 589
Lease financing18,687
 4.37
 408
 19,261
 4.66
 450
Total commercial loans532,916
 3.19
 8,470
 511,594
 4.48
 11,362
Consumer loans:           
Real estate 1-4 family first mortgage287,217
 3.53
 5,064
 285,694
 3.92
 5,597
Real estate 1-4 family junior lien mortgage28,303
 4.70
 662
 33,197
 5.75
 949
Credit card38,147
 11.53
 2,186
 38,168
 12.76
 2,416
Automobile48,350
 4.98
 1,197
 45,007
 5.21
 1,163
Other revolving credit and installment33,223
 5.89
 974
 35,068
 7.13
 1,240
Total consumer loans435,240
 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 securities32,475
 2.00
 325
 34,154
 2.63
 448
Other7,573
 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 savings781,044
 0.33
 1,289
 689,628
 0.54
 1,856
Savings certificates28,575
 1.30
 185
 27,940
 1.46
 202
Other time deposits70,949
 1.43
 505
 97,356
 2.64
 1,275
Deposits in non-U.S. offices45,508
 0.90
 204
 53,649
 1.88
 499
Total interest-bearing deposits984,415
 0.48
 2,327
 925,478
 0.92
 4,239
Short-term borrowings83,256
 0.66
 275
 111,719
 2.24
 1,243
Long-term debt230,699
 2.15
 2,477
 234,963
 3.27
 3,827
Other liabilities30,073
 1.71
 258
 24,801
 2.23
 275
Total interest-bearing liabilities1,328,443
 0.81
 5,337
 1,296,961
 1.49
 9,584
Portion of noninterest-bearing funding sources452,787
 
 
 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
    
Goodwill26,386
     26,417
    
Other121,284
     109,601
    
Total noninterest-earning assets$168,569
     155,562
    
Noninterest-bearing funding sources             
Deposits$377,894
     340,061
    
Other liabilities57,323
     55,864
    
Total equity186,139
     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 fees2,117
 2,318
 (9) 4,599
 4,511
 2
Trust and investment management687
 795
 (14) 1,388
 1,581
 (12)
Investment banking547
 455
 20
 938
 849
 10
Total trust and investment fees3,351
 3,568
 (6) 6,925
 6,941
 
Card fees797
 1,025
 (22) 1,689
 1,969
 (14)
Other fees:          
Lending related charges and fees303
 349
 (13) 631
 696
 (9)
Cash network fees88
 117
 (25) 194
 226
 (14)
Commercial real estate brokerage commissions
 105
 (100) 1
 186
 (99)
Wire transfer and other remittance fees99
 121
 (18) 209
 234
 (11)
All other fees88
 108
 (19) 175
 228
 (23)
Total other fees578
 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 activities1,006
 481
 109
 1,114
 825
 35
Total mortgage banking317
 758
 (58) 696

1,466
 (53)
Net gains from trading activities807
 229
 252
 871
 586
 49
Net gains on debt securities212
 20
 960
 449
 145
 210
Net gains (losses) from equity securities533
 622
 (14) (868) 1,436
 NM
Lease income334
 424
 (21) 686
 867
 (21)
Life insurance investment income163
 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 intangibles22
 27
 (19) 45
 55
 (18)
FDIC and other deposit assessments165
 144
 15
 283
 303
 (7)
Operating losses1,219
 247
 394
 1,683
 485
 247
Outside professional services758
 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 promotion137
 329
 (58) 318
 566
 (44)
Outside data processing142
 175
 (19) 307
 342
 (10)
Travel and entertainment15
 163
 (91) 108
 310
 (65)
Postage, stationery and supplies108
 119
 (9) 237
 241
 (2)
Telecommunications110
 93
 18
 202
 184
 10
Foreclosed assets23
 35
 (34) 52
 72
 (28)
Insurance25
 25
 
 50
 50
 
All other605
 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
 $15
 31
Net gains (losses) from equity securities346
 87
 (275) 432
Total revenue (losses) from deferred compensation plan investments349
 105
 (260) 463
Change in deferred compensation plan liabilities490
 114
 (108) 471
Net derivative (gains) losses from economic hedges of deferred compensation(141) 
 (141) 
Personnel expense349
 114
 (249) 471
Income (loss) before income tax expense$
 (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 accounts419
 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 fees540
 661
 (18) 1,153
 1,300
 (11)
Card fees732
 929
 (21) 1,541
 1,787
 (14)
Other fees247
 335
 (26) 532
 667
 (20)
Mortgage banking253
 655
 (61) 593
 1,296
 (54)
Net gains (losses) from trading activities6
 (11) 155
 35
 (6) 683
Net gains on debt securities123
 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 income3,067
 4,739
 (35) 5,776
 9,241
 (37)
           
Total revenue8,766
 11,805
 (26) 18,262
 23,555
 (22)
           
Provision for credit losses3,378
 479
 605
 5,096
 1,189
 329
Noninterest expense:          
Personnel5,992
 5,436
 10
 11,447
 11,417
 
Technology and equipment (4)648
 614
 6
 1,335
 1,283
 4
Occupancy685
 542
 26
 1,214
 1,084
 12
Core deposit and other intangibles
 
 
 1
 1
 
FDIC and other deposit assessments112
 94
 19
 180
 200
 (10)
Outside professional services460
 387
 19
 902
 703
 28
Operating losses1,037
 197
 426
 1,491
 416
 258
Other (4)(588) (58) NM
 (1,108) (203) NM
Total noninterest expense8,346
 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 deposits848.5
 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 accounts511
 502
 2
 1,019
 985
 3
Trust and investment fees:          
Brokerage advisory, commissions and other fees79
 74
 7
 169
 152
 11
Trust and investment management130
 117
 11
 261
 231
 13
Investment banking614
 475
 29
 1,104
 887
 24
Total trust and investment fees823
 666
 24
 1,534
 1,270
 21
Card fees65
 95
 (32) 148
 181
 (18)
Other fees330
 464
 (29) 676
 901
 (25)
Mortgage banking65
 104
 (38) 105
 172
 (39)
Net gains from trading activities794
 226
 251
 835
 559
 49
Net gains on debt securities89
 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 income2,672
 2,530
 6
 4,353
 5,107
 (15)
           
Total revenue6,563
 7,065
 (7) 12,380
 14,176
 (13)
           
Provision for credit losses6,028
 28
 NM
 8,316
 162
 NM
Noninterest expense:          
Personnel1,311
 1,384
 (5) 2,694
 2,894
 (7)
Technology and equipment (1)8
 13
 (38) 19
 26
 (27)
Occupancy106
 96
 10
 210
 191
 10
Core deposit and other intangibles19
 23
 (17) 38
 47
 (19)
FDIC and other deposit assessments45
 44
 2
 89
 89
 
Outside professional services124
 231
 (46) 225
 415
 (46)
Operating losses173
 10
 NM
 177
 11
 NM
Other (1)2,177
 2,081
 5
 4,274
 4,047
 6
Total noninterest expense3,963
 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 interests1
 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 deposits441.2
 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 accounts4
 4
 
 9
 8
 13
Trust and investment fees:           
Brokerage advisory, commissions and other fees2,039
 2,248
 (9) 4,436
 4,372
 1
Trust and investment management568
 687
 (17) 1,150
 1,363
 (16)
Investment banking1
 (1) 200
 2
 4
 (50)
Total trust and investment fees2,608
 2,934
 (11) 5,588
 5,739
 (3)
Card fees1
 2
 (50) 2
 3
 (33)
Other fees4
 4
 
 8
 8
 
Mortgage banking(3) (3) 
 (6) (6) 
Net gains (losses) from trading activities6
 13
 (54) (1) 32
 NM
Net gains on debt securities
 
 
 
 
 
Net gains (losses) from equity securities161
 35
 360
 (117) 171
 NM
Other (1)143
 24
 496
 289
 36
 703
Total noninterest income2,924
 3,013
 (3) 5,772
 5,991
 (4)
            
Total revenue3,660
 4,050
 (10) 7,375
 8,129
 (9)
            
Provision (reversal of provision) for credit losses257
 (1) NM
 265
 3
 NM
Noninterest expense:           
Personnel2,021
 2,112
 (4) 3,971
 4,309
 (8)
Technology and equipment (1)(94) 15
 NM
 (86) 27
 NM
Occupancy111
 112
 (1) 224
 224
 
Core deposit and other intangibles3
 4
 (25) 6
 7
 (14)
FDIC and other deposit assessments14
 12
 17
 26
 26
 
Outside professional services182
 210
 (13) 373
 394
 (5)
Operating losses15
 43
 (65) 24
 64
 (63)
Other (1)901
 738
 22
 1,718
 1,498
 15
Total noninterest expense3,153
 3,246
 (3) 6,256
 6,549
 (4)
Income before income tax expense and noncontrolling interests250
 805
 (69) 854
 1,577
 (46)
Income tax expense63
 201
 (69) 216
 393
 (45)
Less: Net income (loss) from noncontrolling interests7
 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 deposits171.8
 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 assets569.4
 561.3
Advisory account client assets as a percentage of total client assets36% 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 managed351.6
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 managed367.0
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 rates136.0
 (7.5) 5.5
Decrease in interest rates151.5
 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
Consumer421,968
 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 checking54,477
 4
 62,814
 5
 (13)
Market rate and other savings809,232
 57
 751,080
 57
 8
Savings certificates26,118
 2
 31,715
 2
 (18)
Other time deposits53,203
 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 mortgage123,967
 121,824
Real estate construction21,694
 19,939
Lease financing17,410
 19,831
Total commercial513,187
 515,719
Consumer:   
Real estate 1-4 family first mortgage277,945
 293,847
Real estate 1-4 family junior lien mortgage26,839
 29,509
Credit card36,018
 41,013
Automobile48,808
 47,873
Other revolving credit and installment32,358
 34,304
Total consumer421,968
 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 construction16,229
 11
 Initial deferral of scheduled principal and/or interest up to 90 days, with available extensions up to 90 days
Lease financing1,287
 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 mortgage3,123
 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 card3,173
 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
Automobile6,560
 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 installment1,968
 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 manufacturing98
 21,622
 2
 41,771
 36
 23,457
 2
 42,040
Technology, telecom and media61
 24,912
 3
 54,894
 28
 22,447
 2
 53,343
Real estate and construction290
 25,245
 3
 49,925
 47
 22,011
 2
 48,217
Banks
 15,548
 2
 16,598
 
 20,070
 2
 20,728
Retail216
 23,149
 2
 43,212
 105
 19,923
 2
 41,938
Materials and commodities46
 15,877
 2
 37,877
 33
 16,375
 2
 39,369
Automobile related24
 13,103
 1
 25,162
 24
 15,996
 2
 26,310
Food and beverage manufacturing12
 13,082
 1
 29,284
 9
 14,991
 2
 29,172
Health care and pharmaceuticals76
 17,144
 2
 32,481
 28
 14,920
 2
 30,168
Oil, gas and pipelines1,414
 12,598
 1
 32,679
 615
 13,562
 1
 35,445
Entertainment and recreation62
 11,820
 1
 18,134
 44
 13,462
 1
 19,854
Transportation services319
 10,849
 1
 17,040
 224
 10,957
 1
 17,660
Commercial services98
 12,095
 1
 24,548
 50
 10,455
 1
 22,713
Agribusiness54
 7,362
 *
 12,984
 35
 7,539
 *
 12,901
Utilities1
 6,486
 *
 20,615
 224
 5,995
 *
 19,390
Insurance and fiduciaries2
 6,032
 *
 17,069
 1
 5,525
 *
 15,596
Government and education6
 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 York96
 12,952
   2
 2,059
   98
 15,011
   2
Florida27
 8,295
   1
 1,446
   28
 9,741
   1
Texas341
 8,047
   
 1,226
   341
 9,273
   *
Washington13
 3,934
   
 782
   13
 4,716
   *
Georgia15
 4,043
   
 448
   15
 4,491
   *
North Carolina12
 3,737
   
 648
   12
 4,385
   *
Arizona35
 3,862
   
 318
   35
 4,180
   *
Colorado16
 3,300
   
 587
   16
 3,887
   *
Virginia4
 3,036
   
 664
   4
 3,700
   *
Other509
 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%
Apartments11
 19,284
   
 7,694
   11
 26,978
   3
Industrial/warehouse72
 16,149
   1
 1,674
   73
 17,823
   2
Retail (excluding shopping center)171
 14,211
   2
 181
   173
 14,392
   2
Hotel/motel170
 10,637
   
 1,610
   170
 12,247
   1
Shopping center399
 10,878
   
 1,055
   399
 11,933
   1
Mixed use properties90
 5,641
   
 640
   90
 6,281
   *
Institutional77
 3,910
   20
 2,159
   97
 6,069
   *
Collateral pool
 2,336
   
 202
   
 2,538
   *
Agriculture61
 2,006
   
 9
   61
 2,015
   *
Other6
 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
Canada4
 16,575
 
 87
 
 425
 4
 17,087
 17,091
Cayman Islands
 6,398
 
 
 
 138
 
 6,536
 6,536
Ireland1,217
 4,873
 
 168
 
 117
 1,217
 5,158
 6,375
Japan19
 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 mortgage26,839
 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 York31,163
 1,406
 32,569
 3
New Jersey13,159
 2,539
 15,698
 2
Florida11,172
 2,393
 13,565
 2
Washington10,302
 603
 10,905
 1
Virginia7,829
 1,549
 9,378
 1
Texas8,309
 546
 8,855
 1
North Carolina5,287
 1,262
 6,549
 1
Colorado5,929
 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 York31,163
31,336
 0.95
0.83 0.02
(0.01)0.02
0.01

New Jersey13,159
14,113
 1.38
1.40 0.03

0.02
0.02
(0.06)
Florida11,172
11,804
 2.07
1.81 (0.01)(0.03)(0.06)(0.07)(0.11)
Washington10,302
10,863
 0.37
0.29 (0.01)(0.02)(0.02)
(0.03)
Other86,859
95,750
 1.21
1.20 0.01
0.01
(0.02)
(0.06)
Total265,483
282,122
 0.93
0.86 

(0.02)(0.01)(0.04)
Government insured/guaranteed loans12,462
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 Jersey2,539
 2,744
 2.36
 2.74 (0.12) 0.13
 0.07
 0.11
 (0.07)
Florida2,393
 2,600
 2.38
 2.93 (0.01) 
 (0.09) (0.11) (0.11)
Virginia1,549
 1,712
 1.79
 1.97 (0.05) 0.09
 (0.02) (0.23) (0.17)
Pennsylvania1,540
 1,674
 1.78
 2.16 0.05
 0.11
 (0.10) (0.05) (0.19)
Other11,527
 12,712
 1.77
 2.05 (0.21) 0.01
 (0.18) (0.29) (0.22)
Total26,839
 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 lines9,806
 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 portfolios100% 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
Inflows2,741
 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 period4,285

2,875

2,254

2,312

2,470
Consumer nonaccrual loans         
Balance, beginning of period3,281
 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 period3,320

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
Commercial45
 49
 62
 180
 101
Consumer119
 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 sales2
 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 mortgage717
 697
 669
 598
 620
Real estate construction20
 33
 36
 40
 43
Lease financing10
 10
 13
 16
 31
Total commercial TDRs2,629
 2,042
 1,901
 1,816
 1,988
Consumer:         
Real estate 1-4 family first mortgage7,176
 7,284
 7,589
 7,905
 8,218
Real estate 1-4 family junior lien mortgage1,309
 1,356
 1,407
 1,457
 1,550
Credit Card510
 527
 520
 504
 486
Automobile108
 76
 81
 82
 85
Other revolving credit and installment173
 172
 170
 167
 159
Trial modifications91
 108
 115
 123
 127
Total consumer TDRs9,367
 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/guaranteed1,277
 1,157
 1,190
 1,199
 1,209
Non-government insured/guaranteed7,244
 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 quarter2,629
 2,042
 1,901
 1,816
 1,988
Consumer TDRs         
Balance, beginning of quarter9,523
 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 quarter9,367
 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 mortgage44
 28
 31
 28
 24
Real estate construction
 1
 
 
 
Total commercial145

53

78

34

41
Consumer:         
Real estate 1-4 family first mortgage93
 128
 112
 100
 108
Real estate 1-4 family junior lien mortgage19
 25
 32
 35
 27
Credit card418
 528
 546
 491
 449
Automobile54
 69
 78
 75
 63
Other revolving credit and installment88
 78
 87
 87
 92
Total consumer672
 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 mortgage67
 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 financing15
 0.33
 9
 0.19
 31
 0.63
 8
 0.17
 4
 0.09
Total commercial602
 0.44
 324
 0.25
 203
 0.16
 139
 0.11
 165
 0.13
Consumer:                   
Real estate 1-4 family first mortgage2
 
 (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 card327
 3.60
 377
 3.81
 350
 3.48
 319
 3.22
 349
 3.68
Automobile106
 0.88
 82
 0.68
 87
 0.73
 76
 0.65
 52
 0.46
Other revolving credit and installment88
 1.09
 134
 1.59
 148
 1.71
 138
 1.60
 136
 1.56
Total consumer511
 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 mortgage2,395
 13
 1,236
 13
 1,282
 13
 1,374
 13
 1,320
 14
Real estate construction484
 2
 1,079
 2
 1,200
 2
 1,238
 3
 1,294
 2
Lease financing681
 2
 330
 2
 307
 2
 268
 2
 220
 2
Total commercial11,669
 54
 6,245
 54
 6,417
 54
 6,632
 53
 7,394
 52
Consumer:                   
Real estate 1-4 family first mortgage1,541
 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 card3,777
 4
 2,252
 4
 2,064
 4
 1,944
 4
 1,605
 4
Automobile1,174
 5
 459
 5
 475
 5
 1,039
 5
 817
 6
Other revolving credit and installment1,550
 4
 561
 4
 570
 4
 652
 4
 639
 4
Total consumer8,767
 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 loans2.02% 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 loans2.19  1.09  1.12  1.25  1.30 
Allowance for credit losses for loans as a percentage of total nonaccrual loans269  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 Target0.25%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 Target0.25%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 rate155
 106
 42
 161
 84
 32
 5
 198
 29
 37
 27
 49
Equity14
 10
 6
 17
 6
 7
 4
 10
 4
 5
 4
 8
Commodity4
 4
 2
 7
 2
 2
 1
 6
 2
 2
 1
 6
Foreign exchange1
 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 outflows316,268
LCR129%
(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 agencies58,486
 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 borrowings10,826
 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 borrowings10,667
 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 debt1,683
 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’sA2 P-1 Aa1 P-1
S&P Global Ratings (1)A- A-2 A+ A-1
Fitch Ratings, Inc.A+ F1 AA F1+
DBRS MorningstarAA (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