SEC Info - Wells Fargo & Co./MN - ‘10-Q’ for 6/30/20

Available-for-sale debt securities:

Securities of U.S. Treasury and federal agencies

i 7,923

i 69

( i 9

)

i 7,983

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

i 33,259

i 200

( i 448

)

i 33,011

Mortgage-backed securities:

Federal agencies

i 139,326

i 5,533

( i 24

)

i 144,835

Residential

i 542

i 2

( i 3

)

i 541

Commercial

i 3,663

i 9

( i 113

)

i 3,559

Total mortgage-backed securities

i 143,531

i 5,544

( i 140

)

i 148,935

Corporate debt securities

i 4,972

i 95

( i 92

)

i 4,975

Collateralized loan obligations

i 25,727

i 1

( i 729

)

i 24,999

Other

i 9,055

i 69

( i 128

)

i 8,996

Total available-for-sale debt securities

i 224,467

i 5,978

( i 1,546

)

i 228,899

Held-to-maturity debt securities:

Securities of U.S. Treasury and federal agencies

i 48,578

i 1,972

( i 47

)

i 50,503

Securities of U.S. states and political subdivisions

i 14,277

i 622

( i 7

)

i 14,892

Federal agency and other mortgage-backed securities (3)

i 106,133

i 5,350

( i 10

)

i 111,473

Other debt securities

i 14

i —

i 14

Total held-to-maturity debt securities

i 169,002

i 7,944

( i 64

)

i 176,882

Total (4)

i 393,469

i 13,922

( i 1,610

)

i 405,781

Available-for-sale debt securities:

Securities of U.S. Treasury and federal agencies

i 14,948

i 13

( i 1

)

i 14,960

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

i 39,381

i 992

( i 36

)

i 40,337

Mortgage-backed securities:

Federal agencies

i 160,318

i 2,299

( i 164

)

i 162,453

Residential

i 814

i 14

( i 1

)

i 827

Commercial

i 3,899

i 41

( i 6

)

i 3,934

Total mortgage-backed securities

i 165,031

i 2,354

( i 171

)

i 167,214

Corporate debt securities

i 6,343

i 252

( i 32

)

i 6,563

Collateralized loan obligations

i 29,153

i 25

( i 123

)

i 29,055

Other

i 5,204

i 150

( i 24

)

i 5,330

Total available-for-sale debt securities

i 260,060

i 3,786

( i 387

)

i 263,459

Held-to-maturity debt securities:

Securities of U.S. Treasury and federal agencies

i 45,541

i 617

( i 19

)

i 46,139

Securities of U.S. states and political subdivisions

i 13,486

i 286

( i 13

)

i 13,759

Federal agency and other mortgage-backed securities (3)

i 94,869

i 2,093

( i 37

)

i 96,925

Other debt securities

i 37

i —

i 37

Total held-to-maturity debt securities

i 153,933

i 2,996

( i 69

)

i 156,860

Total (4)

i 413,993

i 6,782

( i 456

)

i 420,319

(1)

Represents amortized cost of the securities, net of the allowance for credit losses of $ i 114 million related to available-for-sale debt securities and $ i 20 million related to held-to-maturity debt securities at June 30, 2020. Prior to our adoption of CECL on January 1, 2020, the allowance for credit losses related to available-for-sale and held-to-maturity debt securities was not applicable and is therefore presented as $ i 0 at December 31, 2019. For more information, see Note 1 (Summary of Significant Accounting Policies).


(2)	Includes investments in tax-exempt preferred debt securities issued by investment funds or trusts that predominantly invest in tax-exempt municipal securities. The amortized cost net of allowance for credit losses and fair value of these types of securities was $ i 5.8 billion at both June 30, 2020, and December 31, 2019.


(3)	Predominantly consists of federal agency mortgage-backed securities at both June 30, 2020 and December 31, 2019.

(4)

We held available-for-sale and held-to-maturity debt securities from Federal National Mortgage Association (FNMA) and Federal Home Loan Mortgage Corporation (FHLMC) that each exceeded i 10% of stockholders’ equity, with an amortized cost of $ i 93.6 billion and $ i 80.1 billion and a fair value of $ i 98.1 billion and $ i 83.8 billion at June 30, 2020 and an amortized cost of $ i 98.5 billion and $ i 84.1 billion and a fair value of $ i 100.3 billion and $ i 85.5 billion at December 31, 2019, respectively.

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

Table 5.2: Held-to-Maturity Debt Securities Purchases and Transfers

Quarter ended June 30,

Six months ended June 30,

(in millions)

2020

2019

2020

2019

Purchases of held-to-maturity debt securities:

Securities of U.S. Treasury and federal agencies

i —

i 3,016

i —

Securities of U.S. states and political subdivisions

i 15

i 243

i 881

i 243

Federal agency and other mortgage-backed securities

i 6,970

i 37

i 22,895

i 53

Total purchases of held-to-maturity debt securities

i 6,985

i 280

i 26,792

i 296

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

Securities of U.S. states and political subdivisions

i —

i 1,558

i —

i 1,558

Federal agency and other mortgage-backed securities

i —

i 2,106

i —

i 4,513

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

i —

i 3,664

i —

i 6,071

Table 5.3 shows the composition of interest income, provision for credit losses, and gross realized gains and losses

from sales and impairment write-downs included in earnings related to available-for-sale and held-to-maturity debt securities (pre-tax).

Table 5.3: Income Statement Impacts for Available-for-Sale and Held-to-Maturity Debt Securities

Quarter ended June 30,

Six months ended June 30,

(in millions)

2020

2019

2020

2019

Interest income:

Available-for-sale

i 1,349

i 2,110

i 3,075

i 4,311

Held-to-maturity

i 938

i 931

i 1,918

i 1,878

Total interest income (1)

i 2,287

i 3,041

i 4,993

i 6,189

Provision (reversal of provision) for credit losses (2):

Available-for-sale

( i 40

)

i —

i 128

i —

Held-to-maturity

i 9

i —

i 13

i —

Total provision (reversal of provision) for credit losses

( i 31

)

i —

i 141

i —

Realized gains and losses (3):

Gross realized gains

i 248

i 29

i 504

i 202

Gross realized losses

( i 36

)

( i 2

)

( i 40

)

( i 5

)

Impairment write-downs included in earnings:

Credit-related (4)

i —

( i 7

)

i —

( i 23

)

Intent-to-sell

i —

( i 15

)

( i 29

)

Total impairment write-downs included in earnings

i —

( i 7

)

( i 15

)

( i 52

)

Net realized gains

i 212

i 20

i 449

i 145


(1)	Total interest income from debt securities excludes interest income from trading debt securities, which is disclosed in Note 4 (Trading Activities).


(2)	Prior to our adoption of CECL on January 1, 2020, the provision for credit losses from debt securities was not applicable and is therefore presented as $ i 0 for the prior period. For more information, see Note 1 (Summary of Significant Accounting Policies).


(3)	Realized gains and losses relate to available-for-sale debt securities. There were i no realized gains or losses from held-to-maturity debt securities in all periods presented.


(4)	For the second quarter and first half of 2020, credit-related impairment recognized in earnings is classified as provision for credit losses due to our adoption of CECL on January 1, 2020. For more information, see Note 1 (Summary of Significant Accounting Policies).

Credit Quality

We monitor credit quality of debt securities by evaluating various attributes and utilize such information in our evaluation of the appropriateness of the allowance for credit losses. The credit quality indicators that we most closely monitor include credit ratings and delinquency status and are based on information as of our financial statement date.

CREDIT RATINGS Credit ratings express opinions about the credit quality of a debt security. We determine the credit rating of a security according to the lowest credit rating made available by national recognized statistical rating organizations (NRSRO). Debt securities rated investment grade, that is those with ratings

similar to BBB-/Baa3 or above, as defined by NRSRO, are generally considered by the rating agencies and market participants to be low credit risk. Conversely, debt securities rated

below investment grade, labeled as “speculative grade” by the rating agencies, are considered to be distinctively higher credit risk than investment grade debt securities.

For debt securities not rated by the NRSRO, we determine an internal credit grade of the debt securities (used for credit risk management purposes) equivalent to the credit ratings assigned by major credit agencies. The fair value of available-for-sale debt securities categorized as investment grade based on internal credit grades was $ i 1.3 billion at June 30, 2020, and $ i 2.2 billion at December 31, 2019. Held-to-maturity debt securities

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

categorized as investment grade based on internal credit grades are not significant. If an internal credit grade was not assigned, we categorized the debt security as non-investment grade.

Table 5.4 shows the percentage of fair value of available-for-sale debt securities and amortized cost of held-to-maturity debt

securities determined by those rated investment grade, inclusive of those based on internal credit grades.

Table 5.4: Investment Grade Debt Securities



	Available-for-Sale				Held-to-Maturity
($ in millions)	Fair value		% investment grade		Amortized cost	% investment grade
June 30, 2020
Total portfolio	$	i 228,899	i 99	%	i 169,022	i 99	%

Breakdown by category:
Securities of U.S. Treasury and federal agencies (1)	$	i 152,818	i 100	%	i 153,863	i 100	%
Securities of U.S. states and political subdivisions	i 33,011		i 99		i 14,286	i 100
Collateralized loan obligations	i 24,999		i 100		N/A	N/A
All other debt securities (2)	i 18,071		i 87		i 873	i 6
December 31, 2019
Total portfolio	$	i 263,459	i 99	%	i 153,933	i 99	%

Breakdown by category:
Securities of U.S. Treasury and federal agencies (1)	$	i 177,413	i 100	%	i 139,619	i 100	%
Securities of U.S. states and political subdivisions	i 40,337		i 99		i 13,486	i 100
Collateralized loan obligations	i 29,055		i 100		N/A	N/A
All other debt securities (2)	i 16,654		i 82		i 828	i 4


(1)	Includes federal agency mortgage-backed securities.


(2)	Includes non-agency mortgage-backed, corporate, and all other debt securities.

DELINQUENCY STATUS AND NONACCRUAL DEBT SECURITIES Debt security issuers that are delinquent in payment of amounts due under contractual debt agreements have a higher probability of recognition of credit losses. As such, as part of our monitoring of the credit quality of the debt security portfolio, we consider whether debt securities we own are past due in payment of principal or interest payments and whether any securities have been placed into nonaccrual status.

We had i no debt securities that were past due and still accruing at June 30, 2020 or December 31, 2019. The fair value of available-for-sale debt securities in nonaccrual status was $ i 153 million and $ i 110 million as of June 30, 2020, and

December 31, 2019, respectively. There were i no held-to-maturity debt securities in nonaccrual status as of June 30, 2020, or December 31, 2019. Purchased debt securities with credit deterioration (PCD) are not considered to be in nonaccrual status, as payments from issuers of these securities remain current.

Table 5.5 presents detail of available-for-sale debt securities purchased with credit deterioration during the period. There were i no available-for-sale debt securities purchased with credit deterioration during second quarter 2020. There were i no held-to-maturity debt securities purchased with credit deterioration during the second quarter and first half of 2020. The amounts presented are as of the date of the PCD assets were purchased.

Table 5.5: Debt Securities Purchased with Credit Deterioration



(in millions)	Six months ended June 30, 2020
Available-for-sale debt securities purchased with credit deterioration (PCD):
Par value	$	i 164
Allowance for credit losses at acquisition	( i 11		)
Discount (or premiums) attributable to other factors	i 3
Purchase price of available-for-sale debt securities purchased with credit deterioration	$	i 156

Unrealized Losses of Available-for-Sale Debt Securities

Table 5.6 shows the gross unrealized losses and fair value of available-for-sale debt securities by length of time those individual securities in each category have been in a continuous loss position. Debt securities on which we have recorded credit impairment are categorized as being “less than 12 months” or

“12 months or more” in a continuous loss position based on the point in time that the fair value declined to below the (1) for the current period presented, amortized cost basis net of allowance for credit losses, or the (2) for the prior period presented, amortized cost basis.

Table 5.6: Gross Unrealized Losses and Fair Value – Available-for-Sale Debt Securities

Less than 12 months

12 months or more

Total

(in millions)

Gross unrealized losses

Fair value

Gross unrealized losses

Fair value

Gross unrealized losses

Fair value

Available-for-sale debt securities:

Securities of U.S. Treasury and federal agencies

( i 9

)

i 608

i —

( i 9

)

i 608

Securities of U.S. states and political subdivisions

( i 372

)

i 17,219

( i 76

)

i 2,539

( i 448

)

i 19,758

Mortgage-backed securities:

Federal agencies

( i 22

)

i 4,129

( i 2

)

i 512

( i 24

)

i 4,641

Residential

( i 2

)

i 302

( i 1

)

i 58

( i 3

)

i 360

Commercial

( i 84

)

i 2,895

( i 29

)

i 343

( i 113

)

i 3,238

Total mortgage-backed securities

( i 108

)

i 7,326

( i 32

)

i 913

( i 140

)

i 8,239

Corporate debt securities

( i 79

)

i 1,308

( i 13

)

i 93

( i 92

)

i 1,401

Collateralized loan obligations

( i 478

)

i 18,215

( i 251

)

i 6,640

( i 729

)

i 24,855

Other

( i 82

)

i 4,185

( i 46

)

i 905

( i 128

)

i 5,090

Total available-for-sale debt securities

( i 1,128

)

i 48,861

( i 418

)

i 11,090

( i 1,546

)

i 59,951

Available-for-sale debt securities:

Securities of U.S. Treasury and federal agencies

i —

( i 1

)

i 2,423

( i 1

)

i 2,423

Securities of U.S. states and political subdivisions

( i 10

)

i 2,776

( i 26

)

i 2,418

( i 36

)

i 5,194

Mortgage-backed securities:

Federal agencies

( i 50

)

i 16,807

( i 114

)

i 10,641

( i 164

)

i 27,448

Residential

( i 1

)

i 149

i —

( i 1

)

i 149

Commercial

( i 3

)

i 998

( i 3

)

i 244

( i 6

)

i 1,242

Total mortgage-backed securities

( i 54

)

i 17,954

( i 117

)

i 10,885

( i 171

)

i 28,839

Corporate debt securities

( i 9

)

i 303

( i 23

)

i 216

( i 32

)

i 519

Collateralized loan obligations

( i 13

)

i 5,001

( i 110

)

i 16,789

( i 123

)

i 21,790

Other

( i 12

)

i 1,656

( i 12

)

i 492

( i 24

)

i 2,148

Total available-for-sale debt securities

( i 98

)

i 27,690

( i 289

)

i 33,223

( i 387

)

i 60,913

We have assessed each debt security with gross unrealized losses included in the previous table for credit impairment. As part of that assessment we evaluated and concluded that we do not intend to sell any of the debt securities, and that it is more likely than not that we will not be required to sell, prior to recovery of the amortized cost basis. We evaluate, where necessary, whether credit impairment exists by comparing the present value of the expected cash flows to the debt securities’ amortized cost basis. In prior periods, credit impairment was recorded as a write-down to the amortized cost basis of the security. In the current period, credit impairment is recorded as an allowance for credit losses.

For descriptions of the factors we consider when analyzing debt securities for impairment as well as methodology and significant inputs used to measure credit losses, see Note 1 (Summary of Significant Accounting Policies).

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

Allowance for Credit Losses for Debt Securities

Table 5.7 presents the allowance for credit losses on available-for-sale and held-to-maturity debt securities.

Table 5.7: Allowance for Credit Losses for Debt Securities



	Quarter ended June 30, 2020				Six months ended June 30, 2020
(in millions)	Available-for-Sale			Held-to-Maturity	Available-for-Sale			Held-to-Maturity
Balance, beginning of period (1)	$	i 161		i 11	$	i —		i —
Cumulative effect from change in accounting policies (2)	i —			i —	i 24			i 7
Balance, beginning of period, adjusted	i 161			i 11	i 24			i 7
Provision (reversal of provision) for credit losses	( i 40		)	i 9	i 128			i 13
Securities purchased with credit deterioration	i —			i —	i 11			i —
Reduction due to sales	( i 8		)	i —	( i 8		)	i —
Reduction due to intent to sell	i —			i —	( i 11		)	i —
Charge-offs	( i 1		)	i —	( i 33		)	i —
Interest income (3)	i 2			i —	i 3			i —
Balance, end of period (4)	$	i 114		i 20	$	i 114		i 20


(1)	Prior to our adoption of CECL on January 1, 2020, the allowance for credit losses related to available-for-sale and held-to-maturity debt securities was not applicable and is therefore presented as $ i 0 at December 31, 2019. For more information, see Note 1 (Summary of Significant Accounting Policies).


(2)	Represents the impact of adoption of CECL on January 1, 2020. For more information, see Note 1 (Summary of Significant Accounting Policies).


(3)	Certain debt securities with an allowance for credit losses calculated by discounting expected cash flows using the securities’ effective interest rate over its remaining life, recognize changes in the allowance for credit losses attributable to the passage of time as interest income.


(4)	The allowance for credit losses for debt securities largely relates to corporate debt securities as of June 30, 2020.

Contractual Maturities

Table 5.8 shows the remaining contractual maturities, amortized cost net of allowance for credit losses, fair value and weighted-average effective yields of available-for-sale debt securities. The remaining contractual principal maturities for MBS do not consider prepayments. Remaining expected maturities will differ from contractual maturities because borrowers may have the right to prepay obligations before the underlying mortgages mature.

Table 5.8: Contractual Maturities – Available-for-Sale Debt Securities

By remaining contractual maturity ($ in millions)

Total

Within one year

After one year

through five years

After five years

through ten years

After ten years

Available-for-sale debt securities (1):

Securities of U.S. Treasury and federal agencies

Amortized cost, net

i 7,923

i 3,671

i 1,280

i 10

i 2,962

Fair value

i 7,983

i 3,672

i 1,283

i 11

i 3,017

Weighted average yield

i 1.84

i 2.66

i 0.27

i 2.34

i 1.49

Securities of U.S. states and political subdivisions

Amortized cost, net

i 33,259

i 2,687

i 3,094

i 3,990

i 23,488

Fair value

i 33,011

i 2,687

i 3,134

i 3,996

i 23,194

Weighted average yield

i 2.37

i 1.17

i 2.00

i 1.51

i 2.70

Mortgage-backed securities:

Federal agencies

Amortized cost, net

i 139,326

i 2

i 119

i 2,418

i 136,787

Fair value

i 144,835

i 2

i 125

i 2,505

i 142,203

Weighted average yield

i 3.18

i 2.09

i 3.18

i 2.38

i 3.20

Residential

Amortized cost, net

i 542

i —

i 542

Fair value

i 541

i —

i 541

Weighted average yield

i 2.26

i —

i 2.26

Commercial

Amortized cost, net

i 3,663

i —

i 33

i 194

i 3,436

Fair value

i 3,559

i —

i 30

i 193

i 3,336

Weighted average yield

i 2.20

i —

i 2.49

i 2.50

i 2.18

Total mortgage-backed securities

Amortized cost, net

i 143,531

i 2

i 152

i 2,612

i 140,765

Fair value

i 148,935

i 2

i 155

i 2,698

i 146,080

Weighted average yield

i 3.16

i 2.09

i 3.03

i 2.39

i 3.17

Corporate debt securities

Amortized cost, net

i 4,972

i 260

i 1,579

i 2,332

i 801

Fair value

i 4,975

i 262

i 1,585

i 2,360

i 768

Weighted average yield

i 4.86

i 6.17

i 4.79

i 4.92

i 4.40

Collateralized loan obligations

Amortized cost, net

i 25,727

i —

i 193

i 11,565

i 13,969

Fair value

i 24,999

i —

i 191

i 11,291

i 13,517

Weighted average yield

i 2.44

i —

i 2.85

i 2.56

i 2.34

Other

Amortized cost, net

i 9,055

i 4,690

i 476

i 1,116

i 2,773

Fair value

i 8,996

i 4,682

i 462

i 1,098

i 2,754

Weighted average yield

i 0.89

( i 0.14

)

i 2.51

i 1.34

i 2.18

Total available-for-sale debt securities

Amortized cost, net

i 224,467

i 11,310

i 6,774

i 21,625

i 184,758

Fair value

i 228,899

i 11,305

i 6,810

i 21,454

i 189,330

Weighted average yield

i 2.86

i 1.23

i 2.43

i 2.54

i 3.01


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

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

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

Table 5.9: Contractual Maturities – Held-to-Maturity Debt Securities

By remaining contractual maturity ($ in millions)

Total

Within one year

After one year

through five years

After five years

through ten years

After ten years

Held-to-maturity debt securities (1):

Securities of U.S. Treasury and federal agencies

Amortized cost, net

i 48,578

i 21,011

i 23,787

i —

i 3,780

Fair value

i 50,503

i 21,349

i 25,164

i —

i 3,990

Weighted average yield

i 2.14

i 2.21

i 2.18

i —

i 1.56

Securities of U.S. states and political subdivisions

Amortized cost, net

i 14,277

i 143

i 640

i 1,864

i 11,630

Fair value

i 14,892

i 145

i 669

i 1,960

i 12,118

Weighted average yield

i 2.71

i 1.61

i 2.43

i 2.88

i 2.72

Federal agency and other mortgage-backed securities

Amortized cost, net

i 106,133

i —

i 15

i 703

i 105,415

Fair value

i 111,473

i —

i 13

i 755

i 110,705

Weighted average yield

i 2.90

i —

i 1.52

i 1.41

i 2.91

Other debt securities

Amortized cost, net

i 14

i —

i 14

i —

Fair value

i 14

i —

i 14

i —

Weighted average yield

i 2.40

i —

i 2.40

i —

Total held-to-maturity debt securities

Amortized cost, net

i 169,002

i 21,154

i 24,442

i 2,581

i 120,825

Fair value

i 176,882

i 21,494

i 25,846

i 2,729

i 126,813

Weighted average yield

i 2.66

i 2.20

i 2.19

i 2.47

i 2.85


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

Note 6: Loans and Related Allowance for Credit Losses

Table 6.1 presents total loans outstanding by portfolio segment and class of financing receivable. Outstanding balances include unearned income, net deferred loan fees or costs, and unamortized discounts and premiums. These amounts were less than i 1% of our total loans outstanding at June 30, 2020, and December 31, 2019.

Outstanding balances exclude accrued interest receivable on loans, except for certain revolving loans, such as credit card loans.

During the first half of 2020, we reversed accrued interest receivable by reversing interest income of $ i 21 million for our commercial portfolio segment and $ i 114 million for our consumer portfolio segment. See Note 9 (Other Assets) for additional information on accrued interest receivable.

Table 6.1: Loans Outstanding



(in millions)	Jun 30, 2020		Dec 31, 2019
Commercial:
Commercial and industrial	$	i 350,116	i 354,125
Real estate mortgage	i 123,967		i 121,824
Real estate construction	i 21,694		i 19,939
Lease financing	i 17,410		i 19,831
Total commercial	i 513,187		i 515,719
Consumer:
Real estate 1-4 family first mortgage	i 277,945		i 293,847
Real estate 1-4 family junior lien mortgage	i 26,839		i 29,509
Credit card	i 36,018		i 41,013
Automobile	i 48,808		i 47,873
Other revolving credit and installment	i 32,358		i 34,304
Total consumer	i 421,968		i 446,546
Total loans	$	i 935,155	i 962,265

Our non-U.S. loans are reported by respective class of financing receivable in the table above. Substantially all of our non-U.S. loan portfolio is commercial loans. Table 6.2 presents total non-U.S. commercial loans outstanding by class of financing receivable.

Table 6.2: Non-U.S. Commercial Loans Outstanding



(in millions)	Jun 30, 2020		Dec 31, 2019
Non-U.S. Commercial Loans
Commercial and industrial	$	i 67,015	i 70,494
Real estate mortgage	i 6,460		i 7,004
Real estate construction	i 1,697		i 1,434
Lease financing	i 1,146		i 1,220
Total non-U.S. commercial loans	$	i 76,318	i 80,152

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

Loan Purchases, Sales, and Transfers

Table 6.3 summarizes the proceeds paid or received for purchases and sales of loans and transfers from loans held for investment to mortgages/loans held for sale. The table excludes loans for which we have elected the fair value option and government insured/guaranteed real estate 1-4 family first mortgage loans because

their loan activity normally does not impact the ACL. In the first half of 2020, we sold $ i 1.2 billion of 1-4 family first mortgage loans for a gain of $ i 724 million, which is included in other noninterest income on our consolidated income statement. These whole loans were designated as MLHFS in 2019.

Table 6.3: Loan Purchases, Sales, and Transfers

2020

2019

(in millions)

Commercial

Consumer

Total

Commercial

Consumer

Total

Quarter ended June 30,

Purchases

i 332

i 2

i 334

i 670

i 5

i 675

Sales

( i 1,957

)

( i 1

)

( i 1,958

)

( i 535

)

( i 153

)

( i 688

)

Transfers (to) from MLHFS/LHFS

( i 8

)

( i 10,379

)

( i 10,387

)

( i 89

)

( i 1,852

)

( i 1,941

)

Six months ended June 30,

Purchases

i 673

i 3

i 676

i 999

i 8

i 1,007

Sales

( i 2,770

)

( i 27

)

( i 2,797

)

( i 956

)

( i 332

)

( i 1,288

)

Transfers (to) from MLHFS/LHFS

i 69

( i 10,377

)

( i 10,308

)

( i 92

)

( i 1,852

)

( i 1,944

)

Commitments to Lend

A commitment to lend is a legally binding agreement to lend funds to a customer, usually at a stated interest rate, if funded, and for specific purposes and time periods. We generally require a fee to extend such commitments. Certain commitments are subject to loan agreements with covenants regarding the financial performance of the customer or borrowing base formulas on an ongoing basis that must be met before we are required to fund the commitment. We may reduce or cancel consumer commitments, including home equity lines and credit card lines, in accordance with the contracts and applicable law.

We may, as a representative for other lenders, advance funds or provide for the issuance of letters of credit under syndicated loan or letter of credit agreements. Any advances are generally repaid in less than a week and would normally require default of both the customer and another lender to expose us to loss. The unfunded amount of these temporary advance arrangements totaled approximately $ i 77.8 billion at June 30, 2020.

We issue commercial letters of credit to assist customers in purchasing goods or services, typically for international trade. At June 30, 2020, and December 31, 2019, we had $ i 922.6 million and $ i 862 million, respectively, of outstanding issued commercial letters of credit. We also originate multipurpose lending commitments under which borrowers have the option to draw on the facility for different purposes in one of several forms, including a standby letter of credit. See Note 13 (Guarantees, Pledged Assets and Collateral, and Other Commitments) for additional information on standby letters of credit.

When we make commitments, we are exposed to credit risk. The maximum credit risk for these commitments will generally be lower than the contractual amount because a significant portion of these commitments are not funded. We manage the potential risk in commitments to lend by limiting the total amount of commitments, both by individual customer and in total, by monitoring the size and maturity structure of these commitments and by applying the same credit standards for these commitments as for all of our credit activities.

For loans and commitments to lend, we generally require collateral or a guarantee. We may require various types of collateral, including commercial and consumer real estate, automobiles, other short-term liquid assets such as accounts receivable or inventory and long-lived assets, such as equipment and other business assets. Collateral requirements for each loan or commitment may vary based on the loan product and our assessment of a customer’s credit risk according to the specific credit underwriting, including credit terms and structure.

The contractual amount of our unfunded credit commitments, including unissued standby and commercial letters of credit, is summarized by portfolio segment and class of financing receivable in Table 6.4. The table excludes the issued standby and commercial letters of credit and temporary advance arrangements described above.

Table 6.4: Unfunded Credit Commitments



(in millions)	Jun 30, 2020		Dec 31, 2019
Commercial:
Commercial and industrial	$	i 348,870	i 346,991
Real estate mortgage	i 8,394		i 8,206
Real estate construction	i 17,316		i 17,729
Total commercial	i 374,580		i 372,926
Consumer:
Real estate 1-4 family first mortgage	i 32,845		i 34,391
Real estate 1-4 family junior lien mortgage	i 35,932		i 36,916
Credit card	i 121,237		i 114,933
Other revolving credit and installment	i 23,357		i 25,898
Total consumer	i 213,371		i 212,138
Total unfunded credit commitments	$	i 587,951	i 585,064

Allowance for Credit Losses for Loans

Table 6.5 presents the allowance for credit losses for loans, which consists of the allowance for loan losses and the allowance for unfunded credit commitments. On January 1, 2020, we adopted CECL. Additional information on our adoption of CECL is included in Note 1 (Summary of Significant Accounting Policies). In second quarter 2020, ACL for loans increased $ i 8.4 billion driven by

current and forecasted economic conditions due to the COVID-19 pandemic. These expected impacts were most significantly affected by anticipated changes to economic variables, as well as higher expected losses in the commercial real estate and consumer real estate mortgage loan portfolios and expected impacts of lower oil prices and deteriorating credit trends on the oil and gas portfolio.

Table 6.5: Allowance for Credit Losses for Loans

Quarter ended June 30,

Six months ended June 30,

(in millions)

2020

2019

2020

2019

Balance, beginning of period

i 12,022

i 10,821

i 10,456

i 10,707

Cumulative effect from change in accounting policies (1)

i —

( i 1,337

)

i —

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

i —

i 8

i —

Balance, beginning of period, adjusted

i 12,022

i 10,821

i 9,127

i 10,707

Provision for credit losses

i 9,565

i 503

i 13,398

i 1,348

Interest income on certain loans (3)

( i 38

)

( i 39

)

( i 76

)

( i 78

)

Loan charge-offs:

Commercial:

Commercial and industrial

( i 556

)

( i 205

)

( i 933

)

( i 381

)

Real estate mortgage

( i 72

)

( i 14

)

( i 75

)

( i 26

)

Real estate construction

i —

( i 1

)

Lease financing

( i 19

)

( i 12

)

( i 32

)

( i 23

)

Total commercial

( i 647

)

( i 231

)

( i 1,040

)

( i 431

)

Consumer:

Real estate 1-4 family first mortgage

( i 20

)

( i 27

)

( i 43

)

( i 70

)

Real estate 1-4 family junior lien mortgage

( i 18

)

( i 29

)

( i 48

)

( i 63

)

Credit card

( i 415

)

( i 437

)

( i 886

)

( i 874

)

Automobile

( i 158

)

( i 142

)

( i 314

)

( i 329

)

Other revolving credit and installment

( i 113

)

( i 167

)

( i 278

)

( i 329

)

Total consumer

( i 724

)

( i 802

)

( i 1,569

)

( i 1,665

)

Total loan charge-offs

( i 1,371

)

( i 1,033

)

( i 2,609

)

( i 2,096

)

Loan recoveries:

Commercial:

Commercial and industrial

i 35

i 46

i 79

i 89

Real estate mortgage

i 5

i 10

i 16

Real estate construction

i 1

i 2

i 17

i 5

Lease financing

i 4

i 8

i 11

Total commercial

i 45

i 66

i 114

i 121

Consumer:

Real estate 1-4 family first mortgage

i 18

i 57

i 44

i 112

Real estate 1-4 family junior lien mortgage

i 30

i 48

i 65

i 91

Credit card

i 88

i 182

i 173

Automobile

i 52

i 90

i 126

i 186

Other revolving credit and installment

i 25

i 31

i 56

i 65

Total consumer

i 213

i 314

i 473

i 627

Total loan recoveries

i 258

i 380

i 587

i 748

Net loan charge-offs

( i 1,113

)

( i 653

)

( i 2,022

)

( i 1,348

)

Other

i —

( i 29

)

i 9

( i 26

)

Balance, end of period

i 20,436

i 10,603

i 20,436

i 10,603

Components:

Allowance for loan losses

i 18,926

i 9,692

i 18,926

i 9,692

Allowance for unfunded credit commitments

i 1,510

i 911

i 1,510

i 911

Allowance for credit losses for loans

i 20,436

i 10,603

i 20,436

i 10,603

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

i 0.46

i 0.28

i 0.42

i 0.29

Allowance for loan losses as a percentage of total loans

i 2.02

i 1.02

i 2.02

i 1.02

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

i 2.19

i 1.12

i 2.19

i 1.12


(1)	Represents the overall decrease in our allowance for credit losses for loans as a result of our adoption of CECL on January 1, 2020.


(2)	Represents the allowance estimated for PCI loans that automatically became PCD loans with the adoption of CECL. For more information, see Note 1 (Summary of Significant Accounting Policies).


(3)	Loans with an allowance measured by discounting expected cash flows using the loan’s effective interest rate over the remaining life of the loan recognize changes in allowance attributable to the passage of time as interest income.

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

Table 6.6 summarizes the activity in the allowance for credit losses for loans by our commercial and consumer portfolio segments.

Table 6.6: Allowance for Credit Losses for Loans Activity by Portfolio Segment

2020

2019

(in millions)

Commercial

Consumer

Total

Commercial

Consumer

Total

Quarter ended June 30,

Balance, beginning of period

i 5,279

i 6,743

i 12,022

i 6,428

i 4,393

i 10,821

Provision for credit losses

i 6,999

i 2,566

i 9,565

i 46

i 457

i 503

Interest income on certain loans (1)

( i 12

)

( i 26

)

( i 38

)

( i 14

)

( i 25

)

( i 39

)

Loan charge-offs

( i 647

)

( i 724

)

( i 1,371

)

( i 231

)

( i 802

)

( i 1,033

)

Loan recoveries

i 45

i 213

i 258

i 66

i 314

i 380

Net loan charge-offs

( i 602

)

( i 511

)

( i 1,113

)

( i 165

)

( i 488

)

( i 653

)

Other

i 5

( i 5

)

i —

i 3

( i 32

)

( i 29

)

Balance, end of period

i 11,669

i 8,767

i 20,436

i 6,298

i 4,305

i 10,603

Six months ended June 30,

Balance, beginning of period

i 6,245

i 4,211

i 10,456

i 6,417

i 4,290

i 10,707

Cumulative effect from change in accounting policies (1)

( i 2,861

)

i 1,524

( i 1,337

)

i —

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

i —

i 8

i —

Balance, beginning of period, adjusted

i 3,384

i 5,743

i 9,127

i 6,417

i 4,290

i 10,707

Provision for credit losses

i 9,239

i 4,159

i 13,398

i 210

i 1,138

i 1,348

Interest income on certain loans (3)

( i 26

)

( i 50

)

( i 76

)

( i 25

)

( i 53

)

( i 78

)

Loan charge-offs

( i 1,040

)

( i 1,569

)

( i 2,609

)

( i 431

)

( i 1,665

)

( i 2,096

)

Loan recoveries

i 114

i 473

i 587

i 121

i 627

i 748

Net loan charge-offs

( i 926

)

( i 1,096

)

( i 2,022

)

( i 310

)

( i 1,038

)

( i 1,348

)

Other

( i 2

)

i 11

i 9

i 6

( i 32

)

( i 26

)

Balance, end of period

i 11,669

i 8,767

i 20,436

i 6,298

i 4,305

i 10,603


(1)	Represents the overall decrease in our allowance for credit losses for loans as a result of our adoption of CECL on January 1, 2020.


(2)	Represents the allowance estimated for PCI loans that automatically became PCD loans with the adoption of CECL. For more information, see Note 1 (Summary of Significant Accounting Policies).


(3)	Loans with an allowance measured by discounting expected cash flows using the loan’s effective interest rate over the remaining life of the loan recognize changes in allowance attributable to the passage of time as interest income.

Table 6.7 disaggregates our allowance for credit losses for loans and recorded investment in loans by impairment methodology. This information is no longer relevant after

December 31, 2019, given our adoption of CECL on January 1, 2020, which has a single impairment methodology.

Table 6.7: Allowance for Credit Losses for Loans by Impairment Methodology

Allowance for credit losses for loans

Recorded investment in loans

(in millions)

Commercial

Consumer

Total

Commercial

Consumer

Total

Collectively evaluated (1)

i 5,778

i 3,364

i 9,142

i 512,586

i 436,081

i 948,667

Individually evaluated (2)

i 467

i 847

i 1,314

i 3,133

i 9,897

i 13,030

PCI (3)

i —

i 568

Total

i 6,245

i 4,211

i 10,456

i 515,719

i 446,546

i 962,265


(1)	Represents non-impaired loans evaluated collectively for impairment.


(2)	Represents impaired loans evaluated individually for impairment.


(3)	Represents the allowance for loan losses and related loan carrying value for PCI loans.

Credit Quality

We monitor credit quality by evaluating various attributes and utilize such information in our evaluation of the appropriateness of the allowance for credit losses. The following sections provide the credit quality indicators we most closely monitor. The credit quality indicators are generally based on information as of our financial statement date, with the exception of updated Fair Isaac Corporation (FICO) scores and updated loan-to-value (LTV)/combined LTV (CLTV). We obtain FICO scores at loan origination and the scores are generally updated at least quarterly, except in limited circumstances, including compliance with the Fair Credit Reporting Act (FCRA). Generally, the LTV and CLTV indicators are updated in the second month of each quarter, with updates no older than March 31, 2020. Amounts disclosed in the credit quality tables that follow are not comparative between reported periods due to our adoption of CECL on January 1, 2020. For more information, see Note 1 (Summary of Significant Accounting Policies).

COMMERCIAL CREDIT QUALITY INDICATORS We manage a consistent process for assessing commercial loan credit quality. Generally, commercial loans are subject to individual risk assessment using our internal borrower and collateral quality ratings, which is our primary credit quality indicator. Our ratings are aligned to federal banking regulators’ definitions of pass and criticized categories with the criticized category including special mention, substandard, doubtful, and loss categories.

Table 6.8 provides a breakdown of outstanding commercial loans by risk category. In connection with our adoption of CECL, credit quality information is provided with the year of origination for term loans. Revolving loans may convert to term loans as a result of a contractual provision in the original loan agreement or if modified in a TDR. At June 30, 2020, we had $ i 475.0 billion and $ i 38.2 billion of pass and criticized loans respectively.

Table 6.8: Commercial Loans Categories by Risk Categories and Vintage (1)

Term loans by origination year

Revolving loans

Revolving loans converted to term loans

Total

(in millions)

2020

2019

2018

2017

2016

Prior

Commercial and industrial

Pass

i 46,042

i 46,198

i 20,195

i 10,082

i 6,048

i 6,347

i 189,019

i 215

i 324,146

Criticized

i 1,461

i 1,886

i 2,170

i 1,367

i 592

i 510

i 17,863

i 121

i 25,970

Total commercial and industrial

i 47,503

i 48,084

i 22,365

i 11,449

i 6,640

i 6,857

i 206,882

i 336

i 350,116

Real estate mortgage

Pass

i 12,781

i 29,006

i 21,842

i 13,270

i 13,973

i 18,728

i 5,134

i 104

i 114,838

Criticized

i 789

i 1,609

i 1,440

i 1,306

i 1,217

i 2,358

i 410

i —

i 9,129

Total real estate mortgage

i 13,570

i 30,615

i 23,282

i 14,576

i 15,190

i 21,086

i 5,544

i 104

i 123,967

Real estate construction

Pass

i 2,970

i 6,823

i 5,319

i 2,432

i 879

i 396

i 1,592

i 8

i 20,419

Criticized

i 26

i 329

i 500

i 144

i 265

i 10

i 1

i —

i 1,275

Total real estate construction

i 2,996

i 7,152

i 5,819

i 2,576

i 1,144

i 406

i 1,593

i 8

i 21,694

Lease financing

Pass

i 2,068

i 4,626

i 2,786

i 2,063

i 1,595

i 2,480

i —

i 15,618

Criticized

i 178

i 562

i 485

i 264

i 174

i 129

i —

i 1,792

Total lease financing

i 2,246

i 5,188

i 3,271

i 2,327

i 1,769

i 2,609

i —

i 17,410

Total commercial loans

i 66,315

i 91,039

i 54,737

i 30,928

i 24,743

i 30,958

i 214,019

i 448

i 513,187

Commercial
and
industrial

Real
estate
mortgage

Real
estate
construction

Lease
financing

Total

By risk category:

Pass

i 338,740

i 118,054

i 19,752

i 18,655

i 495,201

Criticized

i 15,385

i 3,770

i 187

i 1,176

i 20,518

Total commercial loans

i 354,125

i 121,824

i 19,939

i 19,831

i 515,719


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

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

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

Table 6.9: Commercial Loan Categories by Delinquency Status

(in millions)

Commercial

and

industrial

Real

estate

mortgage

Real

estate

construction

Lease

financing

Total

By delinquency status:

Current-29 days past due (DPD) and still accruing

i 346,680

i 122,136

i 21,580

i 17,045

i 507,441

30-89 DPD and still accruing

i 439

i 570

i 80

i 227

i 1,316

90+ DPD and still accruing

i 101

i 44

i —

i 145

Nonaccrual loans

i 2,896

i 1,217

i 34

i 138

i 4,285

Total commercial loans

i 350,116

i 123,967

i 21,694

i 17,410

i 513,187

By delinquency status:

Current-29 DPD and still accruing

i 352,110

i 120,967

i 19,845

i 19,484

i 512,406

30-89 DPD and still accruing

i 423

i 253

i 53

i 252

i 981

90+ DPD and still accruing

i 47

i 31

i —

i 78

Nonaccrual loans

i 1,545

i 573

i 41

i 95

i 2,254

Total commercial loans

i 354,125

i 121,824

i 19,939

i 19,831

i 515,719

CONSUMER CREDIT QUALITY INDICATORS We have various classes of consumer loans that present unique credit risks. Loan delinquency, FICO credit scores and LTV for 1-4 family mortgage loans are the primary credit quality indicators that we monitor and utilize in our evaluation of the appropriateness of the allowance for credit losses for the consumer portfolio segment.

Many of our loss estimation techniques used for the allowance for credit losses rely on delinquency-based models; therefore, delinquency is an important indicator of credit quality and the establishment of our allowance for credit losses.

Table 6.10 provides the outstanding balances of our consumer portfolio by delinquency status. Payment deferral activities instituted in response to the COVID-19 pandemic may delay recognition of delinquencies for customers who otherwise would have moved into past due status.

In connection with our adoption of CECL, credit quality information is provided with the year of origination for term loans. Revolving loans may convert to term loans as a result of a contractual provision in the original loan agreement or if modified in a TDR. The revolving loans converted to term loans in the credit card loan category represent credit card loans with modified terms that require payment over a specific term.

Table 6.10: Consumer Loan Categories by Delinquency Status and Vintage (1)

Term loans by origination year

Revolving loans

Revolving loans converted to term loans

(in millions)

2020

2019

2018

2017

2016

Prior

Total

Real estate 1-4 family first mortgage

By delinquency status:

Current-29 DPD

i 30,155

i 54,199

i 21,265

i 32,823

i 38,466

i 76,491

i 7,644

i 1,994

i 263,037

30-59 DPD

i 25

i 37

i 30

i 26

i 60

i 771

i 23

i 39

i 1,011

60-89 DPD

i 1

i 2

i 6

i 8

i 14

i 370

i 14

i 25

i 440

90-119 DPD

i —

i 1

i 4

i 6

i 166

i 8

i 15

i 200

120-179 DPD

i —

i 2

i 3

i 127

i 9

i 20

i 161

180+ DPD

i —

i 3

i 6

i 9

i 482

i 9

i 125

i 634

Government insured/guaranteed loans (2)

i 5

i 73

i 206

i 334

i 669

i 11,175

i —

i 12,462

Total real estate 1-4 family first mortgage

i 30,186

i 54,311

i 21,511

i 33,203

i 39,227

i 89,582

i 7,707

i 2,218

i 277,945

Real estate 1-4 family junior mortgage

By delinquency status:

Current-29 DPD

i 12

i 39

i 47

i 42

i 36

i 1,382

i 18,052

i 6,730

i 26,340

30-59 DPD

i 1

i —

i 26

i 47

i 79

i 154

60-89 DPD

i —

i 2

i 4

i 2

i 13

i 23

i 49

i 95

90-119 DPD

i —

i 8

i 12

i 30

i 50

120-179 DPD

i —

i 4

i 10

i 34

i 48

180+ DPD

i 1

i —

i 1

i 14

i 13

i 122

i 152

Total real estate 1-4 family junior mortgage

i 14

i 42

i 49

i 47

i 39

i 1,447

i 18,157

i 7,044

i 26,839

Credit cards

By delinquency status:

Current-29 DPD

i —

i 35,008

i 253

i 35,261

30-59 DPD

i —

i 180

i 11

i 191

60-89 DPD

i —

i 137

i 10

i 147

90-119 DPD

i —

i 127

i 10

i 137

120-179 DPD

i —

i 267

i 8

i 275

180+ DPD

i —

i 6

i 1

i 7

Total credit cards

i —

i 35,725

i 293

i 36,018

Automobile

By delinquency status:

Current-29 DPD

i 11,407

i 17,980

i 8,151

i 4,802

i 4,051

i 1,538

i —

i 47,929

30-59 DPD

i 30

i 171

i 122

i 92

i 136

i 76

i —

i 627

60-89 DPD

i 8

i 46

i 37

i 28

i 43

i 25

i —

i 187

90-119 DPD

i 3

i 19

i 12

i 10

i 13

i 8

i —

i 65

120-179 DPD

i —

180+ DPD

i —

Total automobile

i 11,448

i 18,216

i 8,322

i 4,932

i 4,243

i 1,647

i —

i 48,808

Other revolving credit and installment

By delinquency status:

Current-29 DPD

i 1,386

i 3,262

i 1,980

i 1,343

i 1,195

i 5,383

i 17,293

i 179

i 32,021

30-59 DPD

i 2

i 8

i 11

i 13

i 11

i 60

i 16

i 4

i 125

60-89 DPD

i 1

i 6

i 7

i 8

i 9

i 60

i 9

i 6

i 106

90-119 DPD

i —

i 4

i 5

i 4

i 5

i 31

i 8

i 2

i 59

120-179 DPD

i —

i 1

i 2

i 3

i 12

i 13

i 3

i 35

180+ DPD

i —

i 1

i 2

i 9

i 12

Total other revolving credit and installment

i 1,389

i 3,281

i 2,004

i 1,370

i 1,223

i 5,547

i 17,341

i 203

i 32,358

Total consumer loans

i 43,037

i 75,850

i 31,886

i 39,552

i 44,732

i 98,223

i 78,930

i 9,758

i 421,968

(continued on following page)

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

(continued from previous page)

Real estate

1-4 family

first

mortgage

Real estate

1-4 family

junior lien

mortgage

Credit

card

Automobile

Other

revolving

credit and

installment

Total

By delinquency status:

Current-29 DPD

i 279,722

i 28,870

i 39,935

i 46,650

i 33,981

i 429,158

30-59 DPD

i 1,136

i 216

i 311

i 882

i 140

i 2,685

60-89 DPD

i 404

i 115

i 221

i 263

i 81

i 1,084

90-119 DPD

i 197

i 69

i 202

i 77

i 74

i 619

120-179 DPD

i 160

i 71

i 343

i 1

i 18

i 593

180+ DPD

i 503

i 155

i 1

i —

i 10

i 669

Government insured/guaranteed loans (2)

i 11,170

i —

i 11,170

Total consumer loans (excluding PCI)

i 293,292

i 29,496

i 41,013

i 47,873

i 34,304

i 445,978

Total consumer PCI loans (carrying value) (3)

i 555

i 13

i —

i 568

Total consumer loans

i 293,847

i 29,509

i 41,013

i 47,873

i 34,304

i 446,546


(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).


(2)	Represents loans whose repayments are predominantly insured by the Federal Housing Administration (FHA) or guaranteed by the Department of Veterans Affairs (VA). Loans insured/guaranteed by the FHA/VA and 90+ DPD totaled $ i 8.9 billion at June 30, 2020, compared with $ i 6.4 billion at December 31, 2019.


(3)	i 26% of the adjusted unpaid principal balance for consumer PCI loans was 30+ DPD at December 31, 2019.

Of the $ i 1.8 billion of consumer loans not government insured/guaranteed that are 90 days or more past due at June 30, 2020, $ i 672 million was accruing, compared with $ i 1.9 billion past due and $ i 855 million accruing at December 31, 2019.

Table 6.11 provides a breakdown of our consumer portfolio by FICO. Substantially all of the scored consumer portfolio has an updated FICO of 680 and above, reflecting a strong current borrower credit profile. FICO is not available for certain loan types, or may not be required if we deem it unnecessary due to strong collateral and other borrower attributes. Loans not requiring a FICO score totaled $ i 9.5 billion and $ i 9.1 billion at June 30, 2020, and December 31, 2019, respectively. Substantially all loans not requiring a FICO score are securities-based loans originated through retail brokerage.

Table 6.11: Consumer Loan Categories by FICO and Vintage (1)

Term loans by origination year

Revolving loans

Revolving loans converted to term loans

(in millions)

2020

2019

2018

2017

2016

Prior

Total

By FICO:

Real estate 1-4 family first mortgage

800+

i 15,684

i 35,804

i 14,694

i 24,108

i 28,853

i 46,203

i 3,855

i 531

i 169,732

760-799

i 10,373

i 12,379

i 3,925

i 5,095

i 5,444

i 11,147

i 1,424

i 280

i 50,067

720-759

i 3,008

i 4,014

i 1,587

i 2,231

i 2,550

i 7,491

i 944

i 272

i 22,097

680-719

i 827

i 1,312

i 667

i 884

i 1,025

i 4,888

i 602

i 249

i 10,454

640-679

i 163

i 350

i 236

i 298

i 325

i 2,655

i 270

i 176

i 4,473

600-639

i 40

i 77

i 47

i 64

i 99

i 1,555

i 144

i 103

i 2,129

< 600

i 9

i 33

i 50

i 62

i 88

i 2,315

i 200

i 215

i 2,972

No FICO available

i 77

i 269

i 99

i 127

i 174

i 2,153

i 268

i 392

i 3,559

Government insured/guaranteed loans (2)

i 5

i 73

i 206

i 334

i 669

i 11,175

i —

i 12,462

Total real estate 1-4 family first mortgage

i 30,186

i 54,311

i 21,511

i 33,203

i 39,227

i 89,582

i 7,707

i 2,218

i 277,945

Real estate 1-4 family junior lien mortgage

800+

i —

i 350

i 9,233

i 1,984

i 11,567

760-799

i —

i 206

i 3,308

i 1,117

i 4,631

720-759

i —

i 251

i 2,407

i 1,182

i 3,840

680-719

i —

i 226

i 1,485

i 1,016

i 2,727

640-679

i —

i 125

i 620

i 568

i 1,313

600-639

i —

i 76

i 289

i 342

i 707

< 600

i —

i 111

i 336

i 538

i 985

No FICO available

i 14

i 42

i 49

i 47

i 39

i 102

i 479

i 297

i 1,069

Total real estate 1-4 family junior lien mortgage

i 14

i 42

i 49

i 47

i 39

i 1,447

i 18,157

i 7,044

i 26,839

Credit card

800+

i —

i 3,778

i 1

i 3,779

760-799

i —

i 5,103

i 7

i 5,110

720-759

i —

i 7,650

i 25

i 7,675

680-719

i —

i 8,786

i 54

i 8,840

640-679

i —

i 5,588

i 60

i 5,648

600-639

i —

i 2,281

i 48

i 2,329

< 600

i —

i 2,533

i 97

i 2,630

No FICO available

i —

i 6

i 1

i 7

Total credit card

i —

i 35,725

i 293

i 36,018

Automobile

800+

i 1,639

i 3,112

i 1,547

i 1,002

i 716

i 256

i —

i 8,272

760-799

i 1,697

i 3,185

i 1,414

i 787

i 550

i 191

i —

i 7,824

720-759

i 1,890

i 3,086

i 1,403

i 801

i 613

i 224

i —

i 8,017

680-719

i 2,150

i 3,133

i 1,388

i 762

i 622

i 230

i —

i 8,285

640-679

i 2,032

i 2,502

i 1,005

i 549

i 498

i 194

i —

i 6,780

600-639

i 1,269

i 1,521

i 612

i 361

i 389

i 161

i —

i 4,313

< 600

i 770

i 1,647

i 946

i 655

i 830

i 373

i —

i 5,221

No FICO available

i 1

i 30

i 7

i 15

i 25

i 18

i —

i 96

Total automobile

i 11,448

i 18,216

i 8,322

i 4,932

i 4,243

i 1,647

i —

i 48,808

Other revolving credit and installment

800+

i 464

i 1,027

i 612

i 452

i 456

i 2,129

i 2,723

i 30

i 7,893

760-799

i 365

i 752

i 400

i 260

i 242

i 1,094

i 1,212

i 18

i 4,343

720-759

i 257

i 592

i 346

i 217

i 199

i 888

i 1,001

i 27

i 3,527

680-719

i 144

i 407

i 265

i 166

i 149

i 650

i 877

i 30

i 2,688

640-679

i 52

i 186

i 136

i 89

i 82

i 362

i 445

i 22

i 1,374

600-639

i 14

i 56

i 49

i 35

i 36

i 172

i 178

i 15

i 555

< 600

i 7

i 48

i 56

i 42

i 182

i 190

i 25

i 592

No FICO available

i 86

i 213

i 140

i 109

i 17

i 70

i 1,205

i 36

i 1,876

FICO not required

i —

i 9,510

i —

i 9,510

Total other revolving credit and installment

i 1,389

i 3,281

i 2,004

i 1,370

i 1,223

i 5,547

i 17,341

i 203

i 32,358

Total consumer loans

i 43,037

i 75,850

i 31,886

i 39,552

i 44,732

i 98,223

i 78,930

i 9,758

i 421,968

(continued on next page)

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

(continued from prior page)

Real estate
1-4 family
first
mortgage

Real estate
1-4 family
junior lien
mortgage

Credit
card

Automobile

Other
revolving
credit and
installment

Total

By FICO:

800+

i 165,460

i 11,851

i 4,037

i 7,900

i 7,585

i 196,833

760-799

i 61,559

i 5,483

i 5,648

i 7,624

i 4,915

i 85,229

720-759

i 27,879

i 4,407

i 8,376

i 7,839

i 4,097

i 52,598

680-719

i 12,844

i 3,192

i 9,732

i 7,871

i 3,212

i 36,851

640-679

i 5,068

i 1,499

i 6,626

i 6,324

i 1,730

i 21,247

600-639

i 2,392

i 782

i 2,853

i 4,230

i 670

i 10,927

< 600

i 3,264

i 1,164

i 3,373

i 6,041

i 704

i 14,546

No FICO available

i 3,656

i 1,118

i 368

i 44

i 2,316

i 7,502

FICO not required

i —

i 9,075

Government insured/guaranteed loans (2)

i 11,170

i —

i 11,170

Total consumer loans (excluding PCI)

i 293,292

i 29,496

i 41,013

i 47,873

i 34,304

i 445,978

Total consumer PCI loans (carrying value) (3)

i 555

i 13

i —

i 568

Total consumer loans

i 293,847

i 29,509

i 41,013

i 47,873

i 34,304

i 446,546


(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).


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


(3)	i 41% of the adjusted unpaid principal balance for consumer PCI loans had FICO scores less than 680 and i 19% where no FICO was available to us at December 31, 2019.

LTV refers to the ratio comparing the loan’s unpaid principal balance to the property’s collateral value. CLTV refers to the combination of first mortgage and junior lien mortgage (including unused line amounts for credit line products) ratios. LTVs and CLTVs are updated quarterly using a cascade approach which first uses values provided by automated valuation models (AVMs) for the property. If an AVM is not available, then the value is estimated using the original appraised value adjusted by the change in Home Price Index (HPI) for the property location. If an HPI is not available, the original appraised value is used. The HPI value is normally the only method considered for high value properties, generally with an original value of $ i 1 million or more, as the AVM values have proven less accurate for these properties.

Table 6.12 shows the most updated LTV and CLTV distribution of the real estate 1-4 family first and junior lien mortgage loan portfolios. We consider the trends in residential real estate markets as we monitor credit risk and establish our allowance for credit losses. In the event of a default, any loss should be limited to the portion of the loan amount in excess of the net realizable value of the underlying real estate collateral value. Certain loans do not have an LTV or CLTV due to industry data availability and portfolios acquired from or serviced by other institutions.

Table 6.12: Consumer Loan Categories by LTV/CLTV and Vintage (1)

Term loans by origination year

Revolving loans

Revolving loans converted to term loans

(in millions)

2020

2019

2018

2017

2016

Prior

Total

Real estate 1-4 family first mortgage

By LTV/CLTV:

0-60%

i 9,292

i 16,664

i 7,380

i 14,769

i 22,978

i 62,108

i 5,289

i 1,632

i 140,112

60.01-80%

i 19,968

i 31,417

i 11,884

i 16,671

i 14,609

i 14,001

i 1,587

i 382

i 110,519

80.01-100%

i 851

i 5,908

i 1,861

i 1,245

i 787

i 1,605

i 544

i 141

i 12,942

100.01-120% (2)

i 2

i 98

i 83

i 75

i 57

i 281

i 165

i 36

i 797

> 120% (2)

i —

i 55

i 25

i 28

i 31

i 124

i 66

i 13

i 342

No LTV/CLTV available

i 68

i 96

i 72

i 81

i 96

i 288

i 56

i 14

i 771

Government insured/guaranteed loans (3)

i 5

i 73

i 206

i 334

i 669

i 11,175

i —

i 12,462

Total real estate 1-4 family first mortgage

i 30,186

i 54,311

i 21,511

i 33,203

i 39,227

i 89,582

i 7,707

i 2,218

i 277,945

Real estate 1-4 family junior lien mortgage

By LTV/CLTV:

0-60%

i —

i 603

i 9,127

i 3,921

i 13,651

60.01-80%

i —

i 409

i 6,279

i 1,887

i 8,575

80.01-100%

i —

i 260

i 1,996

i 878

i 3,134

100.01-120% (2)

i —

i 90

i 525

i 240

i 855

> 120% (2)

i —

i 29

i 205

i 74

i 308

No LTV/CLTV available

i 14

i 42

i 49

i 47

i 39

i 56

i 25

i 44

i 316

Total real estate 1-4 family junior lien mortgage

i 14

i 42

i 49

i 47

i 39

i 1,447

i 18,157

i 7,044

i 26,839

Total

i 30,200

i 54,353

i 21,560

i 33,250

i 39,266

i 91,029

i 25,864

i 9,262

i 304,784

Real estate

1-4 family

first

mortgage

by LTV

Real estate

1-4 family

junior lien

mortgage

by CLTV

Total

By LTV/CLTV:

0-60%

i 151,478

i 14,603

i 166,081

60.01-80%

i 114,795

i 9,663

i 124,458

80.01-100%

i 13,867

i 3,574

i 17,441

100.01-120% (2)

i 860

i 978

i 1,838

> 120% (2)

i 338

i 336

i 674

No LTV/CLTV available

i 784

i 342

i 1,126

Government insured/guaranteed loans (3)

i 11,170

i —

i 11,170

Total consumer loans (excluding PCI)

i 293,292

i 29,496

i 322,788

Total consumer PCI loans (carrying value) (4)

i 555

i 13

i 568

Total consumer loans

i 293,847

i 29,509

i 323,356


(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).


(2)	Reflects total loan balances with LTV/CLTV amounts in excess of 100%. In the event of default, the loss content would generally be limited to only the amount in excess of 100% LTV/CLTV.


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


(4)	i 9% of the adjusted unpaid principal balance for consumer PCI loans have LTV/CLTV amounts greater than 80% at December 31, 2019.

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

NONACCRUAL LOANS i Table 6.13 provides loans on nonaccrual status. In connection with our adoption of CECL, nonaccrual loans may have an allowance for credit losses or a negative allowance for credit losses from expected recoveries of amounts previously

written off. 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.

Table 6.13: Nonaccrual Loans (1)



	Amortized cost			Six months ended June 30, 2020
(in millions)	Nonaccrual loans		Nonaccrual loans without related allowance for credit losses (2)	Recognized interest income
June 30, 2020
Commercial:
Commercial and industrial	$	i 2,896	i 661	i 30
Real estate mortgage	i 1,217		i 71	i 17
Real estate construction	i 34		i 2	i 5
Lease financing	i 138		i 8	i —
Total commercial	i 4,285		i 742	i 52
Consumer:
Real estate 1-4 family first mortgage	i 2,393		i 1,330	i 81
Real estate 1-4 family junior lien mortgage	i 753		i 424	i 28
Automobile	i 129		i —	i 7
Other revolving credit and installment	i 45		i —	i 1
Total consumer	i 3,320		i 1,754	i 117
Total nonaccrual loans	$	i 7,605	i 2,496	i 169
December 31, 2019
Commercial:
Commercial and industrial	$	i 1,545
Real estate mortgage	i 573
Real estate construction	i 41
Lease financing	i 95
Total commercial	i 2,254
Consumer:
Real estate 1-4 family first mortgage	i 2,150
Real estate 1-4 family junior lien mortgage	i 796
Automobile	i 106
Other revolving credit and installment	i 40
Total consumer	i 3,092
Total nonaccrual loans (excluding PCI)	$	i 5,346


(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).


(2)	Nonaccrual loans may not have an allowance for credit losses if the loss expectations are zero given solid collateral value.

LOANS IN PROCESS OF FORECLOSURE Our recorded investment in consumer mortgage loans collateralized by residential real estate property that are in process of foreclosure was $ i 2.5 billion and $ i 3.5 billion at June 30, 2020, and December 31, 2019, respectively, which included $ i 2.0 billion and $ i 2.8 billion, respectively, of loans that are government insured/guaranteed. Under the Consumer Financial Protection Bureau guidelines, we do not commence the foreclosure process on real estate 1-4 family mortgage loans until after the loan is 120 days delinquent. Foreclosure procedures and timelines vary depending on whether the property address resides in a judicial or non-judicial state. Judicial states require the foreclosure to be processed through the state’s courts while non-judicial states are processed without court intervention. Foreclosure timelines vary according to state law. In connection with our actions to support customers during the COVID-19 pandemic, we have suspended certain mortgage foreclosure activities.

LOANS 90 DAYS OR MORE PAST DUE AND STILL ACCRUING Certain loans 90 days or more past due are still accruing, because they are (1) well-secured and in the process of collection or (2) real estate 1-4 family mortgage loans or consumer loans exempt under regulatory rules from being classified as nonaccrual until later delinquency, usually 120 days past due.

Table 6.14 shows loans 90 days or more past due and still accruing by class for loans not government insured/guaranteed.

Table 6.14: Loans 90 Days or More Past Due and Still Accruing



(in millions)	Jun 30, 2020		Dec 31, 2019
Total:	$	i 9,739	i 7,285
Less: FHA insured/VA guaranteed (1)	i 8,922		i 6,352
Total, not government insured/guaranteed	$	i 817	i 933
By segment and class, not government insured/guaranteed:
Commercial:
Commercial and industrial	$	i 101	i 47
Real estate mortgage	i 44		i 31
Total commercial	i 145		i 78
Consumer:
Real estate 1-4 family first mortgage	i 93		i 112
Real estate 1-4 family junior lien mortgage	i 19		i 32
Credit card	i 418		i 546
Automobile	i 54		i 78
Other revolving credit and installment	i 88		i 87
Total consumer	i 672		i 855
Total, not government insured/guaranteed	$	i 817	i 933


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

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

IMPAIRED LOANS In connection with our adoption of CECL, we no longer provide information on impaired loans. We have retained impaired loans information for the period ended December 31, 2019. i Table 6.15 summarizes key information for impaired loans. Our impaired loans at December 31, 2019, predominantly included loans on nonaccrual status in the commercial portfolio segment and loans modified in a TDR, whether on accrual or nonaccrual status. Impaired loans generally had estimated losses which are included in the allowance for credit losses. We did have impaired loans with no allowance for credit losses when the loss

content has been previously recognized through charge-offs, such as collateral dependent loans, or when loans are currently performing in accordance with their terms and no loss has been estimated. Impaired loans excluded PCI loans and loans that had been fully charged off or otherwise had zero recorded investment.

Table 6.15 included trial modifications that totaled $ i 115 million at December 31, 2019.

For additional information on our legacy impaired loans and allowance for credit losses, see Note 1 (Summary of Significant Accounting Policies) in our 2019 Form 10-K.

Table 6.15: Impaired Loans Summary

Recorded investment

(in millions)

Unpaid principal balance

Impaired loans

Impaired loans with related allowance for credit losses

Related allowance for credit losses

Commercial:

Commercial and industrial

i 2,792

i 2,003

i 1,903

i 311

Real estate mortgage

i 1,137

i 974

i 803

i 110

Real estate construction

i 81

i 51

i 41

i 11

Lease financing

i 131

i 105

i 35

Total commercial

i 4,141

i 3,133

i 2,852

i 467

Consumer:

Real estate 1-4 family first mortgage

i 8,107

i 7,674

i 4,433

i 437

Real estate 1-4 family junior lien mortgage

i 1,586

i 1,451

i 925

i 144

Credit card

i 520

i 209

Automobile

i 138

i 81

i 42

i 8

Other revolving credit and installment

i 178

i 171

i 155

i 49

Total consumer (1)

i 10,529

i 9,897

i 6,075

i 847

Total impaired loans (excluding PCI)

i 14,670

i 13,030

i 8,927

i 1,314

(1)

Included the recorded investment of $ i 1.2 billion at December 31, 2019 of government insured/guaranteed loans that are predominantly insured by the FHA or guaranteed by the VA and generally do not have an ACL. Impaired loans may also have limited, if any, ACL when the recorded investment of the loan approximates estimated net realizable value as a result of charge-offs prior to a TDR modification.

Table 6.16 provides the average recorded investment in impaired loans and the amount of interest income recognized on impaired loans by portfolio segment and class.

Table 6.16: Average Recorded Investment in Impaired Loans



	Year ended December 31, 2019
(in millions)	Average recorded investment		Recognized interest income
Commercial:
Commercial and industrial	$	i 2,150	i 129
Real estate mortgage	i 1,067		i 59
Real estate construction	i 52		i 6
Lease financing	i 93		i 1
Total commercial	i 3,362		i 195
Consumer:
Real estate 1-4 family first mortgage	i 9,031		i 506
Real estate 1-4 family junior lien mortgage	i 1,586		i 99
Credit card	i 488		i 64
Automobile	i 84		i 12
Other revolving credit and installment	i 162		i 13
Total consumer	i 11,351		i 694
Total impaired loans (excluding PCI)	$	i 14,713	i 889



Interest income:
Cash basis of accounting	$	i 241
Other (1)	i 648
Total interest income	$	i 889


(1)	Included interest recognized on accruing TDRs, interest recognized related to certain impaired loans which have an allowance calculated using discounting, and amortization of purchase accounting adjustments related to certain impaired loans.

TROUBLED DEBT RESTRUCTURINGS (TDRs) When, for economic or legal reasons related to a borrower’s financial difficulties, we grant a concession for other than an insignificant period of time to a borrower that we would not otherwise consider, the related loan is classified as a TDR, the balance of which totaled $ i 12.0 billion and $ i 11.8 billion at June 30, 2020, and December 31, 2019, respectively. We do not consider loan resolutions such as foreclosure or short sale to be a TDR. In addition, COVID-related modifications are generally not classified as TDRs due to the relief under the CARES Act and the Interagency Statement. For more information on the TDR relief, see Note 1 (Summary of Significant Accounting Policies).

We may require some consumer borrowers experiencing financial difficulty to make trial payments generally for a period of three to four months, according to the terms of a planned permanent modification, to determine if they can perform according to those terms. These arrangements represent trial modifications, which we classify and account for as TDRs. While loans are in trial payment programs, their original terms are not considered modified and they continue to advance through delinquency status and accrue interest according to their original terms.

Commitments to lend additional funds on loans whose terms have been modified in a TDR amounted to $ i 442 million and $ i 500 million at June 30, 2020, and December 31, 2019, respectively.

100

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

Table 6.17 summarizes our TDR modifications for the periods presented by primary modification type and includes the financial effects of these modifications. For those loans that modify more than once, the table reflects each modification that

occurred during the period. Loans that both modify and pay off within the period, as well as changes in recorded investment during the period for loans modified in prior periods, are not included in the table.

Table 6.17: TDR Modifications

Primary modification type (1)

Financial effects of modifications

(in millions)

Principal (2)

Interest

rate

reduction

Other

concessions (3)

Total

Charge-

offs (4)

Weighted

average

interest

rate

reduction

Recorded

investment

related to

interest rate

reduction (5)

Quarter ended June 30, 2020

Commercial:

Commercial and industrial

i —

i 17

i 948

i 965

i 38

i 0.79

i 17

Real estate mortgage

i —

i 5

i 98

i 103

i —

i 1.75

i 5

Real estate construction

i —

Lease financing

i —

i 1

i —

Total commercial

i —

i 22

i 1,047

i 1,069

i 38

i 1.00

i 22

Consumer:

Real estate 1-4 family first mortgage

i 20

i 3

i 279

i 302

i 1

i 1.84

i 14

Real estate 1-4 family junior lien mortgage

i 3

i 2

i 22

i 27

i —

i 2.39

i 3

Credit card

i —

i 62

i —

i 62

i —

i 12.79

i 62

Automobile

i 1

i 2

i 44

i 47

i 28

i 4.42

i 2

Other revolving credit and installment

i —

i 3

i 6

i 9

i —

i 5.90

i 3

Trial modifications (6)

i —

( i 13

)

( i 13

)

i —

Total consumer

i 24

i 72

i 338

i 434

i 29

i 10.09

i 84

Total

i 24

i 94

i 1,385

i 1,503

i 67

i 8.17

i 106

Quarter ended June 30, 2019

Commercial:

Commercial and industrial

i —

i 34

i 180

i 214

i 26

i 0.34

i 34

Real estate mortgage

i —

i 24

i 95

i 119

i —

i 0.49

i 24

Real estate construction

i 13

i —

i 13

i 26

i —

Lease financing

i —

Total commercial

i 13

i 58

i 288

i 359

i 26

i 0.40

i 58

Consumer:

Real estate 1-4 family first mortgage

i 28

i 2

i 181

i 211

i —

i 1.83

i 19

Real estate 1-4 family junior lien mortgage

i 1

i 11

i 21

i 33

i 1

i 2.39

i 11

Credit card

i —

i 89

i —

i 89

i —

i 13.35

i 89

Automobile

i 2

i 3

i 14

i 19

i 8

i 4.13

i 3

Other revolving credit and installment

i —

i 12

i 1

i 13

i —

i 7.67

i 12

Trial modifications (6)

i —

i 5

i —

Total consumer

i 31

i 117

i 222

i 370

i 9

i 10.06

i 134

Total

i 44

i 175

i 510

i 729

i 35

i 7.17

i 192

(continued on following page)

101

(continued from previous page)

Primary modification type (1)

Financial effects of modifications

($ in millions)

Principal (2)

Interest

rate

reduction

Other

concessions (3)

Total

Charge-

offs (4)

Weighted

average

interest

rate

reduction

Recorded

investment

related to

interest rate

reduction (5)

Six months ended June 30, 2020

Commercial:

Commercial and industrial

i 18

i 32

i 1,262

i 1,312

i 82

i 0.73

i 32

Real estate mortgage

i —

i 18

i 250

i 268

i —

i 1.17

i 18

Real estate construction

i —

i 6

i —

i 2.49

i —

Lease financing

i —

i 1

i —

Total commercial

i 18

i 50

i 1,519

i 1,587

i 82

i 0.90

i 50

Consumer:

Real estate 1-4 family first mortgage

i 41

i 6

i 445

i 492

i 1

i 1.73

i 31

Real estate 1-4 family junior lien mortgage

i 4

i 8

i 36

i 48

i —

i 2.38

i 9

Credit card

i —

i 157

i —

i 157

i —

i 12.51

i 157

Automobile

i 3

i 4

i 54

i 61

i 34

i 4.56

i 4

Other revolving credit and installment

i —

i 15

i 8

i 23

i —

i 7.71

i 15

Trial modifications (6)

i —

( i 11

)

( i 11

)

i —

Total consumer

i 48

i 190

i 532

i 770

i 35

i 10.04

i 216

Total

i 66

i 240

i 2,051

i 2,357

i 117

i 8.30

i 266

Six months ended June 30, 2019

Commercial:

Commercial and industrial

i —

i 45

i 734

i 779

i 39

i 0.42

i 45

Real estate mortgage

i —

i 26

i 168

i 194

i —

i 0.54

i 26

Real estate construction

i 13

i —

i 16

i 29

i —

Lease financing

i —

Total commercial

i 13

i 71

i 918

i 1,002

i 39

i 0.47

i 71

Consumer:

Real estate 1-4 family first mortgage

i 63

i 5

i 475

i 543

i 1

i 1.89

i 38

Real estate 1-4 family junior lien mortgage

i 3

i 22

i 46

i 71

i 2

i 2.34

i 23

Credit card

i —

i 186

i —

i 186

i —

i 13.27

i 186

Automobile

i 4

i 26

i 34

i 14

i 4.55

i 4

Other revolving credit and installment

i —

i 23

i 4

i 27

i —

i 7.63

i 23

Trial modifications (6)

i —

i 5

i —

Total consumer

i 70

i 240

i 556

i 866

i 17

i 10.17

i 274

Total

i 83

i 311

i 1,474

i 1,868

i 56

i 8.18

i 345

(1)

Amounts represent the recorded investment in loans after recognizing the effects of the TDR, if any. TDRs may have multiple types of concessions, but are presented only once in the first modification type based on the order presented in the table above. The reported amounts include loans remodified of $ i 221 million and $ i 323 million for the quarters ended June 30, 2020 and 2019, respectively, and $ i 484 million and $ i 683 million for the first half of 2020 and 2019, respectively.


(2)	Principal modifications include principal forgiveness at the time of the modification, contingent principal forgiveness granted over the life of the loan based on borrower performance, and principal that has been legally separated and deferred to the end of the loan, with a zero percent contractual interest rate.


(3)	Other concessions include loans discharged in bankruptcy, loan renewals, term extensions and other interest and noninterest adjustments, but exclude modifications that also forgive principal and/or reduce the contractual interest rate.

(4)

Charge-offs include write-downs of the investment in the loan in the period it is contractually modified. The amount of charge-off will differ from the modification terms if the loan has been charged down prior to the modification based on our policies. In addition, there may be cases where we have a charge-off/down with no legal principal modification. Modifications resulted in deferring or legally forgiving principal (actual or contingent) of $ i 3 million and $ i 3 million for the quarters ended June 30, 2020 and 2019, respectively, and $ i 32 million and $ i 6 million for the first half of 2020 and 2019, respectively.


(5)	Reflects the effect of reduced interest rates on loans with an interest rate concession as one of its concession types, which includes loans reported as a principal primary modification type that also have an interest rate concession.

(6)

Trial modifications are granted a delay in payments due under the original terms during the trial payment period. However, these loans continue to advance through delinquency status and accrue interest according to their original terms. Any subsequent permanent modification generally includes interest rate related concessions; however, the exact concession type and resulting financial effect are usually not known until the loan is permanently modified. Trial modifications for the period are presented net of previously reported trial modifications that became permanent in the current period.

102

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

Table 6.18 summarizes permanent modification TDRs that have defaulted in the current period within 12 months of their permanent modification date. We are reporting these defaulted TDRs based on a payment default definition of 90 days past due for the commercial portfolio segment and 60 days past due for the consumer portfolio segment.

Table 6.18: Defaulted TDRs

Recorded investment of defaults

Quarter ended June 30,

Six months ended June 30,

(in millions)

2020

2019

2020

2019

Commercial:

Commercial and industrial

i 37

i 25

i 222

i 48

Real estate mortgage

i 81

i 5

i 102

i 33

Real estate construction

i —

i 3

Total commercial

i 118

i 30

i 324

i 84

Consumer:

Real estate 1-4 family first mortgage

i 8

i 13

i 18

i 24

Real estate 1-4 family junior lien mortgage

i 6

i 4

i 8

i 9

Credit card

i 19

i 21

i 45

i 42

Automobile

i 1

i 4

i 3

i 7

Other revolving credit and installment

i 2

i 1

i 3

Total consumer

i 36

i 43

i 77

i 85

Total

i 154

i 73

i 401

i 169

103

Note 7: Leasing Activity

The information below provides a summary of our leasing activities as a lessor and lessee. See Note 7 (Leasing Activity) in our 2019 Form 10-K for additional information about our leasing activities.

As a Lessor

Table 7.1 presents the composition of our leasing revenue.

Table 7.1: Leasing Revenue

Quarter ended June 30,

Six months ended June 30,

(in millions)

2020

2019

2020

2019

Interest income on lease financing

i 196

i 224

i 407

i 447

Other lease revenues:

Variable revenues on lease financing

i 26

i 53

i 50

Fixed revenues on operating leases

i 294

i 357

i 608

i 730

Variable revenues on operating leases

i 11

i 14

i 24

i 32

Other lease-related revenues (1)

i 3

i 27

i 1

i 55

Lease income

i 334

i 424

i 686

i 867

Total leasing revenue

i 530

i 648

i 1,093

i 1,314


(1)	Predominantly includes net gains (losses) on disposition of assets leased under operating leases or lease financings.

As a Lessee

Substantially all of our leases are operating leases. i Table 7.2 presents balances for our operating leases.

Table 7.2: Operating Lease Right of Use (ROU) Assets and Lease Liabilities



(in millions)	Jun 30, 2020		Dec 31, 2019
ROU assets	$	i 4,548	i 4,724
Lease liabilities	i 5,125		i 5,297

Table 7.3 provides the composition of our lease costs, which are predominantly included in occupancy expense.

Table 7.3: Lease Costs

Quarter ended June 30,

Six months ended June 30,

(in millions)

2020

2019

2020

2019

Fixed lease expense – operating leases

i 292

i 291

i 583

i 588

Variable lease expense

i 80

i 146

i 153

Other (1)

( i 42

)

( i 9

)

( i 56

)

( i 17

)

Total lease costs

i 330

i 362

i 673

i 724


(1)	Predominantly includes gains recognized from sale leaseback transactions and sublease rental income.

104

Note 8: Equity Securities (continued)

Note 8: Equity Securities

Table 8.1 provides a summary of our equity securities by business purpose and accounting method, including equity securities with readily determinable fair values (marketable) and those without readily determinable fair values (nonmarketable).

Table 8.1: Equity Securities



(in millions)	Jun 30, 2020		Dec 31, 2019
Held for trading at fair value:
Marketable equity securities	$	i 12,591	i 27,440
Not held for trading:
Fair value:
Marketable equity securities (1)	i 6,426		i 6,481
Nonmarketable equity securities	i 8,322		i 8,015
Total equity securities at fair value	i 14,748		i 14,496
Equity method:
Low-income housing tax credit investments	i 11,294		i 11,343
Private equity	i 3,351		i 3,459
Tax-advantaged renewable energy	i 3,940		i 3,811
New market tax credit and other	i 377		i 387
Total equity method	i 18,962		i 19,000
Other:
Federal Reserve Bank stock and other at cost (2)	i 3,794		i 4,790
Private equity (3)	i 2,399		i 2,515
Total equity securities not held for trading	i 39,903		i 40,801
Total equity securities	$	i 52,494	i 68,241


(1)	Includes $ i 191 million and $ i 3.8 billion at June 30, 2020, and December 31, 2019, respectively, related to securities held as economic hedges of our deferred compensation plan liabilities. In second quarter 2020, we entered into arrangements to transition our economic hedges of our deferred compensation plan liabilities from equity securities to derivative instruments.


(2)	Includes $ i 3.8 billion and $ i 4.8 billion at June 30, 2020, and December 31, 2019, respectively, related to investments in Federal Reserve Bank and Federal Home Loan Bank stock.


(3)	Represents nonmarketable equity securities accounted for under the measurement alternative.

Equity Securities Held for Trading

Equity securities held for trading purposes are marketable equity securities traded on organized exchanges. These securities are held as part of our customer accommodation trading activities. For more information on these activities, see Note 4 (Trading Activities).

Equity Securities Not Held for Trading

We also hold equity securities unrelated to trading activities. These securities include private equity and tax credit investments, securities held as economic hedges or to meet regulatory requirements (for example, Federal Reserve Bank and Federal Home Loan Bank stock).

FAIR VALUE Marketable equity securities held for purposes other than trading consist of exchange-traded equity funds held to economically hedge obligations related to our deferred compensation plans, as well as other holdings of publicly traded equity securities held for investment purposes. We account for certain nonmarketable equity securities under the fair value method, and substantially all of these securities are economically hedged with equity derivatives.

EQUITY METHOD Our equity method investments consist of tax credit and private equity investments, the majority of which are our low-income housing tax credit (LIHTC) investments.

We invest in affordable housing projects that qualify for the LIHTC, which are designed to promote private development of low-income housing. These investments generate a return mostly through realization of federal tax credit and other tax benefits. In the second quarter and first half of 2020, we recognized pre-tax losses of $ i 340 million and $ i 679 million, respectively, related to our LIHTC investments, compared with $ i 298 million and $ i 571 million, respectively, for the same periods a year ago. These losses were recognized in other noninterest income. We also recognized total tax benefits of $ i 401 million and $ i 799 million in the second quarter and first half of 2020, respectively, which included tax credits recorded to income taxes of $ i 317 million and $ i 631 million for the same periods, respectively. In the second quarter and first half of 2019, total tax benefits were $ i 376 million and $ i 746 million, respectively, which included tax credits of $ i 303 million and $ i 605 million for the same periods, respectively. We are periodically required to provide additional financial support during the investment period. A liability is recognized for unfunded commitments that are both legally binding and probable of funding. These commitments are predominantly funded within i three years of initial investment. Our liability for these unfunded commitments was $ i 4.2 billion at June 30, 2020, and $ i 4.3 billion at December 31, 2019. This liability for unfunded commitments is included in long-term debt.

OTHER The remaining portion of our nonmarketable equity securities portfolio consists of securities accounted for using the cost or measurement alternative.

105

Realized Gains and Losses Not Held for Trading

Table 8.2 provides a summary of the net gains and losses from equity securities not held for trading. Gains and losses for securities held for trading are reported in net gains from trading activities.

Table 8.2: Net Gains (Losses) from Equity Securities Not Held for Trading

Quarter ended June 30,

Six months ended June 30,

(in millions)

2020

2019

2020

2019

Net gains (losses) from equity securities carried at fair value:

Marketable equity securities

i 394

i 264

( i 409

)

i 641

Nonmarketable equity securities

i 1,424

i 732

i 320

i 1,668

Total equity securities carried at fair value

i 1,818

i 996

( i 89

)

i 2,309

Net gains (losses) from nonmarketable equity securities not carried at fair value:

Impairment write-downs

( i 106

)

( i 31

)

( i 1,041

)

( i 67

)

Net unrealized gains related to measurement alternative observable transactions

i 24

i 146

i 246

i 331

Net realized gains on sale

i 199

i 169

i 199

i 406

Total nonmarketable equity securities not carried at fair value

i 117

i 284

( i 596

)

i 670

Net gains (losses) from economic hedge derivatives (1)

( i 1,402

)

( i 658

)

( i 183

)

( i 1,543

)

Total net gains (losses) from equity securities not held for trading

i 533

i 622

( i 868

)

i 1,436


(1)	Includes net gains (losses) on derivatives not designated as hedging instruments.

Measurement Alternative

Table 8.3 provides additional information about the impairment write-downs and observable price adjustments related to

nonmarketable equity securities accounted for under the measurement alternative. Gains and losses related to these adjustments are also included in Table 8.2.

Table 8.3: Net Gains (Losses) from Measurement Alternative Equity Securities

Quarter ended June 30,

Six months ended June 30,

(in millions)

2020

2019

2020

2019

Net gains (losses) recognized in earnings during the period:

Gross unrealized gains due to observable price changes

i 24

i 157

i 246

i 342

Gross unrealized losses due to observable price changes

i —

( i 11

)

i —

( i 11

)

Impairment write-downs

( i 58

)

( i 11

)

( i 412

)

( i 33

)

Realized net gains from sale

i 11

i 102

i 13

i 125

Total net gains (losses) recognized during the period

( i 23

)

i 237

( i 153

)

i 423

Table 8.4 presents cumulative carrying value adjustments to nonmarketable equity securities accounted for under the measurement alternative that were still held at the end of each reporting period presented.

Table 8.4: Measurement Alternative Cumulative Gains (Losses)



(in millions)	Jun 30, 2020			Dec 31, 2019
Cumulative gains (losses):
Gross unrealized gains due to observable price changes	$	i 1,109		i 973
Gross unrealized losses due to observable price changes	( i 43		)	( i 42	)
Impairment write-downs	( i 522		)	( i 134	)

106

Note 9: Other Assets

Table 9.1 presents the components of other assets.

Table 9.1: Other Assets



(in millions)	Jun 30, 2020		Dec 31, 2019
Corporate/bank-owned life insurance	$	i 20,227	i 20,070
Accounts receivable (1)	i 31,794		i 29,137
Interest receivable:
AFS and HTM debt securities	i 1,506		i 1,729
Loans	i 3,046		i 3,099
Trading and other	i 492		i 758
Customer relationship and other amortized intangibles	i 375		i 423
Foreclosed assets:
Residential real estate:
Government insured/guaranteed (1)	i 31		i 50
Non-government insured/guaranteed	i 107		i 172
Other	i 57		i 81
Operating lease assets (lessor)	i 7,930		i 8,221
Operating lease ROU assets (lessee)	i 4,548		i 4,724
Due from customers on acceptances	i 173		i 253
Other	i 15,325		i 10,200
Total other assets	$	i 85,611	i 78,917


(1)	Certain government-guaranteed residential real estate mortgage loans upon foreclosure are included in Accounts receivable. For more information, see Note 1 (Summary of Significant Accounting Policies) in our 2019 Form 10-K.

107

Note 10: Securitizations and Variable Interest Entities

Involvement with Special Purpose Entities (SPEs)

In the normal course of business, we enter into various types of on- and off-balance sheet transactions with SPEs, which are corporations, trusts, limited liability companies or partnerships that are established for a limited purpose. For further description

of our involvement with SPEs, see Note 10 (Securitizations and Variable Interest Entities) in our 2019 Form 10-K.

Table 10.1 provides the classifications of assets and liabilities in our balance sheet for our transactions with VIEs.

Table 10.1: Balance Sheet Transactions with VIEs

(in millions)

VIEs that we

do not

consolidate

VIEs

that we

consolidate

Transfers that

we account

for as secured

borrowings

Total

Cash and due from banks

i —

i 26

i —

i 26

Interest-earning deposits with banks

i —

Debt securities (1):

Trading debt securities

i 1,670

i 257

i —

i 1,927

Available-for-sale debt securities

i 1,554

i 298

i —

i 1,852

Held-to-maturity debt securities

i 1,156

i —

i 1,156

Loans

i 1,890

i 11,579

i 74

i 13,543

Mortgage servicing rights

i 7,499

i —

i 7,499

Derivative assets

i 269

i 1

i —

i 270

Equity securities

i 11,351

i 71

i —

i 11,422

Other assets

i 974

i 215

i —

i 1,189

Total assets

i 26,363

i 12,447

i 74

i 38,884

Short-term borrowings

i —

i 501

i —

i 501

Derivative liabilities

i 2

i 1

i —

i 3

Accrued expenses and other liabilities

i 239

i 212

i —

i 451

Long-term debt

i 4,201

i 225

i 73

i 4,499

Total liabilities

i 4,442

i 939

i 73

i 5,454

Noncontrolling interests

i —

i 36

i —

i 36

Net assets

i 21,921

i 11,472

i 1

i 33,394

Cash and due from banks

i —

i 16

i —

i 16

Interest-earning deposits with banks

i —

i 284

i —

i 284

Debt securities (1):

Trading debt securities

i 792

i 339

i —

i 1,131

Available-for-sale debt securities

i 1,696

i 201

i —

i 1,897

Held-to-maturity debt securities

i 791

i —

i 791

Loans

i 2,127

i 13,170

i 80

i 15,377

Mortgage servicing rights

i 11,884

i —

i 11,884

Derivative assets

i 142

i 1

i —

i 143

Equity securities

i 11,401

i 118

i —

i 11,519

Other assets

i 1,268

i 239

i —

i 1,507

Total assets

i 30,101

i 14,368

i 80

i 44,549

Short-term borrowings

i —

i 401

i —

i 401

Derivative liabilities

i 1

i 3

i —

i 4

Accrued expenses and other liabilities

i 189

i 235

i —

i 424

Long-term debt

i 4,817

i 587

i 79

i 5,483

Total liabilities

i 5,007

i 1,226

i 79

i 6,312

Noncontrolling interests

i —

i 43

i —

i 43

Net assets

i 25,094

i 13,099

i 1

i 38,194


(1)	Excludes certain debt securities related to loans serviced for the Federal National Mortgage Association (FNMA), Federal Home Loan Mortgage Corporation (FHLMC) and Government National Mortgage Association (GNMA).

Transactions with Unconsolidated VIEs

Our transactions with unconsolidated VIEs include predominantly securitizations of residential and commercial mortgage loans, and investments in tax credit structures. We have various forms of involvement with VIEs, including servicing, holding senior or

subordinated interests, and entering into liquidity arrangements and derivative contracts. Involvements with these unconsolidated VIEs are recorded on our balance sheet in debt and equity securities, loans, MSRs, derivative assets and liabilities, other assets, other liabilities, and long-term debt, as appropriate.

108

Note 10: Securitizations and Variable Interest Entities (continued)

Table 10.2 provides a summary of our exposure to unconsolidated VIEs with which we have significant continuing involvement but for which we are not the primary beneficiary.

We include transactions where we were the sponsor or servicer and also have other significant forms of continuing involvement. Sponsorship includes transactions where we solely or materially participated in the initial design or structuring of the VIE or marketed the transaction to investors. We consider investments in securities, loans, guarantees, liquidity agreements, commitments and certain derivatives to be other forms of

continuing involvement that may be significant. We also include transactions where we transferred assets to a VIE, account for the transfer as a sale, and service the VIE collateral or have other forms of continuing involvement that may be significant (as described above). We exclude certain transactions with unconsolidated VIEs when our continuing involvement is temporary in nature or insignificant in size. We also exclude secured borrowing transactions with unconsolidated VIEs (for information on these transactions, see the Transactions with Consolidated VIEs and Secured Borrowings section in this Note).

Table 10.2: Unconsolidated VIEs

Carrying value – asset (liability)

(in millions)

Total

VIE

assets

Debt and

equity

interests (1)

Servicing

assets and advances

Derivatives

Debt, guarantees, and other

commitments

Net

assets

Residential mortgage loan securitizations:

Conforming (2)

i 1,042,774

i 1,884

i 7,291

i —

( i 248

)

i 8,927

Other/nonconforming

i 5,184

i 1

i 34

i —

i 35

Commercial mortgage loan securitizations (2)

i 175,912

i 2,484

i 1,148

i 195

( i 33

)

i 3,794

Tax credit structures

i 38,839

i 13,037

i —

( i 4,159

)

i 8,878

Other asset-based finance structures

i 1,277

i 167

i —

i 72

i —

i 239

Other

i 1,146

i 48

i —

i 48

Total

i 1,265,132

i 17,621

i 8,473

i 267

( i 4,440

)

i 21,921

Maximum exposure to loss

Debt and

equity

interests (1)

Servicing

assets and advances

Derivatives

Debt, guarantees, and other

commitments

Total

exposure

Residential mortgage loan securitizations:

Conforming (2)

i 1,853

i 7,291

i —

i 1,335

i 10,479

Other/nonconforming

i 1

i 34

i —

i 35

Commercial mortgage loan securitizations (2)

i 2,473

i 1,148

i 195

i 12,108

i 15,924

Tax credit structures

i 13,037

i —

i 1,327

i 14,364

Other asset-based finance structures

i 167

i —

i 76

i 71

i 314

Other

i 48

i —

i 157

i 205

Total

i 17,579

i 8,473

i 271

i 14,998

i 41,321

Carrying value – asset (liability)

(in millions)

Total
VIE
assets

Debt and
equity
interests (1)

Servicing
assets and advances

Derivatives

Debt, guarantees,
and other
commitments

Net
assets

Residential mortgage loan securitizations:

Conforming (2)

i 1,098,103

i 1,528

i 11,931

i —

( i 683

)

i 12,776

Other/nonconforming

i 5,178

i 6

i 152

i —

i 158

Commercial mortgage loan securitizations (2)

i 169,736

i 2,239

i 1,069

i 80

( i 43

)

i 3,345

Tax credit structures

i 39,091

i 12,826

i —

( i 4,260

)

i 8,566

Other asset-based finance structures

i 1,355

i 157

i —

i 61

( i 20

)

i 198

Other

i 1,167

i 51

i —

i 51

Total

i 1,314,630

i 16,807

i 13,152

i 141

( i 5,006

)

i 25,094

Maximum exposure to loss

Debt and

equity

interests (1)

Servicing

assets and advances

Derivatives

Debt, guarantees,

and other

commitments

Total

exposure

Residential mortgage loan securitizations:

Conforming (2)

i 972

i 11,931

i —

i 937

i 13,840

Other/nonconforming

i 6

i 152

i —

i 158

Commercial mortgage loan securitizations (2)

i 2,239

i 1,069

i 80

i 11,667

i 15,055

Tax credit structures

i 12,826

i —

i 1,701

i 14,527

Other asset-based finance structures

i 157

i —

i 63

i 91

i 311

Other

i 51

i —

i 157

i 208

Total

i 16,251

i 13,152

i 143

i 14,553

i 44,099


(1)	Includes total equity interests of $ i 11.4 billion at both June 30, 2020, and December 31, 2019. Also includes debt interests in the form of both loans and securities. Excludes certain debt securities held related to loans serviced for FNMA, FHLMC and GNMA.

(2)

Carrying values include assets and related liabilities of $ i 42 million and $ i 556 million at June 30, 2020, and December 31, 2019, respectively, related to certain unexercised unconditional repurchase options. These amounts represent the carrying value of the loans and associated debt that would be payable if the option was exercised to repurchase eligible loans from GNMA residential and multifamily loan securitizations. These amounts are excluded from maximum exposure to loss as we are not obligated to exercise the options.

In Table 10.2, “Total VIE assets” represents the remaining principal balance of assets held by unconsolidated VIEs using the most current information available. For VIEs that obtain exposure to assets synthetically through derivative instruments, the notional amount of the derivative is included in the asset balance.

“Carrying value” is the amount in our consolidated balance sheet related to our involvement with the unconsolidated VIEs. “Maximum exposure to loss” is determined as the carrying value of our investment in the VIEs excluding the unconditional repurchase options that have not been exercised, plus the

109

remaining undrawn liquidity and lending commitments, the notional amount of net written derivative contracts, and generally the notional amount of, or stressed loss estimate for, other commitments and guarantees. It represents estimated loss that would be incurred under severe, hypothetical circumstances, for which we believe the possibility is extremely remote, such as where the value of our interests and any associated collateral declines to zero, without any consideration of recovery or offset from any economic hedges. Accordingly, this disclosure is not an indication of expected loss.

For complete descriptions of our transactions with unconsolidated VIEs with which we have a significant continuing involvement, but we are not the primary beneficiary, see Note 10 (Securitizations and Variable Interest Entities) in our 2019 Form 10-K.

Loan Sales and Securitization Activity

We periodically transfer consumer and commercial loans and other types of financial assets in securitization and whole loan sale transactions. We typically retain the servicing rights from these sales and may continue to hold other beneficial interests in

the transferred financial assets. We may also provide liquidity to investors in the beneficial interests and credit enhancements. Through these transfers we may be exposed to liability under limited amounts of recourse as well as standard representations and warranties we make to purchasers and issuers.

Table 10.3 presents information about transfers of assets during the period to unconsolidated VIEs or third-party investors for which we recorded the transfers as sales and have continuing involvement with the transferred assets. In connection with these transfers, we recorded servicing assets, securities, and a liability for repurchase losses which reflects management’s estimate of probable losses related to various representations and warranties for the loans transferred. Each of these interests are initially measured at fair value. Servicing rights are classified as Level 3 measurements, and generally securities are initially classified as Level 2.

Sales with continuing involvement include securitizations of conforming residential mortgages that are sold to the government-sponsored entities (GSEs) or GNMA. Substantially all transfers to these entities resulted in no gain or loss because the loans were already measured at fair value on a recurring basis.

Table 10.3: Transfers With Continuing Involvement

(in millions)

2020

2019

Quarter ended June 30,

Residential mortgages

Commercial mortgages

Residential mortgages

Commercial mortgages

Net gains (losses) on sale

i —

i 64

i 46

i 74

Asset balances sold

i 63,584

i 2,505

i 36,672

i 3,358

Servicing rights recognized

i 443

i 48

i 387

i 33

Securities recognized (1)

( i 263

)

i 12

i 2,482

i —

Liability for repurchase losses recognized

i 4

i —

i 5

i —

Six months ended June 30,

Net gains (losses) on sale

i 52

i 133

i 60

i 121

Asset balances sold

i 111,441

i 5,233

i 70,775

i 6,060

Servicing rights recognized

i 889

i 82

i 707

i 59

Securities recognized (1)

i 2,050

i 74

i 3,394

i —

Liability for repurchase losses recognized

i 7

i —

i 8

i —


(1)	Includes securities retained upon initial transfer and subsequent sales during the periods presented, which may result in a net reduction of securities recognized.

Table 10.4 presents the key weighted-average assumptions we used to measure residential MSRs at the date of securitization.

Table 10.4: Residential Mortgage Servicing Rights



	Residential mortgage servicing rights
	2020			2019
Quarter ended June 30,
Prepayment speed (1)	i 15.0		%	i 13.5
Discount rate	i 7.0			i 7.5
Cost to service ($ per loan) (2)	$	i 97		i 121
Six months ended June 30,
Prepayment speed (1)	i 14.0		%	i 13.5
Discount rate	i 6.8			i 7.7
Cost to service ($ per loan) (2)	$	i 94		i 109


(1)	The prepayment speed assumption for residential MSRs includes a blend of prepayment speeds and default rates. Prepayment speed assumptions are influenced by mortgage interest rate inputs as well as our estimation of drivers of borrower behavior.


(2)	Includes costs to service and unreimbursed foreclosure costs, which can vary period to period due to changes in model assumptions and the mix of modified government-guaranteed loans sold to GNMA.

Table 10.5 presents the proceeds related to transfers accounted for as sales in which we have continuing involvement with the transferred financial assets, as well as current period cash flows from continuing involvement with previous transfers accounted for as sales. Cash flows from other interests held predominantly include principal and interest payments received on retained bonds. Repurchases of assets represents cash paid to repurchase loans from investors under representation and warranty obligations or in connection with the exercise of cleanup calls on securitizations. Loss reimbursements is cash paid to reimburse investors for losses on individual loans that are already liquidated. Government insured loans are delinquent loans that we service and have exercised our option to purchase out of GNMA pools. These loans are insured by the FHA or guaranteed by the VA.

110

Note 10: Securitizations and Variable Interest Entities (continued)

Table 10.5: Cash Inflows (Outflows) From Sales and Securitization Activity



	Mortgage loans
(in millions)	2020			2019
Quarter ended June 30,
Proceeds from securitizations and whole loan sales	$	i 65,009		i 39,697
Fees from servicing rights retained	i 663			i 786
Cash flows from other interests held	i 192			i 133
Repurchases of assets/loss reimbursements:
Non-agency securitizations and whole loan transactions	( i 1		)	( i 1	)
Government insured loans	( i 3,594		)	( i 1,246	)
Agency securitizations	( i 35		)	( i 27	)
Servicing advances, net of recoveries (1)	( i 93		)	i 54
Six months ended June 30,
Proceeds from securitizations and whole loan sales	$	i 115,238		i 76,204
Fees from servicing rights retained	i 1,419			i 1,566
Cash flows from other interests held	i 359			i 244
Repurchases of assets/loss reimbursements:
Non-agency securitizations and whole loan transactions	( i 1		)	( i 1	)
Government insured loans	( i 5,034		)	( i 3,188	)
Agency securitizations	( i 61		)	( i 44	)
Servicing advances, net of recoveries (1)	( i 60		)	i 93


(1)	Cash flows from servicing advances includes principal and interest payments to investors required by servicing agreements.

111

Retained Interests from Unconsolidated VIEs

Table 10.6 provides key economic assumptions and the sensitivity of the current fair value of residential MSRs and other interests held related to unconsolidated VIEs to immediate adverse changes in those assumptions. Amounts for residential MSRs include purchased servicing rights as well as servicing rights resulting from the transfer of loans. See Note 16 (Fair Values of Assets and Liabilities) for additional information on key economic assumptions for residential MSRs. “Other interests held” were obtained when we securitized residential and commercial mortgage loans. Residential mortgage-backed securities retained in securitizations issued through GSEs or GNMA, are excluded

from the table because these securities have a remote risk of credit loss due to the GSE or government guarantee. These securities also have economic characteristics similar to GSE or GNMA mortgage-backed securities that we purchase, which are not included in the table. Subordinated interests include only those bonds whose credit rating was below AAA by a major rating agency at issuance. Senior interests include only those bonds whose credit rating was AAA by a major rating agency at issuance. The information presented excludes trading positions held in inventory.

Table 10.6: Retained Interests from Unconsolidated VIEs



				Other interests held
	Residential mortgage servicing rights			Commercial
($ in millions, except cost to service amounts)				Subordinated bonds			Senior bonds
Fair value of interests held at June 30, 2020	$	i 6,819		i 982			i 273
Expected weighted-average life (in years)	i 3.9			i 7.0			i 6.6
Key economic assumptions:
Prepayment speed assumption	i 18.5		%
Decrease in fair value from:
10% adverse change	$	i 470
25% adverse change	i 1,089
Discount rate assumption	i 6.8		%	i 5.4			i 1.8
Decrease in fair value from:
100 basis point increase	$	i 255		i 57			i 15
200 basis point increase	i 490			i 109			i 30
Cost to service assumption ($ per loan)	i 152
Decrease in fair value from:
10% adverse change	i 234
25% adverse change	i 583
Credit loss assumption				i 4.5		%	i —
Decrease in fair value from:
10% higher losses				$	i 36		i —
25% higher losses				i 40			i —
Fair value of interests held at December 31, 2019	$	i 11,517		i 909			i 352
Expected weighted-average life (in years)	i 5.3			i 7.3			i 5.5
Key economic assumptions:
Prepayment speed assumption	i 11.9		%
Decrease in fair value from:
10% adverse change	$	i 537
25% adverse change	i 1,261
Discount rate assumption	i 7.2		%	i 4.0			i 2.9
Decrease in fair value from:
100 basis point increase	$	i 464		i 53			i 16
200 basis point increase	i 889			i 103			i 32
Cost to service assumption ($ per loan)	i 102
Decrease in fair value from:
10% adverse change	i 253
25% adverse change	i 632
Credit loss assumption				i 3.1		%	i —
Decrease in fair value from:
10% higher losses				$	i 1		i —
25% higher losses				i 4			i —

In addition to residential MSRs included in the previous table, we have a small portfolio of commercial MSRs, which are carried at the lower of cost or fair value (LOCOM), with a fair value of

$ i 1.4 billion and $ i 1.9 billion at June 30, 2020, and December 31, 2019, respectively. Prepayment assumptions do not significantly impact values of commercial MSRs and commercial mortgage

112

Note 10: Securitizations and Variable Interest Entities (continued)

bonds as commercial loans generally include contractual restrictions on prepayment. Servicing costs are not a driver of our MSR value as we are typically primary or master servicer; the higher costs of servicing delinquent and foreclosed loans is generally borne by the special servicer. The primary economic driver impacting the fair value of our commercial MSRs is forward interest rates, which are derived from market observable yield curves used to price capital markets instruments. Market interest rates significantly affect interest earned on custodial deposit balances. The sensitivity of the current fair value of our commercial MSRs to a hypothetical immediate adverse 25% change in the assumption about interest earned on deposit balances at June 30, 2020, and December 31, 2019, would result in a decrease in fair value of $ i 94 million and $ i 205 million, respectively. See Note 11 (Mortgage Banking Activities) for further information on our commercial MSRs.

The sensitivities in the preceding paragraph and table are hypothetical and caution should be exercised when relying on this data. Changes in value based on variations in assumptions generally cannot be extrapolated because the relationship of the change in the assumption to the change in value may not be linear. Also, the effect of a variation in a particular assumption on the value of the other interests held is calculated independently

without changing any other assumptions. In reality, changes in one factor may result in changes in others (for example, changes in prepayment speed estimates could result in changes in the credit losses), which might magnify or counteract the sensitivities.

Off-Balance Sheet Loans

Table 10.7 presents information about the principal balances of off-balance sheet loans that were sold or securitized, including residential mortgage loans sold to FNMA, FHLMC, GNMA and other investors, for which we have some form of continuing involvement (including servicer). Delinquent loans include loans 90 days or more past due and loans in bankruptcy, regardless of delinquency status. In accordance with applicable servicing guidelines, delinquency status continues to advance for loans with COVID-related payment deferrals. For loans sold or securitized where servicing is our only form of continuing involvement, we would only experience a loss if we were required to repurchase a delinquent loan or foreclosed asset due to a breach in representations and warranties associated with our loan sale or servicing contracts.

Table 10.7: Off-Balance Sheet Loans Sold or Securitized

Net charge-offs (2)

Total loans

Delinquent loans

and foreclosed assets (1)

Six months ended Jun 30,

(in millions)

Jun 30, 2020

Dec 31, 2019

Jun 30, 2020

Dec 31, 2019

2020

2019

Commercial:

Real estate mortgage

i 114,057

i 112,507

i 791

i 776

i 83

i 89

Total commercial

i 114,057

i 112,507

i 791

i 776

i 83

i 89

Consumer:

Real estate 1-4 family first mortgage

i 942,481

i 1,008,446

i 53,282

i 6,664

i 59

i 110

Real estate 1-4 family junior lien mortgage

i 11

i 13

i 2

i —

Total consumer

i 942,492

i 1,008,459

i 53,284

i 6,666

i 59

i 110

Total off-balance sheet sold or securitized loans (3)

i 1,056,549

i 1,120,966

i 54,075

i 7,442

i 142

i 199


(1)	Includes $ i 319 million and $ i 492 million of commercial foreclosed assets and $ i 294 million and $ i 356 million of consumer foreclosed assets at June 30, 2020, and December 31, 2019, respectively.


(2)	Net charge-offs exclude loans sold to FNMA, FHLMC and GNMA as we do not service or manage the underlying real estate upon foreclosure and, as such, do not have access to net charge-off information.


(3)	At June 30, 2020, and December 31, 2019, the table includes total loans of $ i 1.0 trillion at both dates, delinquent loans of $ i 51.3 billion and $ i 5.2 billion, respectively, and foreclosed assets of $ i 224 million and $ i 251 million, respectively, for FNMA, FHLMC and GNMA.

113

Transactions with Consolidated VIEs and Secured Borrowings

Table 10.8 presents a summary of financial assets and liabilities for asset transfers accounted for as secured borrowings and involvements with consolidated VIEs. Carrying values of “Assets” are presented using GAAP measurement methods, which may include fair value, credit impairment or other adjustments, and

therefore in some instances will differ from “Total VIE assets.” For VIEs that obtain exposure synthetically through derivative instruments, the notional amount of the derivative is included in “Total VIE assets.” On the consolidated balance sheet, we separately disclose the consolidated assets of certain VIEs that can only be used to settle the liabilities of those VIEs.

Table 10.8: Transactions with Consolidated VIEs and Secured Borrowings

Carrying value

(in millions)

Total

VIE assets

Assets

Liabilities

Noncontrolling

interests

Net assets

Secured borrowings:

Residential mortgage securitizations

i 74

( i 73

)

i —

i 1

Total secured borrowings

i 74

( i 73

)

i —

i 1

Consolidated VIEs:

Commercial and industrial loans and leases

i 6,970

i 5,838

( i 210

)

( i 12

)

i 5,616

Nonconforming residential mortgage loan securitizations

i 652

i 565

( i 225

)

i —

i 340

Commercial real estate loans

i 5,387

i —

i 5,387

Municipal tender option bond securitizations

i 501

i 500

( i 500

)

i —

Other

i 157

( i 4

)

( i 24

)

i 129

Total consolidated VIEs

i 13,667

i 12,447

( i 939

)

( i 36

)

i 11,472

Total secured borrowings and consolidated VIEs

i 13,741

i 12,521

( i 1,012

)

( i 36

)

i 11,473

Secured borrowings:

Residential mortgage securitizations

i 81

i 80

( i 79

)

i —

i 1

Total secured borrowings

i 81

i 80

( i 79

)

i —

i 1

Consolidated VIEs:

Commercial and industrial loans and leases

i 8,054

i 8,042

( i 529

)

( i 16

)

i 7,497

Nonconforming residential mortgage loan securitizations

i 935

i 809

( i 290

)

i —

i 519

Commercial real estate loans

i 4,836

i —

i 4,836

Municipal tender option bond securitizations

i 401

i 402

( i 401

)

i —

i 1

Other

i 279

( i 6

)

( i 27

)

i 246

Total consolidated VIEs

i 14,505

i 14,368

( i 1,226

)

( i 43

)

i 13,099

Total secured borrowings and consolidated VIEs

i 14,586

i 14,448

( i 1,305

)

( i 43

)

i 13,100

We have raised financing through the securitization of certain financial assets in transactions with VIEs accounted for as secured borrowings. We also consolidate VIEs where we are the primary beneficiary. In certain transactions, we provide contractual support in the form of limited recourse and liquidity to facilitate the remarketing of short-term securities issued to third-party investors. Other than this limited contractual support, the assets of the VIEs are the sole source of repayment of the securities held by third parties.

For complete descriptions of our accounting for transfers accounted for as secured borrowings and involvement with consolidated VIEs, see Note 10 (Securitizations and Variable Interest Entities) in our 2019 Form 10-K.

Other Transactions

In addition to the transactions included in the previous tables, we have used wholly-owned trust preferred security VIEs to issue debt securities or preferred equity exclusively to third-party investors. As the sole assets of the VIEs are receivables from us, we do not consolidate the VIEs even though we own all of the voting equity shares of the VIEs, have fully guaranteed the obligations of the VIEs, and may have the right to redeem the third-party securities under certain circumstances. In our

consolidated balance sheet we reported the debt securities issued to the VIEs as long-term junior subordinated debt with a carrying value of $ i 692 million and $ i 2.1 billion at June 30, 2020, and December 31, 2019, respectively. During first quarter 2020, we liquidated certain of our trust preferred security VIEs. As part of these liquidations, the preferred securities issued by the trusts were canceled and junior subordinated debentures with a total carrying value of $ i 1.4 billion were distributed to the preferred security holders. Prior to the liquidations, we held $ i 10 million of these preferred securities, which were exchanged for junior subordinated debentures upon liquidation and subsequently retired with i no impact to earnings. See Note 17 (Preferred Stock) for additional information about trust preferred securities.

Certain money market funds are also excluded from the previous tables because they are exempt from the consolidation analysis. We voluntarily waived a portion of our management fees for these money market funds to maintain a minimum level of daily net investment income. The amount of fees waived was $ i 22 million and $ i 33 million in the second quarter and first half of 2020, respectively, compared with $ i 10 million and $ i 20 million for the same periods a year ago.

114

Note 11: Mortgage Banking Activities (continued)

Note 11: Mortgage Banking Activities

Mortgage banking activities consist of residential and commercial mortgage originations, sales and servicing.

We apply the amortization method to commercial MSRs and the fair value method to residential MSRs. i Table 11.1 presents the changes in MSRs measured using the fair value method.

Table 11.1: Analysis of Changes in Fair Value MSRs

Quarter ended June 30,

Six months ended June 30,

(in millions)

2020

2019

2020

2019

Fair value, beginning of period

i 8,126

i 13,336

i 11,517

i 14,649

Servicing from securitizations or asset transfers (1)

i 462

i 400

i 923

i 741

Sales and other (2)

( i 1

)

( i 1

)

( i 32

)

( i 282

)

Net additions

i 461

i 399

i 891

i 459

Changes in fair value:

Due to valuation inputs or assumptions:

Mortgage interest rates (3)

( i 600

)

( i 1,153

)

( i 3,622

)

( i 2,093

)

Servicing and foreclosure costs (4)

( i 349

)

( i 22

)

( i 422

)

( i 10

)

Discount rates

i —

( i 109

)

i 27

( i 9

)

Prepayment estimates and other (5)

( i 182

)

i 206

( i 371

)

i 143

Net changes in valuation inputs or assumptions

( i 1,131

)

( i 1,078

)

( i 4,388

)

( i 1,969

)

Changes due to collection/realization of expected cash flows (6)

( i 637

)

( i 561

)

( i 1,201

)

( i 1,043

)

Total changes in fair value

( i 1,768

)

( i 1,639

)

( i 5,589

)

( i 3,012

)

Fair value, end of period

i 6,819

i 12,096

i 6,819

i 12,096


(1)	Includes impacts associated with exercising cleanup calls on securitizations and our right to repurchase delinquent loans from GNMA loan securitization pools. MSRs may increase upon repurchase due to servicing liabilities associated with these delinquent GNMA loans.


(2)	Includes sales and transfers of MSRs, which can result in an increase in MSRs if related to portfolios with servicing liabilities.


(3)	Includes prepayment speed changes as well as other valuation changes due to changes in mortgage interest rates.


(4)	Includes costs to service and unreimbursed foreclosure costs.


(5)	Represents other changes in valuation model inputs or assumptions including prepayment speed estimation changes that are independent of mortgage interest rate changes.


(6)	Represents the reduction in the MSR fair value for the cash flows expected to be collected during the period, net of income accreted due to the passage of time.

Table 11.2 presents the changes in amortized MSRs.

Table 11.2: Analysis of Changes in Amortized MSRs

Quarter ended June 30,

Six months ended June 30,

(in millions)

2020

2019

2020

2019

Balance, beginning of period

i 1,406

i 1,427

i 1,430

i 1,443

Purchases

i 7

i 16

i 15

i 40

Servicing from securitizations or asset transfers

i 48

i 33

i 82

i 59

Amortization (1)

( i 100

)

( i 69

)

( i 166

)

( i 135

)

Balance, end of period

i 1,361

i 1,407

i 1,361

i 1,407

Fair value of amortized MSRs:

Beginning of period

i 1,490

i 2,149

i 1,490

i 2,288

End of period

i 1,401

i 1,897

i 1,401

i 1,897


(1)	Commercial amortized MSRs are evaluated for impairment purposes by the following risk strata: agency (GSEs) for multi-family properties and non-agency. There was a $ i 30 million impairment and associated valuation allowance recorded in the second quarter and first half of 2020 on the commercial amortized MSRs.

115

We present the components of our managed servicing portfolio in Table 11.3 at unpaid principal balance for loans serviced and subserviced for others and at book value for owned loans serviced.

Table 11.3: Managed Servicing Portfolio



(in billions)	Jun 30, 2020			Dec 31, 2019
Residential mortgage servicing:
Serviced and subserviced for others	$	i 992		i 1,065
Owned loans serviced	i 335			i 343
Total residential servicing	i 1,327			i 1,408
Commercial mortgage servicing:
Serviced and subserviced for others	i 578			i 575
Owned loans serviced	i 125			i 124
Total commercial servicing	i 703			i 699
Total managed servicing portfolio	$	i 2,030		i 2,107
Total serviced for others, excluding subserviced for others	$	i 1,558		i 1,629
Ratio of MSRs to related loans serviced for others	i 0.52		%	i 0.79

At June 30, 2020, and December 31, 2019, we had servicer advances, net of an allowance for uncollectible amounts, of $ i 2.1 billion and $ i 2.0 billion, respectively. As the servicer of loans for others, we advance certain payments of principal, interest, taxes, insurance, and default-related expenses which are generally reimbursed within a short timeframe from cash flows from the trust, GSEs, insurer or borrower. The credit risk related to these advances is limited since the reimbursement is generally senior to cash payments to investors. We also advance payments of taxes

and insurance for our owned loans which are collectible from the borrower. We maintain an allowance for uncollectible amounts for advances on loans serviced for others that may not be reimbursed if the payments were not made in accordance with applicable servicing agreements or if the insurance or servicing agreements contain limitations on reimbursements. Servicing advances on owned loans are charged-off when deemed uncollectible.

Table 11.4 presents the components of mortgage banking noninterest income.

Table 11.4: Mortgage Banking Noninterest Income

Quarter ended June 30,

Six months ended June 30,

(in millions)

2020

2019

2020

2019

Servicing fees:

Contractually specified servicing fees, late charges and ancillary fees

i 749

i 914

i 1,614

i 1,825

Unreimbursed direct servicing costs (1)

( i 105

)

( i 84

)

( i 212

)

( i 154

)

Servicing fees

i 644

i 830

i 1,402

i 1,671

Amortization (2)

( i 100

)

( i 69

)

( i 166

)

( i 135

)

Changes due to collection/realization of expected cash flows (3)

(A)

( i 637

)

( i 561

)

( i 1,201

)

( i 1,043

)

Net servicing fees

( i 93

)

i 200

i 35

i 493

Changes in fair value of MSRs due to valuation inputs or assumptions (4)

(B)

( i 1,131

)

( i 1,078

)

( i 4,388

)

( i 1,969

)

Net derivative gains from economic hedges (5)

i 535

i 1,155

i 3,935

i 2,117

Market-related valuation changes to MSRs, net of hedge results

( i 596

)

i 77

( i 453

)

i 148

Total servicing income (loss), net

( i 689

)

i 277

( i 418

)

i 641

Net gains on mortgage loan origination/sales activities (6)

i 1,006

i 481

i 1,114

i 825

Total mortgage banking noninterest income

i 317

i 758

i 696

i 1,466

Total changes in fair value of MSRs carried at fair value

(A)+(B)

( i 1,768

)

( i 1,639

)

( i 5,589

)

( i 3,012

)


(1)	Includes costs associated with foreclosures, unreimbursed interest advances to investors, and other interest costs.


(2)	Includes a $ i 30 million impairment and associated valuation allowance recorded in the second quarter and first half of 2020 on the commercial amortized MSRs.


(3)	Represents the reduction in the MSR fair value for the cash flows expected to be collected during the period, net of income accreted due to the passage of time.


(4)	Refer to the analysis of changes in fair value MSRs presented in Table 11.1 in this Note for more detail.


(5)	See Note 15 (Derivatives) for additional discussion and detail on economic hedges.


(6)	Includes net losses of $ i 393 million and $ i 1.3 billion in the second quarter and first half of 2020, respectively, and $ i 283 million and $ i 434 million in the second quarter and first half of 2019, respectively, related to derivatives used as economic hedges of mortgage loans held for sale and derivative loan commitments.

116

Note 12: Intangible Assets (continued)

Note 12: Intangible Assets

Table 12.1 presents the gross carrying value of intangible assets and accumulated amortization.

Table 12.1: Intangible Assets

(in millions)

Gross

carrying

value

Accumulated

amortization

Net

carrying

value

Gross

carrying

value

Accumulated

amortization

Net

carrying

value

Amortized intangible assets (1):

MSRs (2)

i 4,519

( i 3,158

)

i 1,361

i 4,422

( i 2,992

)

i 1,430

Customer relationship and other intangibles

i 879

( i 504

)

i 375

i 947

( i 524

)

i 423

Total amortized intangible assets

i 5,398

( i 3,662

)

i 1,736

i 5,369

( i 3,516

)

i 1,853

Unamortized intangible assets:

MSRs (carried at fair value) (2)

i 6,819

i 11,517

Goodwill

i 26,385

i 26,390

Trademark

i 14


(1)	Balances are excluded commencing in the period following full amortization.


(2)	Includes a $ i 30 million impairment and associated valuation allowance recorded in the second quarter and first half of 2020 on the commercial amortized MSRs. See Note 11 (Mortgage Banking Activities) for additional information on MSRs.

Table 12.2 provides the current year and estimated future amortization expense for amortized intangible assets. We based our projections of amortization expense shown below on existing

asset balances at June 30, 2020. Future amortization expense may vary from these projections.

Table 12.2: Amortization Expense for Intangible Assets



(in millions)	Amortized MSRs		Customer relationship and other intangibles	Total
Six months ended June 30, 2020 (actual)	$	i 166	i 48	i 214
Estimate for the remainder of 2020	$	i 130	i 47	i 177
Estimate for year ended December 31,
2021	i 235		i 81	i 316
2022	i 210		i 68	i 278
2023	i 182		i 59	i 241
2024	i 157		i 48	i 205
2025	i 132		i 39	i 171

Table 12.3 shows the allocation of goodwill to our reportable operating segments. We assess goodwill for impairment at a

reporting unit level, which is generally one level below the operating segments.

Table 12.3: Goodwill

(in millions)

Community

Banking

Wholesale

Banking

Wealth and Investment Management

Consolidated

Company

December 31, 2018

i 16,685

i 8,450

i 1,283

i 26,418

Reclassification of goodwill held for sale to other assets

i —

( i 7

)

( i 7

)

Foreign currency translation

i —

i 4

i —

i 4

June 30, 2019

i 16,685

i 8,454

i 1,276

i 26,415

i 16,685

i 8,429

i 1,276

i 26,390

Foreign currency translation

i —

( i 5

)

i —

( i 5

)

i 16,685

i 8,424

i 1,276

i 26,385

117

Note 13: Guarantees, Pledged Assets and Collateral, and Other Commitments

arrangements. For complete descriptions of our guarantees, see Note 16 (Guarantees, Pledged Assets and Collateral, and Other Commitments) in our 2019 Form 10-K. i Table 13.1 shows carrying value, maximum exposure to loss on our guarantees and the related non-investment grade amounts.

Table 13.1: Guarantees – Carrying Value and Maximum Exposure to Loss

Maximum exposure to loss

(in millions)

Carrying

value of obligation (asset)

Expires in

one year

or less

Expires after

one year

through

three years

Expires after

three years

through

five years

Expires

after five

years

Total

Non-

investment

grade

Standby letters of credit

i 178

i 12,171

i 4,447

i 2,051

i 426

i 19,095

i 7,689

Direct pay letters of credit

i 72

i 1,846

i 3,475

i 971

i 39

i 6,331

i 1,224

Written options (1)

( i 49

)

i 15,916

i 10,481

i 2,495

i 357

i 29,249

i 19,223

Loans and MLHFS sold with recourse (2)

i 31

i 122

i 722

i 1,714

i 9,957

i 12,515

i 10,363

Exchange and clearing house guarantees

i —

i 5,296

i —

Other guarantees and indemnifications (3)

i 1

i 444

i 1

i 1,389

i 1,835

i 426

Total guarantees

i 233

i 30,499

i 19,126

i 7,232

i 17,464

i 74,321

i 38,925

Standby letters of credit

i 36

i 11,569

i 4,460

i 2,812

i 467

i 19,308

i 7,104

Direct pay letters of credit

i —

i 1,861

i 3,815

i 824

i 105

i 6,605

i 1,184

Written options (1)

( i 345

)

i 17,088

i 10,869

i 2,341

i 273

i 30,571

i 18,113

Loans and MLHFS sold with recourse (2)

i 52

i 114

i 576

i 1,356

i 10,050

i 12,096

i 9,835

Exchange and clearing house guarantees

i —

i 4,817

i —

Other guarantees and indemnifications (3)

i 1

i 785

i 1

i 3

i 809

i 1,598

i 698

Total guarantees

( i 256

)

i 31,417

i 19,721

i 7,336

i 16,521

i 74,995

i 36,934


(1)	Written options, which are in the form of derivatives, are also included in the derivative disclosures in Note 15 (Derivatives). Carrying value net asset position is a result of certain deferred premium option trades.


(2)	Represent recourse provided, predominantly to the GSEs, on loans sold under various programs and arrangements.


(3)	Includes indemnifications provided to certain third-party clearing agents. Outstanding customer obligations under these arrangements were $ i 77 million and $ i 80 million with related collateral of $ i 1.3 billion and $ i 696 million at June 30, 2020, and December 31, 2019, respectively.

“Maximum exposure to loss” and “Non-investment grade” are required disclosures under GAAP. Maximum exposure to loss represents the estimated loss that would be incurred under an assumed hypothetical circumstance, despite what we believe is a remote possibility, where the value of our interests and any associated collateral declines to zero. Maximum exposure to loss estimates in Table 13.1 do not reflect economic hedges or collateral we could use to offset or recover losses we may incur under our guarantee agreements. Accordingly, this required disclosure is not an indication of expected loss. We believe the carrying value is more representative of our exposure to loss than maximum exposure to loss. The carrying value represents the fair value of the guarantee, if any, and also includes an ACL for guarantees, if applicable.

Non-investment grade represents those guarantees on which we have a higher risk of performance under the terms of the guarantee. If the underlying assets under the guarantee are non-investment grade (that is, an external rating that is below investment grade or an internal credit default grade that is equivalent to a below investment grade external rating), we consider the risk of performance to be high. Internal credit default grades are determined based upon the same credit policies that we use to evaluate the risk of payment or performance when making loans and other extensions of credit. Credit quality indicators we usually consider in evaluating risk of

payments or performance are described in Note 6 (Loans and Related Allowance for Credit Losses).

We provide debit and credit card transaction processing services through the payment networks directly for merchants and as a sponsor for merchant processing servicers, including our joint venture with a third party that is accounted for as an equity method investment. In our role as the merchant acquiring bank, we have a potential obligation for payment and delivery disputes between the merchant and the cardholder that are resolved in favor of the cardholder. If we are unable to collect the amounts from the merchant, we incur a loss for the refund to the cardholder. We are secondarily obligated to make a refund for transactions involving the sponsored merchant processing servicers. We have a low likelihood of loss since most products and services are delivered when purchased and amounts are refunded when items are returned to the merchant. In addition, we may reduce our risk by withholding future payments and requiring cash or other collateral. For the first half of 2020, we processed card transaction volume of $ i 608.3 billion as a merchant acquiring bank, and related losses, including those from our joint venture entity, were immaterial.

The Parent fully and unconditionally guarantees the payment of principal, interest, and any other amounts that may be due on securities that its 100% owned finance subsidiary, Wells Fargo Finance LLC, may issue. These guaranteed liabilities were $ i 2.4 billion and $ i 1.6 billion at June 30, 2020 and December 31,

118

Note 13: Guarantees, Pledged Assets and Collateral, and Other Commitments (continued)

2019, respectively. These guarantees rank on parity with all of the Parent’s other unsecured and unsubordinated indebtedness.

Pledged Assets

Table 13.2 provides the carrying amount of on-balance sheet pledged assets and the fair value of other pledged collateral. Other pledged collateral is collateral we have received from third parties, have the right to repledge and is not recognized on our balance sheet.

TRADING RELATED ACTIVITY Our trading businesses may pledge debt and equity securities in connection with securities sold under agreements to repurchase (repurchase agreements) and securities lending arrangements. The collateral that we pledge related to our trading activities may include our own collateral as well as collateral that we have received from third parties and have the right to repledge. All of the trading activity pledged collateral is eligible to be repledged or sold by the secured party.

NON-TRADING RELATED ACTIVITY As part of our liquidity management strategy, we may pledge loans, debt securities, and other assets to secure trust and public deposits, borrowings and letters of credit from the Federal Home Loan Bank (FHLB) and FRB and for other purposes as required or permitted by law or insurance statutory requirements. Substantially all of the non-trading activity pledged collateral is not eligible to be repledged or sold by the secured party.

VIE RELATED We pledge assets in connection with various types of transactions entered into with VIEs. These pledged assets can only be used to settle the liabilities of those entities. We also have loans recorded on our balance sheet which represent certain delinquent loans that are eligible for repurchase from GNMA loan securitizations. See Note 10 (Securitizations and Variable Interest Entities) for additional information on consolidated VIE assets and VIEs accounted for as secured borrowings.

Table 13.2: Pledged Assets



(in millions)	Jun 30, 2020		Dec 31, 2019
Related to trading activities:
Repledged third-party owned debt and equity securities	$	i 41,952	i 60,083
Trading debt securities and other	i 22,847		i 51,083
Equity securities	i 971		i 1,379
Total pledged assets related to trading activities	i 65,770		i 112,545
Related to non-trading activities:
Loans	i 406,496		i 406,106
Debt securities:
Available-for-sale	i 54,455		i 61,126
Held-to-maturity	i 2,826		i 3,685
Mortgage loans held for sale	i 181		i 2,266
Total pledged assets related to non-trading activities	i 463,958		i 473,183
Related to VIEs:
Consolidated VIE assets	i 12,447		i 14,368
VIEs accounted for as secured borrowings	i 74		i 80
Loans eligible for repurchase from GNMA securitizations	i 54		i 568
Total pledged assets related to VIEs	i 12,575		i 15,016
Total pledged assets	$	i 542,303	i 600,744

Securities Financing Activities

We enter into resale and repurchase agreements and securities borrowing and lending agreements (collectively, “securities financing activities”) typically to finance trading positions (including securities and derivatives), acquire securities to cover short trading positions, accommodate customers’ financing needs, and settle other securities obligations. These activities are conducted through our broker-dealer subsidiaries and to a lesser extent through other bank entities. Our securities financing activities primarily involve high quality, liquid securities such as U.S. Treasury securities and government agency securities, and to a lesser extent, less liquid securities, including equity securities, corporate bonds and asset-backed securities. We account for these transactions as collateralized financings in which we typically receive or pledge securities as collateral. We believe these financing transactions generally do not have material credit risk given the collateral provided and the related monitoring processes.

OFFSETTING OF SECURITIES FINANCING ACTIVITIES i Table 13.3 presents resale and repurchase agreements subject to master repurchase agreements (MRA) and securities borrowing and lending agreements subject to master securities lending agreements (MSLA). Collateralized financings with a single counterparty are presented net on our balance sheet, provided certain criteria are met that permit balance sheet netting. Most transactions subject to these agreements do not meet those criteria and thus are not eligible for balance sheet netting.

Collateral we pledged consists of non-cash instruments, such as securities or loans, and is not netted on the balance sheet against the related liability. Collateral we received includes securities or loans and is not recognized on our balance sheet. Collateral pledged or received may be increased or decreased over time to maintain certain contractual thresholds, as the assets underlying each arrangement fluctuate in value. Generally, these agreements require collateral to exceed the asset or liability recognized on the balance sheet. The following table includes the amount of collateral pledged or received related to exposures subject to enforceable MRAs or MSLAs. While these agreements

119

are typically over-collateralized, U.S. GAAP requires disclosure in this table to limit the reported amount of such collateral to the amount of the related recognized asset or liability for each counterparty.

In addition to the amounts included in Table 13.3, we also have balance sheet netting related to derivatives that is disclosed in Note 15 (Derivatives).

Table 13.3: Offsetting – Securities Financing Activities



(in millions)	Jun 30, 2020			Dec 31, 2019
Assets:
Resale and securities borrowing agreements
Gross amounts recognized	$	i 110,900		i 140,773
Gross amounts offset in consolidated balance sheet (1)	( i 13,640		)	( i 19,180	)
Net amounts in consolidated balance sheet (2)	i 97,260			i 121,593
Collateral not recognized in consolidated balance sheet (3)	( i 96,541		)	( i 120,786	)
Net amount (4)	$	i 719		i 807
Liabilities:
Repurchase and securities lending agreements
Gross amounts recognized	$	i 63,028		i 111,038
Gross amounts offset in consolidated balance sheet (1)	( i 13,640		)	( i 19,180	)
Net amounts in consolidated balance sheet (5)	i 49,388			i 91,858
Collateral pledged but not netted in consolidated balance sheet (6)	( i 49,147		)	( i 91,709	)
Net amount (4)	$	i 241		i 149


(1)	Represents recognized amount of resale and repurchase agreements with counterparties subject to enforceable MRAs that have been offset in the consolidated balance sheet.

(2)

Includes $ i 79.3 billion and $ i 102.1 billion classified on our consolidated balance sheet in federal funds sold and securities purchased under resale agreements at June 30, 2020, and December 31, 2019, respectively. Also includes securities purchased under long-term resale agreements (generally one year or more) classified in loans, which totaled $ i 18.0 billion and $ i 19.5 billion, at June 30, 2020, and December 31, 2019, respectively.

(3)

Represents the fair value of collateral we have received under enforceable MRAs or MSLAs, limited in the table above to the amount of the recognized asset due from each counterparty. At June 30, 2020, and December 31, 2019, we have received total collateral with a fair value of $ i 122.5 billion and $ i 150.9 billion, respectively, all of which we have the right to sell or repledge. These amounts include securities we have sold or repledged to others with a fair value of $ i 41.1 billion at June 30, 2020, and $ i 59.1 billion at December 31, 2019.


(4)	Represents the amount of our exposure (assets) or obligation (liabilities) that is not collateralized and/or is not subject to an enforceable MRA or MSLA.


(5)	Amount is classified in short-term borrowings on our consolidated balance sheet.

(6)

Represents the fair value of collateral we have pledged, related to enforceable MRAs or MSLAs, limited in the table above to the amount of the recognized liability owed to each counterparty. At June 30, 2020, and December 31, 2019, we have pledged total collateral with a fair value of $ i 64.3 billion and $ i 113.3 billion, respectively, substantially all of which may be sold or repledged by the counterparty.

REPURCHASE AND SECURITIES LENDING AGREEMENTS Securities sold under repurchase agreements and securities lending arrangements are effectively short-term collateralized borrowings. In these transactions, we receive cash in exchange for transferring securities as collateral and recognize an obligation to reacquire the securities for cash at the transaction’s maturity. These types of transactions create risks, including (1) the counterparty may fail to return the securities at maturity, (2) the fair value of the securities transferred may decline below the amount of our obligation to reacquire the securities, and therefore create an obligation for us to pledge additional amounts, and (3) the counterparty may accelerate the maturity on demand, requiring us to reacquire the security prior to contractual maturity. We attempt to mitigate these risks in various ways. Our collateral primarily consists of highly liquid securities. In addition, we underwrite and monitor the financial strength of our counterparties, monitor the fair value of collateral pledged relative to contractually required repurchase amounts, and monitor that our collateral is properly returned through the clearing and settlement process in advance of our cash repayment. i Table 13.4 provides the gross amounts recognized on the balance sheet (before the effects of offsetting) of our liabilities for repurchase and securities lending agreements disaggregated by underlying collateral type.

120

Note 13: Guarantees, Pledged Assets and Collateral, and Other Commitments (continued)

Table 13.4: Gross Obligations by Underlying Collateral Type



(in millions)	Jun 30, 2020		Dec 31, 2019
Repurchase agreements:
Securities of U.S. Treasury and federal agencies	$	i 33,757	i 48,161
Securities of U.S. States and political subdivisions	i 54		i 104
Federal agency mortgage-backed securities	i 9,751		i 44,737
Non-agency mortgage-backed securities	i 1,103		i 1,818
Corporate debt securities	i 9,273		i 7,126
Asset-backed securities	i 1,008		i 1,844
Equity securities	i 1,399		i 1,674
Other	i 363		i 705
Total repurchases	i 56,708		i 106,169
Securities lending arrangements:
Securities of U.S. Treasury and federal agencies	i 38		i 163
Federal agency mortgage-backed securities	i 18		i —
Corporate debt securities	i 97		i 223
Equity securities (1)	i 6,164		i 4,481
Other	i 3		i 2
Total securities lending	i 6,320		i 4,869
Total repurchases and securities lending	$	i 63,028	i 111,038


(1)	Equity securities are generally exchange traded and represent collateral received from third parties that has been repledged. We received the collateral through either margin lending agreements or contemporaneous securities borrowing transactions with other counterparties.

Table 13.5 provides the contractual maturities of our gross obligations under repurchase and securities lending agreements.

Table 13.5: Contractual Maturities of Gross Obligations

(in millions)

Overnight/continuous

Up to 30 days

30-90 days

>90 days

Total gross obligation

Repurchase agreements

i 44,823

i 3,430

i 4,970

i 3,485

i 56,708

Securities lending arrangements

i 5,771

i —

i 549

i —

i 6,320

Total repurchases and securities lending (1)

i 50,594

i 3,430

i 5,519

i 3,485

i 63,028

Repurchase agreements

i 79,793

i 17,681

i 4,825

i 3,870

i 106,169

Securities lending arrangements

i 4,724

i —

i 145

i —

i 4,869

Total repurchases and securities lending (1)

i 84,517

i 17,681

i 4,970

i 3,870

i 111,038


(1)	Securities lending is executed under agreements that allow either party to terminate the transaction without notice, while repurchase agreements have a term structure to them that technically matures at a point in time. The overnight/continuous repurchase agreements require election of both parties to roll the trade rather than the election to terminate the arrangement as in securities lending.

OTHER COMMITMENTS To meet the financing needs of our customers, we may enter into commitments to purchase debt and equity securities to provide capital for their funding, liquidity or other future needs. As of June 30, 2020, and December 31, 2019, we had commitments to purchase debt securities of $ i 18 million in both periods and commitments to purchase equity securities of $ i 3.3 billion and $ i 2.7 billion, respectively.

As part of maintaining our memberships in certain clearing organizations, we are required to stand ready to provide liquidity to sustain market clearing activity in the event unforeseen events occur or are deemed likely to occur. Certain of these obligations are guarantees of other members’ performance and accordingly are included in Other guarantees and indemnifications in

Table 13.1.

Also, we have commitments to purchase loans and securities under resale agreements from certain counterparties, including central clearing organizations. The amount of our unfunded contractual commitments was $ i 14.1 billion and $ i 7.5 billion as of June 30, 2020, and December 31, 2019, respectively.

Given the nature of these commitments, they are excluded from Table 6.4 (Unfunded Credit Commitments) in Note 6 (Loans and Related Allowance for Credit Losses).

121

Note 14: Legal Actions

Wells Fargo and certain of our subsidiaries are involved in a number of judicial, regulatory, governmental, arbitration, and other proceedings or investigations concerning matters arising from the conduct of our business activities, and many of those proceedings and investigations expose Wells Fargo to potential financial loss. These proceedings and investigations include actions brought against Wells Fargo and/or our subsidiaries with respect to corporate-related matters and transactions in which Wells Fargo and/or our subsidiaries were involved. In addition, Wells Fargo and our subsidiaries may be requested to provide information or otherwise cooperate with government authorities in the conduct of investigations of other persons or industry groups.

Although there can be no assurance as to the ultimate outcome, Wells Fargo and/or our subsidiaries have generally denied, or believe we have a meritorious defense and will deny, liability in all significant legal actions pending against us, including the matters described below, and we intend to defend vigorously each case, other than matters we describe as having settled. We establish accruals for legal actions when potential losses associated with the actions become probable and the costs can be reasonably estimated. For such accruals, we record the amount we consider to be the best estimate within a range of potential losses that are both probable and estimable; however, if we cannot determine a best estimate, then we record the low end of the range of those potential losses. The actual costs of resolving legal actions may be substantially higher or lower than the amounts accrued for those actions.

ATM ACCESS FEE LITIGATION In October 2011, plaintiffs filed a putative class action, Mackmin, et al. v. Visa, Inc. et al., against Wells Fargo & Company, Wells Fargo Bank, N.A., Visa, MasterCard, and several other banks in the United States District Court for the District of Columbia. Plaintiffs allege that the Visa and MasterCard requirement that if an ATM operator charges an access fee on Visa and MasterCard transactions, then that fee cannot be greater than the access fee charged for transactions on other networks, violates antitrust rules. Plaintiffs seek treble damages, restitution, injunctive relief, and attorneys’ fees where available under federal and state law. Two other antitrust cases that make similar allegations were filed in the same court, but these cases did not name Wells Fargo as a defendant. On February 13, 2013, the district court granted defendants’ motions to dismiss the i three actions. Plaintiffs appealed the dismissals and, on August 4, 2015, the United States Court of Appeals for the District of Columbia Circuit vacated the district court’s decisions and remanded the i three cases to the district court for further proceedings. On June 28, 2016, the United States Supreme Court granted defendants’ petitions for writ of certiorari to review the decisions of the United States Court of Appeals for the District of Columbia. On November 17, 2016, the United States Supreme Court dismissed the petitions as improvidently granted, and the i three cases returned to the district court for further proceedings. On March 18, 2020, the Company reached a settlement in principle pursuant to which the Company will pay $ i 20.8 million to resolve the cases, subject to final documentation of the settlement agreement.

AUTOMOBILE LENDING MATTERS On April 20, 2018, the Company entered into consent orders with the Office of the Comptroller of the Currency (OCC) and the Consumer Financial Protection Bureau (CFPB) to resolve, among other things, investigations by

the agencies into the Company’s compliance risk management program and its past practices involving certain automobile collateral protection insurance (CPI) policies and certain mortgage interest rate lock extensions. The consent orders require remediation to customers and the payment of a total of $ i 1.0 billion in civil money penalties to the agencies. In July 2017, the Company announced a plan to remediate customers who may have been financially harmed due to issues related to automobile CPI policies purchased through a third-party vendor on their behalf. Multiple putative class action cases alleging, among other things, unfair and deceptive practices relating to these CPI policies, have been filed against the Company and consolidated into i one multi-district litigation in the United States District Court for the Central District of California. The Company has reached an agreement to resolve the multi-district litigation pursuant to which the Company has agreed to pay, consistent with its remediation obligations under the consent orders, approximately $ i 609 million in remediation to customers with CPI policies placed between October 15, 2005, and September 30, 2016. The settlement amount is not incremental to the Company’s remediation obligations under the consent orders, but instead encompasses those obligations, including remediation payments to date. The settlement amount is subject to change as the Company finalizes its remediation activity under the consent orders. In addition, the Company has agreed to contribute $ i 1 million to a common fund for the class. The district court granted final approval of the settlement on November 21, 2019. A putative class of shareholders also filed a securities fraud class action against the Company and its executive officers alleging material misstatements and omissions of CPI-related information in the Company’s public disclosures. In January 2020, the court dismissed this action as to all defendants except the Company and a former executive officer and limited the action to two alleged misstatements. In addition, the Company is subject to a class action lawsuit in the United States District Court for the Central District of California alleging that customers are entitled to refunds related to the unused portion of guaranteed automobile protection (GAP) waiver or insurance agreements between the customer and dealer and, by assignment, the lender. Allegations related to the CPI and GAP programs are among the subjects of shareholder derivative lawsuits pending in federal and state court in California. The court dismissed the state court action in September 2018, but plaintiffs filed an amended complaint in November 2018. The parties to the state court action have entered into an agreement to resolve the action pursuant to which the Company will pay plaintiffs’ attorneys’ fees and undertake certain business and governance practices. The state court granted final approval of the settlement on January 15, 2020, and a notice of appeal has been filed. These and other issues related to the origination, servicing, and collection of consumer automobile loans, including related insurance products, have also subjected the Company to formal or informal inquiries, investigations, or examinations from federal and state government agencies. In December 2018, the Company entered into an agreement with all 50 state Attorneys General and the District of Columbia to resolve an investigation into the Company’s retail sales practices, CPI and GAP, and mortgage interest rate lock matters, pursuant to which the Company paid $ i 575 million.

CONSENT ORDER DISCLOSURE LITIGATION Wells Fargo shareholders have brought securities fraud class actions in the

122

Note 14: Legal Actions (continued)

United States District Courts for the Northern District of California and the Southern District of New York alleging that the Company made false or misleading statements regarding its efforts to comply with the February 2018 consent order with the FRB and the April 2018 consent orders with the CFPB and OCC.

CONSUMER DEPOSIT ACCOUNT RELATED REGULATORY INVESTIGATION The CFPB is conducting an investigation into whether customers were unduly harmed by the Company’s historical practices associated with the freezing (and, in many cases, closing) of consumer deposit accounts after the Company detected suspected fraudulent activity (by third parties or account holders) that affected those accounts.

CORONAVIRUS AID, RELIEF, AND ECONOMIC SECURITY ACT/PAYCHECK PROTECTION PROGRAM Plaintiffs have filed putative class actions in various federal courts against the Company. The actions seek damages and injunctive relief related to the Company’s offering of Paycheck Protection Program (PPP) loans under the Coronavirus Aid, Relief, and Economic Security Act, as well as claims for fees by purported agents who allegedly assisted customers with preparing PPP loan applications submitted to the Company. The Company has also received formal and informal inquiries from federal and state governmental agencies regarding its offering of PPP loans.

FIDUCIARY AND CUSTODY ACCOUNT FEE CALCULATIONS Federal government agencies are conducting formal or informal inquiries, investigations, or examinations regarding fee calculations within certain fiduciary and custody accounts in the Company’s investment and fiduciary services business, which is part of the wealth management business within the Wealth and Investment Management (WIM) operating segment. The Company has determined that there have been instances of incorrect fees being applied to certain assets and accounts, resulting in both overcharges and undercharges to customers.

FOREIGN EXCHANGE BUSINESS The United States Department of Justice (Department of Justice) is investigating certain activities in the Company’s foreign exchange business, including whether customers may have received pricing inconsistent with commitments made to those customers. Previous investigations by other federal government agencies have been resolved.

INTERCHANGE LITIGATION Plaintiffs representing a putative class of merchants have filed putative class actions, and individual merchants have filed individual actions, against Wells Fargo Bank, N.A., Wells Fargo & Company, Wachovia Bank, N.A., and Wachovia Corporation regarding the interchange fees associated with Visa and MasterCard payment card transactions. Visa, MasterCard, and several other banks and bank holding companies are also named as defendants in these actions. These actions have been consolidated in the United States District Court for the Eastern District of New York. The amended and consolidated complaint asserts claims against defendants based on alleged violations of federal and state antitrust laws and seeks damages, as well as injunctive relief. Plaintiff merchants allege that Visa, MasterCard, and payment card issuing banks unlawfully colluded to set interchange rates. Plaintiffs also allege that enforcement of certain Visa and MasterCard rules and alleged tying and bundling of services offered to merchants are anticompetitive. Wells Fargo and Wachovia, along with other defendants and entities, are parties to Loss and Judgment Sharing Agreements, which provide that they, along with other entities, will share, based on a formula, in any losses from the Interchange Litigation. On July 13, 2012,

Visa, MasterCard, and the financial institution defendants, including Wells Fargo, signed a memorandum of understanding with plaintiff merchants to resolve the consolidated class action and reached a separate settlement in principle of the consolidated individual actions. The settlement payments to be made by all defendants in the consolidated class and individual actions totaled approximately $ i 6.6 billion before reductions applicable to certain merchants opting out of the settlement. The class settlement also provided for the distribution to class merchants of 10 basis points of default interchange across all credit rate categories for a period of eight consecutive months. The district court granted final approval of the settlement, which was appealed to the United States Court of Appeals for the Second Circuit by settlement objector merchants. Other merchants opted out of the settlement and are pursuing several individual actions. On June 30, 2016, the Second Circuit vacated the settlement agreement and reversed and remanded the consolidated action to the United States District Court for the Eastern District of New York for further proceedings. On November 23, 2016, prior class counsel filed a petition to the United States Supreme Court, seeking review of the reversal of the settlement by the Second Circuit, and the Supreme Court denied the petition on March 27, 2017. On November 30, 2016, the district court appointed lead class counsel for a damages class and an equitable relief class. The parties have entered into a settlement agreement to resolve the money damages class claims pursuant to which defendants will pay a total of approximately $ i 6.2 billion, which includes approximately $ i 5.3 billion of funds remaining from the 2012 settlement and $ i 900 million in additional funding. The Company’s allocated responsibility for the additional funding is approximately $ i 94.5 million. The court granted final approval of the settlement on December 13, 2019, which was appealed to the United States Court of Appeals for the Second Circuit by settlement objector merchants. Several of the opt-out and direct action litigations have been settled while others remain pending. Discovery is proceeding in the opt-out litigations and the equitable relief class case.

LOW INCOME HOUSING TAX CREDITS Federal government agencies have undertaken formal or informal inquiries or investigations regarding the manner in which the Company purchased, and negotiated the purchase of, certain federal low income housing tax credits in connection with the financing of low income housing developments.

MOBILE DEPOSIT PATENT LITIGATION The Company is a defendant in i two separate cases brought by United Services Automobile Association (USAA) in the United States District Court for the Eastern District of Texas alleging claims of patent infringement regarding mobile deposit capture technology patents held by USAA. Trial in the first case commenced on October 30, 2019, and resulted in a $ i 200 million verdict against the Company. Trial in the second case commenced on January 6, 2020, and resulted in a $ i 102.7 million verdict against the Company. The Company has filed post-trial motions to, among other things, vacate the verdicts, and USAA has filed post-trial motions seeking future royalty payments and damages for willful infringement.

MORTGAGE LOAN MODIFICATION LITIGATION Plaintiffs representing a putative class of mortgage borrowers have filed separate putative class actions, Hernandez v. Wells Fargo, et al., Coordes v. Wells Fargo, et al., Ryder v. Wells Fargo, Liguori v. Wells Fargo, and Dore v. Wells Fargo, against Wells Fargo Bank, N.A., in the United States District Court for the Northern District

123

of California, the United States District Court for the District of Washington, the United States District Court for the Southern District of Ohio, the United States District Court for the Southern District of New York, and the United States District Court for the Western District of Pennsylvania, respectively. Plaintiffs allege that Wells Fargo improperly denied mortgage loan modifications or repayment plans to customers in the foreclosure process due to the overstatement of foreclosure attorneys’ fees that were included for purposes of determining whether a customer in the foreclosure process qualified for a mortgage loan modification or repayment plan. The district court in the Hernandez case certified a nationwide breach of contract class for foreclosed borrowers and denied certification on claims pertaining to other impacted borrowers. In March 2020, the Company entered into an agreement pursuant to which the Company will pay $ i 18.5 million to resolve the claims of the certified class in the Hernandez case.

MORTGAGE-RELATED REGULATORY INVESTIGATIONS Federal and state government agencies, including the Department of Justice, have been investigating or examining certain mortgage related activities of Wells Fargo and predecessor institutions. Wells Fargo, for itself and for predecessor institutions, has responded, or continues to respond, to requests from these agencies seeking information regarding the origination, underwriting, and securitization of residential mortgages, including sub-prime mortgages. These agencies have advanced theories of purported liability with respect to certain of these activities. An agreement, pursuant to which the Company paid $ i 2.09 billion, was reached in August 2018 to resolve the Department of Justice investigation, which related to certain 2005-2007 residential mortgage-backed securities activities. In addition, the Company reached an agreement with the Attorney General of the State of Illinois in November 2018 pursuant to which the Company paid $ i 17 million in restitution to certain Illinois state pension funds and reached an agreement with the Attorney General of the State of Maryland in June 2020 pursuant to which the Company agreed to pay $ i 20 million in restitution, in each case to resolve claims relating to certain residential mortgage-backed securities activities. Other financial institutions have entered into similar settlements with these agencies, the nature of which related to the specific activities of those financial institutions, including the imposition of significant financial penalties and remedial actions.

NOMURA/NATIXIS MORTGAGE-RELATED LITIGATION In August 2014 and August 2015, Nomura Credit & Capital Inc. (Nomura) and Natixis Real Estate Holdings, LLC (Natixis) filed a total of i seven third-party complaints against Wells Fargo Bank, N.A., in New York state court. In the underlying first-party actions, Nomura and Natixis have been sued for alleged breaches of representations and warranties made in connection with residential mortgage-backed securities sponsored by them. In the third-party actions, Nomura and Natixis allege that Wells Fargo, as master servicer, primary servicer or securities administrator, failed to notify Nomura and Natixis of their own breaches, failed to properly oversee the primary servicers, and failed to adhere to accepted servicing practices. Natixis additionally alleges that Wells Fargo failed to perform default oversight duties. Wells Fargo has asserted counterclaims alleging that Nomura and Natixis failed to provide Wells Fargo notice of their representation and warranty breaches.

OFAC RELATED INVESTIGATION The Company has self-identified an issue whereby certain foreign banks utilized a Wells Fargo software-based solution to conduct import/export trade-related financing transactions with countries and entities prohibited by

the Office of Foreign Assets Control (OFAC) of the United States Department of the Treasury. We do not believe any funds related to these transactions flowed through accounts at Wells Fargo as a result of the aforementioned conduct. The Company has made voluntary self-disclosures to OFAC and is cooperating with an inquiry from the Department of Justice.

ORDER OF POSTING LITIGATION Plaintiffs filed a series of putative class actions against Wachovia Bank, N.A., and Wells Fargo Bank, N.A., as well as many other banks, challenging the “high to low” order in which the banks post debit card transactions to consumer deposit accounts. Most of these actions were consolidated in multi-district litigation proceedings (MDL proceedings) in the United States District Court for the Southern District of Florida. The court in the MDL proceedings has certified a class of putative plaintiffs, and Wells Fargo moved to compel arbitration of the claims of unnamed class members. The court denied the motions to compel arbitration in October 2016, and Wells Fargo appealed this decision to the United States Court of Appeals for the Eleventh Circuit. In May 2018, the Eleventh Circuit ruled in Wells Fargo’s favor and found that Wells Fargo had not waived its arbitration rights and remanded the case to the district court for further proceedings. On September 26, 2019, the district court entered an order granting Wells Fargo’s motion and dismissed the claims of unnamed class members in favor of arbitration. Plaintiffs appealed this decision to the United States Court of Appeals for the Eleventh Circuit.

RETAIL SALES PRACTICES MATTERS A number of bodies or entities, including (a) federal, state, and local government agencies, including the Department of Justice, the United States Securities and Exchange Commission (SEC), and the United States Department of Labor, (b) state attorneys general, including the New York Attorney General, and (c) Congressional committees, have undertaken formal or informal inquiries, investigations, or examinations arising out of certain retail sales practices of the Company that were the subject of settlements with the CFPB, the OCC, and the Office of the Los Angeles City Attorney announced by the Company on September 8, 2016. These matters are at varying stages. The Company has responded, and continues to respond, to requests from certain of the foregoing. In October 2018, the Company entered into an agreement to resolve the New York Attorney General’s investigation pursuant to which the Company paid $ i 65 million to the State of New York. In December 2018, the Company entered into an agreement with all 50 state Attorneys General and the District of Columbia to resolve an investigation into the Company’s retail sales practices, CPI and GAP, and mortgage interest rate lock matters, pursuant to which the Company paid $ i 575 million. On i February 21, 2020, the Company entered into an agreement with the Department of Justice to resolve the Department of Justice’s criminal investigation into the Company’s retail sales practices, as well as a separate agreement to resolve the Department of Justice’s civil investigation. As part of the Department of Justice criminal settlement, no charges will be filed against the Company provided the Company abides by all the terms of the agreement. i The Department of Justice criminal settlement also includes the Company’s agreement that the facts set forth in the settlement document constitute sufficient facts for the finding of criminal violations of statutes regarding bank records and personal information. On i February 21, 2020, the Company also entered into an order to resolve the SEC’s investigation arising out of the Company’s retail sales practices. The SEC order contains a finding, to which

124

Note 14: Legal Actions (continued)

the Company consented, that the facts set forth include violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. As part of the resolution of the Department of Justice and SEC investigations, the Company has agreed to make payments totaling $ i 3.0 billion. In addition, as part of the settlements and included in the $ i 3.0 billion amount, the Company has agreed to the creation of a $ i 500 million Fair Fund for the benefit of investors who were harmed by the conduct covered in the SEC settlement.

In addition, a number of lawsuits have been filed by non-governmental parties seeking damages or other remedies related to these retail sales practices. First, various class plaintiffs, purporting to represent consumers who allege that they received products or services without their authorization or consent, have brought separate putative class actions against the Company in the United States District Court for the Northern District of California and various other jurisdictions. On June 14, 2018, the district court granted final approval of a settlement entered into by the Company in the first-filed action, Jabbari v. Wells Fargo Bank, N.A., pursuant to which the Company will pay $ i 142 million to resolve claims regarding certain products or services provided without authorization or consent for the time period May 1, 2002 to April 20, 2017. On July 20, 2020, the United States Court of Appeals for the Ninth Circuit affirmed the district court's order granting final approval of the settlement. Second, the Company was subject to a consolidated securities fraud class action alleging certain misstatements and omissions in the Company’s disclosures related to sales practices matters. The Company entered into a settlement agreement to resolve this matter pursuant to which the Company paid $ i 480 million. Third, Wells Fargo shareholders have brought numerous shareholder derivative lawsuits asserting breach of fiduciary duty claims against, among others, current and former directors and officers for their alleged involvement with and failure to detect and prevent sales practices issues. These actions are currently pending in the United States District Court for the Northern District of California and California state court as consolidated or coordinated proceedings. The parties have entered into settlement agreements to resolve the shareholder derivative lawsuits pursuant to which insurance carriers will pay the Company approximately $ i 240 million for alleged damage to the Company, and the Company will pay plaintiffs’ attorneys’ fees. The federal court granted final approval of the settlement for its action on April 7, 2020. The state court granted final approval of the settlement for its action on January 15, 2020. Fourth, a purported Employee Retirement Income Security Act (ERISA) class action was filed in the United States District Court for the District of Minnesota on behalf of 401(k) plan participants. The district court dismissed the action, and on July 27, 2020, the United States Court of Appeals for the Eighth Circuit affirmed the dismissal.

RMBS TRUSTEE LITIGATION In November 2014, a group of institutional investors (Institutional Investor Plaintiffs), including funds affiliated with BlackRock, Inc., filed a putative class action in the United States District Court for the Southern District of New York against Wells Fargo Bank, N.A., alleging claims against the Company in its capacity as trustee for a number of residential mortgage-backed securities (RMBS) trusts (Federal Court Complaint). Similar complaints have been filed against other trustees in various courts, including in the Southern District of New York, in New York state court, and in other states, by RMBS investors. The Federal Court Complaint alleged that Wells Fargo Bank, N.A., as trustee, caused losses to investors and asserted causes of action based upon, among other things, the trustee’s

alleged failure to notify and enforce repurchase obligations of mortgage loan sellers for purported breaches of representations and warranties, notify investors of alleged events of default, and abide by appropriate standards of care following alleged events of default. Plaintiffs sought money damages in an unspecified amount, reimbursement of expenses, and equitable relief. In December 2014 and December 2015, certain other investors filed additional complaints alleging similar claims against Wells Fargo Bank, N.A., in the Southern District of New York (Related Federal Cases). In January 2016, the Southern District of New York entered an order in connection with the Federal Court Complaint dismissing claims related to certain of the trusts at issue (Dismissed Trusts). The Company’s subsequent motion to dismiss the Federal Court Complaint and the complaints for the Related Federal Cases was granted in part and denied in part in March 2017. In May 2017, the Company filed third-party complaints against certain investment advisors affiliated with the Institutional Investor Plaintiffs seeking contribution with respect to claims alleged in the Federal Court Complaint (Third-Party Claims).

In December 2016, the Institutional Investor Plaintiffs filed a new putative class action complaint in New York state court in respect of i 261 RMBS trusts, including the Dismissed Trusts, for which Wells Fargo Bank, N.A., serves or served as trustee (State Court Action). A complaint raising similar allegations to those in the Federal Court Complaint was filed in May 2016 in New York state court by IKB International and IKB Deutsche Industriebank (IKB Action).

In July 2017, certain of the plaintiffs from the State Court Action filed a civil complaint relating to Wells Fargo Bank, N.A.’s setting aside reserves for legal fees and expenses in connection with the liquidation of i eleven RMBS trusts at issue in the State Court Action (Declaratory Judgment Action). The complaint sought, among other relief, declarations that the Company is not entitled to indemnification, the advancement of funds, or the taking of reserves from trust funds for legal fees and expenses it incurs in defending the claims in the State Court Action.

In May 2019, the New York state court approved a settlement agreement among the Institutional Investor Plaintiffs and the Company pursuant to which, among other terms, the Company paid $ i 43 million to resolve the Federal Court Complaint and the State Court Action. The settlement also resolved the Third Party Claims and the Declaratory Judgment Action. The settlement did not affect the Related Federal Cases or the IKB Action, which remain pending.

SEMINOLE TRIBE TRUSTEE LITIGATION The Seminole Tribe of Florida filed a complaint in Florida state court alleging that Wells Fargo, as trustee, charged excess fees in connection with the administration of a minor’s trust and failed to invest the assets of the trust prudently. The complaint was later amended to include i three individual current and former beneficiaries as plaintiffs and to remove the Tribe as a party to the case. In December 2016, the Company filed a motion to dismiss the amended complaint on the grounds that the Tribe is a necessary party and that the individual beneficiaries lack standing to bring claims. The motion was denied in June 2018. The case is pending trial.

WHOLESALE BANKING CONSENT ORDER INVESTIGATION On November 19, 2015, the Company entered into a consent order with the OCC, pursuant to which the Wholesale Banking group was required to implement customer due diligence standards that include collection of current beneficial ownership information for certain business customers. The Company is responding to

125

inquiries from various federal government agencies regarding potentially inappropriate conduct in connection with the collection of beneficial ownership information.

OUTLOOK As described above, the Company establishes accruals for legal actions when potential losses associated with the actions become probable and the costs can be reasonably estimated. The high end of the range of reasonably possible potential losses in excess of the Company’s accrual for probable and estimable losses was approximately $ i 2.3 billion as of June 30, 2020. The outcomes of legal actions are unpredictable and subject to significant uncertainties, and it is inherently difficult to determine whether any loss is probable or even possible. It is also inherently difficult to estimate the amount of any loss and there may be matters for which a loss is probable or reasonably possible but not currently estimable. Accordingly, actual losses may be in excess of the established accrual or the range of reasonably possible loss. Wells Fargo is unable to determine whether the ultimate resolution of the retail sales practices matters will have a material adverse effect on its consolidated financial condition. Based on information currently available, advice of counsel, available insurance coverage, and established reserves, Wells Fargo believes that the eventual outcome of other actions against Wells Fargo and/or its subsidiaries will not, individually or in the aggregate, have a material adverse effect on Wells Fargo’s consolidated financial condition. However, it is possible that the ultimate resolution of a matter, if unfavorable, may be material to Wells Fargo’s results of operations for any particular period.

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Note 15: Derivatives (continued)

Note 15: Derivatives

We use derivatives to manage exposure to market risk, including interest rate risk, credit risk and foreign currency risk, and to assist customers with their risk management objectives. We designate certain derivatives as hedging instruments in qualifying hedge accounting relationships (fair value or cash flow hedges). Our remaining derivatives consist of economic hedges that do not qualify for hedge accounting, and derivatives held for customer accommodation trading or other purposes. For more information on our derivative activities, see Note 18 (Derivatives) in our 2019 Form 10-K.

Table 15.1 presents the total notional or contractual amounts and fair values for our derivatives. Derivative transactions can be measured in terms of the notional amount, but this amount is not recorded on the balance sheet and is not, when viewed in isolation, a meaningful measure of the risk profile of the instruments. The notional amount is generally not exchanged but is used only as the basis on which interest and other payments are determined.

Table 15.1: Notional or Contractual Amounts and Fair Values of Derivatives

Notional or

contractual

amount

Fair value

Notional or

contractual

amount

Fair value

(in millions)

Derivative

assets

Derivative

liabilities

Derivative
assets

Derivative
liabilities

Derivatives designated as hedging instruments

Interest rate contracts

i 192,835

i 3,701

i 2,035

i 182,789

i 2,595

i 1,237

Foreign exchange contracts

i 34,459

i 281

i 1,220

i 32,386

i 341

i 1,170

Total derivatives designated as qualifying hedging instruments

i 3,982

i 3,255

i 2,936

i 2,407

Derivatives not designated as hedging instruments

Economic hedges:

Interest rate contracts

i 313,604

i 556

i 374

i 235,810

i 207

i 160

Equity contracts

i 22,616

i 1,294

i 100

i 19,263

i 1,126

i 224

Foreign exchange contracts

i 52,349

i 1,062

i 196

i 26,595

i 118

i 286

Credit contracts – protection purchased

i 99

i 35

i —

i 1,400

i 27

i —

Subtotal

i 2,947

i 670

i 1,478

i 670

Customer accommodation trading and other derivatives:

Interest rate contracts

i 11,254,860

i 44,355

i 34,055

i 11,117,542

i 21,245

i 17,969

Commodity contracts

i 77,608

i 2,039

i 3,741

i 79,737

i 1,421

i 1,770

Equity contracts

i 303,271

i 9,375

i 11,986

i 272,145

i 7,410

i 10,240

Foreign exchange contracts

i 302,847

i 5,088

i 6,043

i 364,469

i 4,755

i 4,791

Credit contracts – protection sold

i 15,513

i 10

i 58

i 12,215

i 12

i 65

Credit contracts – protection purchased

i 25,695

i 85

i 15

i 24,030

i 69

i 18

Subtotal

i 60,952

i 55,898

i 34,912

i 34,853

Total derivatives not designated as hedging instruments

i 63,899

i 56,568

i 36,390

i 35,523

Total derivatives before netting

i 67,881

i 59,823

i 39,326

i 37,930

Netting

( i 45,105

)

( i 48,455

)

( i 25,123

)

( i 28,851

)

Total

i 22,776

i 11,368

i 14,203

i 9,079

127

Table 15.2 provides information on the gross fair values of derivative assets and liabilities, the balance sheet netting adjustments and the resulting net fair value amount recorded on our balance sheet, as well as the non-cash collateral associated with such arrangements. We execute substantially all of our derivative transactions under master netting arrangements and reflect all derivative balances and related cash collateral subject to enforceable master netting arrangements on a net basis within the balance sheet. The “Gross amounts recognized” column in the following table includes $ i 59.6 billion and $ i 54.7 billion of gross derivative assets and liabilities, respectively, at June 30, 2020, and $ i 33.7 billion and $ i 33.5 billion, respectively, at December 31, 2019, with counterparties subject to enforceable master netting arrangements that are eligible for balance sheet netting adjustments. The majority of these amounts are interest rate contracts executed in over-the-counter (OTC) markets. The remaining gross derivative assets and liabilities of $ i 8.3 billion and $ i 5.1 billion, respectively, at June 30, 2020, and $ i 5.6 billion and $ i 4.4 billion, respectively, at December 31, 2019, include those with counterparties subject to master netting arrangements for which we have not assessed the enforceability because they are with counterparties where we do not currently have positions to offset, those subject to master netting arrangements where we have not been able to confirm the enforceability and those not subject to master netting arrangements. As such, we do not net derivative balances or collateral within the balance sheet for these counterparties. Cash collateral receivables and payables that have not been offset against our derivatives were $ i 1.2 billion and $ i 1.4 billion, respectively, at June 30, 2020, and $ i 6.3 billion and $ i 1.4 billion, respectively, at December 31, 2019.

We determine the balance sheet netting adjustments based on the terms specified within each master netting arrangement. We disclose the balance sheet netting amounts within the column titled “Gross amounts offset in consolidated balance sheet.” Balance sheet netting adjustments are determined at the counterparty level for which there may be multiple contract types. For disclosure purposes, we allocate these netting adjustments to the contract type for each counterparty proportionally based upon the “Gross amounts recognized” by counterparty. As a result, the net amounts disclosed by contract type may not represent the actual exposure upon settlement of the contracts.

We do not net non-cash collateral that we receive and pledge on the balance sheet. For disclosure purposes, we present the fair value of this non-cash collateral in the column titled “Gross amounts not offset in consolidated balance sheet (Disclosure-only netting)” within the table. We determine and allocate the Disclosure-only netting amounts in the same manner as balance sheet netting amounts.

The “Net amounts” column within Table 15.2 represents the aggregate of our net exposure to each counterparty after considering the balance sheet and Disclosure-only netting adjustments. We manage derivative exposure by monitoring the credit risk associated with each counterparty using counterparty specific credit risk limits, using master netting arrangements and obtaining collateral. Derivative contracts executed in OTC markets include bilateral contractual arrangements that are not cleared through a central clearing organization but are typically subject to master netting arrangements. Other derivative contracts that are settled through a central clearing organization whether OTC or exchange-traded, are excluded from that percentage. In addition to the netting amounts included in the table, we also have balance sheet netting related to resale and repurchase agreements that are disclosed within Note 13 (Guarantees, Pledged Assets and Collateral, and Other Commitments).

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Note 15: Derivatives (continued)

Table 15.2: Gross Fair Values of Derivative Assets and Liabilities

(in millions)

Gross

amounts

recognized

Gross amounts

offset in

consolidated

balance

sheet (1)

Net amounts in

consolidated

balance

sheet

Gross amounts

not offset in

consolidated

balance sheet

(Disclosure-only

netting)

Net

amounts

Percent

exchanged in

over-the-counter

market

Derivative assets

Interest rate contracts

i 48,612

( i 31,539

)

i 17,073

( i 1,318

)

i 15,755

i 97

Commodity contracts

i 2,039

( i 1,495

)

i 544

( i 3

)

i 541

i 73

Equity contracts

i 10,669

( i 7,076

)

i 3,593

( i 650

)

i 2,943

i 67

Foreign exchange contracts

i 6,431

( i 4,920

)

i 1,511

( i 4

)

i 1,507

i 100

Credit contracts – protection sold

i 10

( i 8

)

i 2

i —

i 2

i 68

Credit contracts – protection purchased

i 120

( i 67

)

i 53

( i 2

)

i 51

i 89

Total derivative assets

i 67,881

( i 45,105

)

i 22,776

( i 1,977

)

i 20,799

Derivative liabilities

Interest rate contracts

i 36,464

( i 33,777

)

i 2,687

( i 637

)

i 2,050

i 96

Commodity contracts

i 3,741

( i 1,404

)

i 2,337

( i 2

)

i 2,335

i 86

Equity contracts

i 12,086

( i 7,361

)

i 4,725

( i 242

)

i 4,483

i 73

Foreign exchange contracts

i 7,459

( i 5,855

)

i 1,604

( i 59

)

i 1,545

i 100

Credit contracts – protection sold

i 58

( i 54

)

i 4

i —

i 4

i 95

Credit contracts – protection purchased

i 15

( i 4

)

i 11

i —

i 11

i 84

Total derivative liabilities

i 59,823

( i 48,455

)

i 11,368

( i 940

)

i 10,428

Derivative assets

Interest rate contracts

i 24,047

( i 14,878

)

i 9,169

( i 445

)

i 8,724

i 95

Commodity contracts

i 1,421

( i 888

)

i 533

( i 2

)

i 531

i 80

Equity contracts

i 8,536

( i 5,570

)

i 2,966

( i 69

)

i 2,897

i 65

Foreign exchange contracts

i 5,214

( i 3,722

)

i 1,492

( i 22

)

i 1,470

i 100

Credit contracts – protection sold

i 12

( i 9

)

i 3

i —

i 3

i 84

Credit contracts – protection purchased

i 96

( i 56

)

i 40

( i 1

)

i 39

i 97

Total derivative assets

i 39,326

( i 25,123

)

i 14,203

( i 539

)

i 13,664

Derivative liabilities

Interest rate contracts

i 19,366

( i 16,595

)

i 2,771

( i 545

)

i 2,226

i 94

Commodity contracts

i 1,770

( i 677

)

i 1,093

( i 2

)

i 1,091

i 82

Equity contracts

i 10,464

( i 6,647

)

i 3,817

( i 319

)

i 3,498

i 81

Foreign exchange contracts

i 6,247

( i 4,866

)

i 1,381

( i 169

)

i 1,212

i 100

Credit contracts – protection sold

i 65

( i 60

)

i 5

( i 3

)

i 2

i 98

Credit contracts – protection purchased

i 18

( i 6

)

i 12

i —

i 12

i 93

Total derivative liabilities

i 37,930

( i 28,851

)

i 9,079

( i 1,038

)

i 8,041

(1)

Represents amounts with counterparties subject to enforceable master netting arrangements that have been offset in the consolidated balance sheet, including related cash collateral and portfolio level counterparty valuation adjustments. Counterparty valuation adjustments related to derivative assets were $ i 600 million and $ i 231 million and debit valuation adjustments related to derivative liabilities were $ i 229 million and $ i 100 million at June 30, 2020, and December 31, 2019, respectively. Cash collateral totaled $ i 7.3 billion and $ i 11.0 billion, netted against derivative assets and liabilities, respectively, at June 30, 2020, and $ i 2.9 billion and $ i 6.8 billion, respectively, at December 31, 2019.

Fair Value and Cash Flow Hedges

For fair value hedges, we use interest rate swaps to convert certain of our fixed-rate long-term debt and time certificates of deposit to floating rates to hedge our exposure to interest rate risk. We also enter into cross-currency swaps, cross-currency interest rate swaps and forward contracts to hedge our exposure to foreign currency risk and interest rate risk associated with the issuance of non-U.S. dollar denominated long-term debt. In addition, we use interest rate swaps, cross-currency swaps, cross-currency interest rate swaps and forward contracts to hedge against changes in fair value of certain investments in available-for-sale debt securities due to changes in interest rates, foreign currency rates, or both. We also use interest rate swaps to hedge against changes in fair value for certain mortgage loans held for sale. For certain fair value hedges of foreign currency risk, changes in fair value of cross-currency swaps attributable to

changes in cross-currency basis spreads are excluded from the assessment of hedge effectiveness and recorded in other comprehensive income. See Note 26 (Other Comprehensive Income) for the amounts recognized in other comprehensive income.

For cash flow hedges, we use interest rate swaps to hedge the variability in interest payments received on certain floating-rate commercial loans and paid on certain floating-rate debt due to changes in the contractually specified interest rate. We also use cross-currency swaps to hedge variability in interest payments on fixed-rate foreign currency-denominated long-term debt due to changes in foreign exchange rates.

We estimate $ i 203 million pre-tax of deferred net losses related to cash flow hedges in OCI at June 30, 2020, will be reclassified into net interest income during the next twelve months. The deferred losses expected to be reclassified into net

129

interest income are predominantly related to discontinued hedges of floating rate loans. For cash flow hedges as of June 30, 2020, we are hedging our foreign currency exposure to the variability of future cash flows for all forecasted transactions for a maximum of i 10 years. For more information on our accounting

hedges, see Note 1 (Summary of Significant Accounting Policies) and Note 18 (Derivatives) in our 2019 Form 10-K.

Table 15.3 and Table 15.4 show the net gains (losses) by income statement line item impacted, related to derivatives in fair value and cash flow hedging relationships, respectively.

Table 15.3: Gains (Losses) Recognized on Fair Value Hedging Relationships

Net interest income

Noninterest income

Total recorded in net income

Total recorded in OCI

(in millions)

Debt securities

Mortgage loans held for sale

Deposits

Long-term debt

Other

Derivative gains (losses)

Quarter ended June 30, 2020

Total amounts presented in the consolidated statement of income and other comprehensive income

i 2,946

i 230

( i 585

)

( i 1,237

)

i 97

N/A

i 3

Interest contracts:

Amounts related to interest settlements on derivatives

( i 93

)

i —

i 152

i 428

i —

i 487

Recognized on derivatives

( i 21

)

( i 3

)

( i 86

)

i 549

i —

i 439

i —

Recognized on hedged items

i 63

i 4

i 77

( i 618

)

i —

( i 474

)

Total gains (losses) (pre-tax) on interest rate contracts

( i 51

)

i 1

i 143

i 359

i —

i 452

i —

Foreign exchange contracts:

Amounts related to interest settlements on derivatives

i 11

i —

( i 46

)

i —

( i 35

)

Recognized on derivatives

( i 1

)

i —

i 117

i 709

i 825

( i 57

)

Recognized on hedged items

i 1

i —

( i 70

)

( i 684

)

( i 753

)

Total gains (losses) (pre-tax) on foreign exchange contracts

i 11

i —

i 1

i 25

i 37

( i 57

)

Total gains (losses) (pre-tax) recognized on fair value hedges

( i 40

)

i 1

i 143

i 360

i 25

i 489

( i 57

)

Six months ended June 30, 2020

Total amounts presented in the consolidated statement of income and other comprehensive income

i 6,418

i 427

( i 2,327

)

( i 2,477

)

i 564

N/A

i 185

Interest contracts:

Amounts related to interest settlements on derivatives

( i 139

)

i —

i 222

i 602

i —

i 685

Recognized on derivatives

( i 1,892

)

( i 53

)

i 444

i 10,324

i —

i 8,823

i —

Recognized on hedged items

i 1,919

i 54

( i 434

)

( i 10,044

)

i —

( i 8,505

)

Total gains (losses) (pre-tax) on interest rate contracts

( i 112

)

i 1

i 232

i 882

i —

i 1,003

i —

Foreign exchange contracts:

Amounts related to interest settlements on derivatives

i 17

i —

( i 131

)

i —

( i 114

)

Recognized on derivatives

( i 2

)

i —

i 224

( i 76

)

i 146

i 87

Recognized on hedged items

i 3

i —

( i 244

)

i 80

( i 161

)

Total gains (losses) (pre-tax) on foreign exchange contracts

i 18

i —

( i 151

)

i 4

( i 129

)

i 87

Total gains (losses) (pre-tax) recognized on fair value hedges

( i 94

)

i 1

i 232

i 731

i 4

i 874

i 87

(continued on following page)

130

Note 15: Derivatives (continued)

(continued from previous page)

Net interest income

Noninterest income

Total recorded in net income

Total recorded in OCI

(in millions)

Debt securities

Mortgage loans held for sale

Deposits

Long-term debt

Other

Derivative gains (losses)

Quarter ended June 30, 2019

Total amounts presented in the consolidated statement of income and other comprehensive income

i 3,781

i 195

( i 2,213

)

( i 1,900

)

i 837

N/A

i 136

Interest contracts:

Amounts related to interest settlements on derivatives

i 14

i —

( i 7

)

i 7

i —

i 14

Recognized on derivatives

( i 1,089

)

( i 25

)

i 351

i 2,947

i —

i 2,184

i —

Recognized on hedged items

i 1,096

i 24

( i 343

)

( i 2,890

)

i —

( i 2,113

)

Total gains (losses) (pre-tax) on interest rate contracts

i 21

( i 1

)

i 1

i 64

i —

i 85

i —

Foreign exchange contracts:

Amounts related to interest settlements on derivatives

i 10

i —

( i 128

)

i —

( i 118

)

Recognized on derivatives

( i 5

)

i —

i 205

i 326

i 526

i 56

Recognized on hedged items

i 4

i —

( i 186

)

( i 315

)

( i 497

)

Total gains (losses) (pre-tax) on foreign exchange contracts

i 9

i —

( i 109

)

i 11

( i 89

)

i 56

Total gains (losses) (pre-tax) recognized on fair value hedges

i 30

( i 1

)

i 1

( i 45

)

i 11

( i 4

)

i 56

Six months ended June 30, 2019

Total amounts presented in the consolidated statement of income and other comprehensive income

i 7,722

i 347

( i 4,239

)

( i 3,827

)

i 1,507

N/A

i 180

Interest contracts:

Amounts related to interest settlements on derivatives

i 30

i —

( i 30

)

i —

Recognized on derivatives

( i 1,903

)

( i 33

)

i 558

i 4,933

i —

i 3,555

i —

Recognized on hedged items

i 1,913

i 31

( i 533

)

( i 4,837

)

i —

( i 3,426

)

Total gains (losses) (pre-tax) on interest rate contracts

i 40

( i 2

)

( i 5

)

i 96

i —

i 129

i —

Foreign exchange contracts:

Amounts related to interest settlements on derivatives

i 20

i —

( i 270

)

i —

( i 250

)

Recognized on derivatives

( i 9

)

i —

i 497

( i 76

)

i 412

i 30

Recognized on hedged items

i 9

i —

( i 452

)

i 76

( i 367

)

Total gains (losses) (pre-tax) on foreign exchange contracts

i 20

i —

( i 225

)

i —

( i 205

)

i 30

Total gains (losses) (pre-tax) recognized on fair value hedges

i 60

( i 2

)

( i 5

)

( i 129

)

i —

( i 76

)

i 30

131

Table 15.4: Gains (Losses) Recognized on Cash Flow Hedging Relationships



	Net interest Income						Total recorded in net income		Total recorded in OCI
(in millions)	Loans			Long-term debt			Derivative gains (losses)		Derivative gains (losses)
Quarter ended June 30, 2020
Total amounts presented in the consolidated statement of income and other comprehensive income	$	i 8,448		( i 1,237		)	N/A		i 3
Interest rate contracts:
Realized gains (losses) (pre-tax) reclassified from OCI into net income	( i 53		)	i 1			( i 52	)	i 52
Net unrealized gains (losses) (pre-tax) recognized in OCI	N/A			N/A			N/A		i —
Total gains (losses) (pre-tax) on interest rate contracts	( i 53		)	i 1			( i 52	)	i 52
Foreign exchange contracts:
Realized gains (losses) (pre-tax) reclassified from OCI into net income	—			( i 3		)	( i 3	)	i 3
Net unrealized gains (losses) (pre-tax) recognized in OCI	N/A			N/A			N/A		i 5
Total gains (losses) (pre-tax) on foreign exchange contracts	i —			( i 3		)	( i 3	)	i 8
Total gains (losses) (pre-tax) recognized on cash flow hedges	$	( i 53	)	$	( i 2	)	( i 55	)	i 60
Six months ended June 30, 2020
Total amounts presented in the consolidated statement of income and other comprehensive income	$	i 18,513		( i 2,477		)	N/A		i 185
Interest rate contracts:
Realized gains (losses) (pre-tax) reclassified from OCI into net income	( i 109		)	i 1			( i 108	)	i 108
Net unrealized gains (losses) (pre-tax) recognized in OCI	N/A			N/A			N/A		i —
Total gains (losses) (pre-tax) on interest rate contracts	( i 109		)	i 1			( i 108	)	i 108
Foreign exchange contracts:
Realized gains (losses) (pre-tax) reclassified from OCI into net income	—			( i 5		)	( i 5	)	i 5
Net unrealized gains (losses) (pre-tax) recognized in OCI	N/A			N/A			N/A		( i 15	)
Total gains (losses) (pre-tax) on foreign exchange contracts	i —			( i 5		)	( i 5	)	( i 10	)
Total gains (losses) (pre-tax) recognized on cash flow hedges	$	( i 109	)	( i 4		)	( i 113	)	i 98
Quarter ended June 30, 2019
Total amounts presented in the consolidated statement of income and other comprehensive income	$	i 11,316		( i 1,900		)	N/A		i 136
Interest rate contracts:
Realized gains (losses) (pre-tax) reclassified from OCI into net income	( i 77		)	i 1			( i 76	)	i 76
Net unrealized gains (losses) (pre-tax) recognized in OCI	N/A			N/A			N/A		i —
Total gains (losses) (pre-tax) on interest rate contracts	( i 77		)	i 1			( i 76	)	i 76
Foreign exchange contracts:
Realized gains (losses) (pre-tax) reclassified from OCI into net income	—			( i 3		)	( i 3	)	i 3
Net unrealized gains (losses) (pre-tax) recognized in OCI	N/A			N/A			N/A		i 1
Total gains (losses) (pre-tax) on foreign exchange contracts	i —			( i 3		)	( i 3	)	i 4
Total gains (losses) (pre-tax) recognized on cash flow hedges	$	( i 77	)	( i 2		)	( i 79	)	i 80
Six months ended June 30, 2019
Total amounts presented in the consolidated statement of income and other comprehensive income	$	i 22,670		( i 3,827		)	N/A		i 180
Interest rate contracts:
Realized gains (losses) (pre-tax) reclassified from OCI into net income	( i 155		)	i 1			( i 154	)	i 154
Net unrealized gains (losses) (pre-tax) recognized in OCI	N/A			N/A			N/A		i —
Total gains (losses) (pre-tax) on interest rate contracts	( i 155		)	i 1			( i 154	)	i 154
Foreign exchange contracts:
Realized gains (losses) (pre-tax) reclassified from OCI into net income	—			( i 4		)	( i 4	)	i 4
Net unrealized gains (losses) (pre-tax) recognized in OCI	N/A			N/A			N/A		( i 8	)
Total gains (losses) (pre-tax) on foreign exchange contracts	i —			( i 4		)	( i 4	)	( i 4	)
Total gains (losses) (pre-tax) recognized on cash flow hedges	$	( i 155	)	( i 3		)	( i 158	)	i 150

132

Note 15: Derivatives (continued)

Table 15.5 shows the carrying amount and associated cumulative basis adjustment related to the application of hedge

accounting that is included in the carrying amount of hedged assets and liabilities in fair value hedging relationships.

Table 15.5: Hedged Items in Fair Value Hedging Relationship



	Hedged Items Currently Designated					Hedged Items No Longer Designated (1)
(in millions)	Carrying Amount of Assets/(Liabilities) (2)(4)			Hedge Accounting Basis Adjustment Assets/(Liabilities) (3)		Carrying Amount of Assets/(Liabilities) (4)		Hedge Accounting Basis Adjustment Assets/(Liabilities)
June 30, 2020
Available-for-sale debt securities (5)	$	i 29,585		i 2,560		i 8,952		i 269
Mortgage loans held for sale	i 233			i 10		i —		i —
Deposits	( i 35,247		)	( i 761	)	i —		i —
Long-term debt	( i 166,000		)	( i 16,022	)	( i 21,254	)	i 92
December 31, 2019
Available-for-sale debt securities (5)	$	i 36,896		i 1,110		i 9,486		i 278
Mortgage loans held for sale	i 961			( i 12	)	i —		i —
Deposits	( i 43,716		)	( i 324	)	i —		i —
Long-term debt	( i 127,423		)	( i 5,827	)	( i 25,750	)	i 173


(1)	Represents hedged items no longer designated in qualifying fair value hedging relationships for which an associated basis adjustment exists at the balance sheet date.


(2)	Does not include the carrying amount of hedged items where only foreign currency risk is the designated hedged risk. The carrying amount excluded $ i 5.2 billion for debt securities and $( i 4.3) billion for long-term debt as of June 30, 2020, and $ i 1.2 billion for debt securities and $( i 5.2) billion for long-term debt as of December 31, 2019.

(3)

The balance includes $ i 548 million and $ i 143 million of debt securities and long-term debt cumulative basis adjustments, respectively, as of June 30, 2020, and $ i 790 million and $ i 109 million of debt securities and long-term debt cumulative basis adjustments, respectively, as of December 31, 2019, on terminated hedges whereby the hedged items have subsequently been re-designated into existing hedges.


(4)	Represents the full carrying amount of the hedged asset or liability item as of the balance sheet date, except for circumstances in which only a portion of the asset or liability was designated as the hedged item in which case only the portion designated is presented.


(5)	Carrying amount represents the amortized cost.

133

Derivatives Not Designated as Hedging Instruments

Derivatives not designated as hedging instruments include economic hedges and derivatives entered into for customer accommodation trading purposes.

We use economic hedge derivatives to manage our exposure to interest rate risk, equity price risk, foreign currency risk, and credit risk. We also use economic hedge derivatives to mitigate the periodic earnings volatility caused by mismatches between the changes in fair value of the hedged item and hedging instrument recognized on our fair value accounting hedges. In second quarter 2020, we entered into arrangements to transition

the economic hedges of our deferred compensation plan liabilities from equity securities to derivative instruments. Changes in the fair values of derivatives used to economically hedge the deferred compensation plan are reported in personnel expense.

For more information on economic hedges and other derivatives, see Note 18 (Derivatives) to Financial Statements in our 2019 Form 10-K.

i Table 15.6 shows the net gains (losses) recognized by income statement lines, related to derivatives not designated as hedging instruments.

Table 15.6: Gains (Losses) on Derivatives Not Designated as Hedging Instruments

Noninterest income

Noninterest Expense

(in millions)

Mortgage banking

Net gains (losses) from equity securities

Net gains (losses) from trading activities

Other

Total

Personnel expense

Quarter ended June 30, 2020

Net gains (losses) recognized on economic hedges derivatives:

Interest contracts (1)

i 142

i —

( i 74

)

i 68

i —

Equity contracts

i —

( i 1,402

)

i —

( i 6

)

( i 1,408

)

( i 141

)

Foreign exchange contracts

i —

( i 55

)

( i 55

)

i —

Credit contracts

i —

i 1

i —

Subtotal

i 142

( i 1,402

)

i —

( i 134

)

( i 1,394

)

( i 141

)

Net gains (losses) recognized on customer accommodation trading and other derivatives:

Interest contracts

i 546

i —

i 676

i —

i 1,222

—

Commodity contracts

i —

( i 224

)

i —

( i 224

)

—

Equity contracts

i —

( i 2,348

)

( i 145

)

( i 2,493

)

—

Foreign exchange contracts

i —

i 155

i —

i 155

—

Credit contracts

i —

( i 134

)

i —

( i 134

)

—

Subtotal

i 546

i —

( i 1,875

)

( i 145

)

( i 1,474

)

i —

Net gains (losses) recognized related to derivatives not designated as hedging instruments

i 688

( i 1,402

)

( i 1,875

)

( i 279

)

( i 2,868

)

( i 141

)

Six months ended June 30, 2020

Net gains (losses) recognized on economic hedges derivatives:

Interest contracts (1)

i 2,613

i —

( i 45

)

i 2,568

i —

Equity contracts

i —

( i 183

)

i —

( i 34

)

( i 217

)

( i 141

)

Foreign exchange contracts

i —

i 572

i —

Credit contracts

i —

i 17

i —

Subtotal

i 2,613

( i 183

)

i —

i 510

i 2,940

( i 141

)

Net gains (losses) recognized on customer accommodation trading and other derivatives:

Interest contracts

i 1,099

i —

( i 1,787

)

i —

( i 688

)

—

Commodity contracts

i —

( i 112

)

i —

( i 112

)

—

Equity contracts

i —

i 2,401

( i 72

)

i 2,329

—

Foreign exchange contracts

i —

( i 402

)

i —

( i 402

)

—

Credit contracts

i —

i 147

i —

i 147

—

Subtotal

i 1,099

i —

i 247

( i 72

)

i 1,274

i —

Net gains (losses) recognized related to derivatives not designated as hedging instruments

i 3,712

( i 183

)

i 247

i 438

i 4,214

( i 141

)

(continued on following page)

134

Note 15: Derivatives (continued)

(continued from previous page)




	Noninterest income
(in millions)	Mortgage banking		Net gains (losses) from equity securities		Net gains (losses) from trading activities		Other		Total
Quarter ended June 30, 2019
Net gains (losses) recognized on economic hedges derivatives:
Interest contracts (1)	$	i 872	i —		i —		i 2		i 874
Equity contracts	i —		( i 658	)	i —		( i 7	)	( i 665	)
Foreign exchange contracts	i —		i —		i —		i 164		i 164
Credit contracts	i —		i —		i —		( i 5	)	( i 5	)
Subtotal	i 872		( i 658	)	i —		i 154		i 368
Net gains (losses) recognized on customer accommodation trading and other derivatives:
Interest contracts	i 179		i —		( i 222	)	i —		( i 43	)
Commodity contracts	i —		i —		i 27		i —		i 27
Equity contracts	i —		i —		( i 1,110	)	( i 133	)	( i 1,243	)
Foreign exchange contracts	i —		i —		( i 83	)	i —		( i 83	)
Credit contracts	i —		i —		( i 16	)	i —		( i 16	)
Subtotal	i 179		i —		( i 1,404	)	( i 133	)	( i 1,358	)
Net gains (losses) recognized related to derivatives not designated as hedging instruments	$	i 1,051	( i 658	)	( i 1,404	)	i 21		( i 990	)
Six months ended June 30, 2019
Net gains (losses) recognized on economic hedges derivatives:
Interest contracts (1)	$	i 1,683	i —		i —		i 7		i 1,690
Equity contracts	i —		( i 1,543	)	i —		i —		( i 1,543	)
Foreign exchange contracts	i —		i —		i —		i 140		i 140
Credit contracts	i —		i —		i —		i 10		i 10
Subtotal	i 1,683		( i 1,543	)	i —		i 157		i 297
Net gains (losses) recognized on customer accommodation trading and other derivatives:
Interest contracts	i 297		i —		( i 506	)	i —		( i 209	)
Commodity contracts	i —		i —		i 78		i —		i 78
Equity contracts	i —		i —		( i 3,259	)	( i 406	)	( i 3,665	)
Foreign exchange contracts	i —		i —		( i 69	)	i —		( i 69	)
Credit contracts	i —		i —		( i 60	)	i —		( i 60	)
Subtotal	i 297		i —		( i 3,816	)	( i 406	)	( i 3,925	)
Net gains (losses) recognized related to derivatives not designated as hedging instruments	$	i 1,980	( i 1,543	)	( i 3,816	)	( i 249	)	( i 3,628	)

(1)

Mortgage banking amounts for the second quarter and first half of 2020 are comprised of gains of $ i 535 million and $ i 3.9 billion, respectively, related to derivatives used as economic hedges of MSRs measured at fair value offset by gains (losses) of $( i 393) million and $( i 1.3) billion, respectively, related to derivatives used as economic hedges of mortgage loans held for sale and derivative loan commitments. The corresponding amounts for the second quarter and first half of 2019 are comprised of gains of $ i 1.2 billion and $ i 2.1 billion offset by gains (losses) of $( i 283) million and $( i 434) million, respectively.

135

Credit Derivatives

Credit derivative contracts are arrangements whose value is derived from the transfer of credit risk of a reference asset or entity from one party (the purchaser of credit protection) to another party (the seller of credit protection). We use credit derivatives to assist customers with their risk management objectives. We may also use credit derivatives in structured product transactions or liquidity agreements written to special purpose vehicles. The maximum exposure of sold credit derivatives is managed through posted collateral, purchased credit derivatives and similar products in order to achieve our desired credit risk profile. This credit risk management provides

an ability to recover a significant portion of any amounts that would be paid under the sold credit derivatives. We would be

required to perform under sold credit derivatives in the event of default by the referenced obligors. Events of default include events such as bankruptcy, capital restructuring or lack of principal and/or interest payment. In certain cases, other triggers may exist, such as the credit downgrade of the referenced obligors or the inability of the special purpose vehicle for which we have provided liquidity to obtain funding.

Table 15.7 provides details of sold and purchased credit derivatives.

Table 15.7: Sold and Purchased Credit Derivatives

Notional amount

(in millions)

Fair value asset

Fair value

liability

Protection

sold (A)

Protection

sold –

non-

investment

grade

Protection

purchased

with

identical

underlyings (B)

Net

protection

sold

(A) - (B)

Other

protection

purchased

Range of

maturities

Credit default swaps on:

Corporate bonds

i 7

i 2

i 3,433

i 827

i 2,508

i 925

i 2,971

2020 - 2029

Structured products

i —

i 9

i 30

i 31

i 29

i 1

i 110

2034 - 2047

Credit protection on:

Default swap index

i 1

i 5,084

i 1,759

i 2,610

i 2,474

i 3,874

2020 - 2029

Commercial mortgage-backed securities index

i 2

i 27

i 317

i 59

i 292

i 25

i 75

2047 - 2072

Asset-backed securities index

i —

i 8

i 40

i 41

( i 1

)

i 1

2045 - 2046

Other

i —

i 11

i 6,609

i 6,441

i —

i 6,609

i 13,283

2020 - 2040

Total credit derivatives

i 10

i 58

i 15,513

i 9,158

i 5,480

i 10,033

i 20,314

Credit default swaps on:

Corporate bonds

i 8

i 1

i 2,855

i 707

i 1,885

i 970

i 2,447

2020 - 2029

Structured products

i —

i 25

i 74

i 69

i 63

i 11

i 111

2022 - 2047

Credit protection on:

Default swap index

i 1

i —

i 2,542

i 120

i 550

i 1,992

i 8,105

2020 - 2029

Commercial mortgage-backed securities index

i 3

i 26

i 322

i 67

i 296

i 26

i 50

2047 - 2058

Asset-backed securities index

i —

i 8

i 41

i —

i 1

2045 - 2046

Other

i —

i 5

i 6,381

i 5,738

i —

i 6,381

i 11,881

2020 - 2049

Total credit derivatives

i 12

i 65

i 12,215

i 6,742

i 2,835

i 9,380

i 22,595

Protection sold represents the estimated maximum exposure to loss that would be incurred under an assumed hypothetical circumstance, where the value of our interests and any associated collateral declines to zero, without any consideration of recovery or offset from any economic hedges. We believe this hypothetical circumstance to be an extremely remote possibility and accordingly, this required disclosure is not an indication of expected loss. The amounts under non-investment grade represent the notional amounts of those credit derivatives on which we have a higher risk of being required to perform under the terms of the credit derivative and are a function of the underlying assets.

We consider the risk of performance to be high if the underlying assets under the credit derivative have an external rating that is below investment grade or an internal credit default grade that is equivalent thereto. We believe the net protection sold, which is representative of the net notional amount of protection sold and purchased with identical underlyings, in combination with other protection purchased, is more representative of our exposure to loss than either non-investment grade or protection sold. Other protection purchased represents additional protection, which may offset the exposure to loss for protection sold, that was not purchased with an identical underlying of the protection sold.

136

Note 15: Derivatives (continued)

Credit-Risk Contingent Features

Certain of our derivative contracts contain provisions whereby if the credit rating of our debt were to be downgraded by certain major credit rating agencies, the counterparty could demand additional collateral or require termination or replacement of derivative instruments in a net liability position. i Table 15.8 illustrates our exposure to such derivatives with credit-risk contingent features, collateral we have posted, and the additional collateral we would be required to post if the credit rating of our debt was downgraded below investment grade.

Table 15.8: Credit-Risk Contingent Features



(in billions)	Jun 30, 2020		Dec 31, 2019
Net derivative liabilities with credit-risk contingent features	$	i 15.2	i 10.4
Collateral posted	i 13.4		i 9.1
Additional collateral to be posted upon a below investment grade credit rating (1)	i 1.8		i 1.3


(1)	Any credit rating below investment grade requires us to post the maximum amount of collateral.

137

Note 16: Fair Values of Assets and Liabilities

We use fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. Assets and liabilities recorded at fair value on a recurring basis are presented in Table 16.2 in this Note. From time to time, we may be required to record fair value adjustments on a nonrecurring basis. These nonrecurring fair value adjustments typically involve application of LOCOM accounting, write-downs of individual assets or application of the measurement alternative for nonmarketable equity securities. Assets recorded on a nonrecurring basis are presented in Table 16.13 in this Note.

Table 16.19 includes estimates of fair value for financial instruments that are not recorded at fair value.

See Note 1 (Summary of Significant Accounting Policies) in our 2019 Form 10-K for discussion of how we determine fair value. For descriptions of the valuation methodologies we use for assets and liabilities recorded at fair value on a recurring or nonrecurring basis and for estimating fair value for financial instruments that are not recorded at fair value, see Note 19 (Fair Values of Assets and Liabilities) in our 2019 Form 10-K.

FAIR VALUE HIERARCHY We classify our assets and liabilities measured at fair value as either Level 1, Level 2 or Level 3 in the fair value hierarchy. The highest priority (Level 1) is assigned to valuations based on unadjusted quoted prices in active markets and the lowest priority (Level 3) is assigned to valuations based on significant unobservable inputs. See Note 1 (Summary of Significant Accounting Policies) in our 2019 Form 10-K for a detailed description of the fair value hierarchy.

In the determination of the classification of financial instruments in Level 2 or Level 3 of the fair value hierarchy, we consider all available information, including observable market data, indications of market liquidity and orderliness, and our understanding of the valuation techniques and significant inputs used. For securities in inactive markets, we use a predetermined percentage to evaluate the impact of fair value adjustments

derived from weighting both external and internal indications of value to determine if the instrument is classified as Level 2 or Level 3. Otherwise, the classification of Level 2 or Level 3 is based upon the specific facts and circumstances of each instrument or instrument category and judgments are made regarding the significance of the Level 3 inputs to the instruments’ fair value measurement in its entirety. If Level 3 inputs are considered significant, the instrument is classified as Level 3.

We do not classify equity securities in the fair value hierarchy if we use the non-published net asset value (NAV) per share (or its equivalent) that has been communicated to us as an investor as a practical expedient to measure fair value. We generally use NAV per share as the fair value measurement for certain nonmarketable equity fund investments. Marketable equity securities with published NAVs are classified in the fair value hierarchy.

Fair Value Measurements from Vendors

For certain assets and liabilities, we obtain fair value measurements from vendors and we record the fair value in our financial statements. For additional information, see Note 19 (Fair Values of Assets and Liabilities) in our 2019 Form 10-K.

Table 16.1 presents fair value measurements obtained from third-party pricing services classified within the fair value hierarchy. Fair value measurements obtained from brokers and fair value measurements obtained from third-party pricing services that we have adjusted using internal models or non-vendor data to determine the fair value are excluded from

Table 16.1.

The unadjusted fair value measurements obtained from brokers for available-for-sale debt securities were $ i 19 million in Level 2 assets and $ i 123 million in Level 3 assets at June 30, 2020, and $ i 45 million and $ i 126 million at December 31, 2019, respectively.

Table 16.1: Fair Value Measurements obtained from Third-Party Pricing Services

(in millions)

Level 1

Level 2

Level 3

Level 1

Level 2

Level 3

Trading debt securities

i 1,113

i 291

i —

i 634

i 329

i —

Available-for-sale debt securities:

Securities of U.S. Treasury and federal agencies

i 7,983

i —

i 13,460

i 1,500

i —

Securities of U.S. states and political subdivisions

i —

i 32,660

i 72

i —

i 39,868

i 34

Mortgage-backed securities

i —

i 148,611

i 61

i —

i 167,172

i 42

Other debt securities (1)

i —

i 36,610

i 571

i —

i 38,067

i 650

Total available-for-sale debt securities

i 7,983

i 217,881

i 704

i 13,460

i 246,607

i 726

Marketable equity securities

i —

i 99

i —

i 110

i —

Derivative assets

i 17

i 1

i —

i 12

i 1

i —

Derivative liabilities

( i 19

)

( i 1

)

i —

( i 11

)

( i 3

)

i —


(1)	Includes corporate debt securities, collateralized loan obligations, and other debt securities.

138

Note 16: Fair Values of Assets and Liabilities (continued)

Assets and Liabilities Recorded at Fair Value on a Recurring Basis

Table 16.2 presents the balances of assets and liabilities recorded at fair value on a recurring basis.

Table 16.2: Fair Value on a Recurring Basis

(in millions)

Level 1

Level 2

Level 3

Netting (1)

Total

Trading debt securities:

Securities of U.S. Treasury and federal agencies

i 30,741

i 4,114

i —

—

i 34,855

Securities of U.S. states and political subdivisions

i —

i 1,868

i —

—

i 1,868

Collateralized loan obligations

i —

i 606

i 128

—

i 734

Corporate debt securities

i —

i 12,609

i 23

—

i 12,632

Mortgage-backed securities

i —

i 23,777

i 49

—

i 23,826

Other

i —

i 741

i 23

—

i 764

Total trading debt securities

i 30,741

i 43,715

i 223

—

i 74,679

Available-for-sale debt securities:

Securities of U.S. Treasury and federal agencies

i 7,983

i —

—

i 7,983

Securities of U.S. states and political subdivisions

i —

i 32,660

i 351

—

i 33,011

Mortgage-backed securities:

Federal agencies

i —

i 144,835

i —

—

i 144,835

Residential

i —

i 541

i —

—

i 541

Commercial

i —

i 3,498

i 61

—

i 3,559

Total mortgage-backed securities

i —

i 148,874

i 61

—

i 148,935

Corporate debt securities

i 35

i 3,889

i 1,051

—

i 4,975

Collateralized loan obligations

i —

i 24,990

i 9

—

i 24,999

Other

i —

i 8,370

i 626

—

i 8,996

Total available-for-sale debt securities

i 8,018

i 218,783

i 2,098

(2)

—

i 228,899

Mortgage loans held for sale

i —

i 17,893

i 751

—

i 18,644

Loans held for sale

i —

i 1,194

i 7

—

i 1,201

Loans

i —

i 152

—

i 152

Mortgage servicing rights (residential)

i —

i 6,819

—

i 6,819

Derivative assets:

Interest rate contracts

i 37

i 47,985

i 590

—

i 48,612

Commodity contracts

i —

i 2,002

i 37

—

i 2,039

Equity contracts

i 3,527

i 5,692

i 1,450

—

i 10,669

Foreign exchange contracts

i 17

i 6,404

i 10

—

i 6,431

Credit contracts

i —

i 60

i 70

—

i 130

Netting

i —

( i 45,105

)

( i 45,105

)

Total derivative assets

i 3,581

i 62,143

i 2,157

( i 45,105

)

i 22,776

Equity securities – excluding securities at NAV:

Marketable

i 18,822

i 195

i —

—

i 19,017

Nonmarketable

i —

i 18

i 8,165

—

i 8,183

Total equity securities

i 18,822

i 213

i 8,165

—

i 27,200

Total assets included in the fair value hierarchy

i 61,162

i 343,941

i 20,372

( i 45,105

)

i 380,370

Equity securities at NAV (3)

i 139

Total assets recorded at fair value

i 380,509

Derivative liabilities:

Interest rate contracts

( i 44

)

( i 36,353

)

( i 67

)

—

( i 36,464

)

Commodity contracts

i —

( i 3,705

)

( i 36

)

—

( i 3,741

)

Equity contracts

( i 3,288

)

( i 7,368

)

( i 1,430

)

—

( i 12,086

)

Foreign exchange contracts

( i 19

)

( i 7,414

)

( i 26

)

—

( i 7,459

)

Credit contracts

i —

( i 53

)

( i 20

)

—

( i 73

)

Netting

i —

i 48,455

Total derivative liabilities

( i 3,351

)

( i 54,893

)

( i 1,579

)

i 48,455

( i 11,368

)

Short sale liabilities:

Securities of U.S. Treasury and federal agencies

( i 11,080

)

( i 207

)

i —

—

( i 11,287

)

Mortgage-backed securities

i —

( i 1,286

)

i —

—

( i 1,286

)

Corporate debt securities

i —

( i 5,104

)

i —

—

( i 5,104

)

Equity securities

( i 2,531

)

i —

—

( i 2,531

)

Other securities

i —

( i 2

)

( i 3

)

—

( i 5

)

Total short sale liabilities

( i 13,611

)

( i 6,599

)

( i 3

)

—

( i 20,213

)

Other liabilities

i —

( i 2

)

—

( i 2

)

Total liabilities recorded at fair value

( i 16,962

)

( i 61,492

)

( i 1,584

)

i 48,455

( i 31,583

)


(1)	Represents balance sheet netting of derivative asset and liability balances, related cash collateral and portfolio level counterparty valuation adjustments. See Note 15 (Derivatives) for additional information.


(2)	Largely consists of securities that are investment grade based on ratings received from the ratings agencies or internal credit grades categorized as investment grade if external ratings are not available. The securities are classified as Level 3 due to limited market activity.


(3)	Consists of certain nonmarketable equity securities that are measured at fair value using NAV per share (or its equivalent) as a practical expedient and are excluded from the fair value hierarchy.

(continued on following page)

139

(continued from previous page)

(in millions)

Level 1

Level 2

Level 3

Netting (1)

Total

Trading debt securities:

Securities of U.S. Treasury and federal agencies

i 32,335

i 4,382

i —

—

i 36,717

Securities of U.S. states and political subdivisions

i —

i 2,434

i —

—

i 2,434

Collateralized loan obligations

i —

i 555

i 183

—

i 738

Corporate debt securities

i —

i 11,006

i 38

—

i 11,044

Mortgage-backed securities

i —

i 27,712

i —

—

i 27,712

Other

i —

i 1,086

i 2

—

i 1,088

Total trading debt securities

i 32,335

i 47,175

i 223

—

i 79,733

Available-for-sale debt securities:

Securities of U.S. Treasury and federal agencies

i 13,460

i 1,500

i —

—

i 14,960

Securities of U.S. states and political subdivisions

i —

i 39,924

i 413

—

i 40,337

Mortgage-backed securities:

Federal agencies

i —

i 162,453

i —

—

i 162,453

Residential

i —

i 827

i —

—

i 827

Commercial

i —

i 3,892

i 42

—

i 3,934

Total mortgage-backed securities

i —

i 167,172

i 42

—

i 167,214

Corporate debt securities

i 37

i 6,159

i 367

—

i 6,563

Collateralized loan obligations

i —

i 29,055

i —

—

i 29,055

Other

i —

i 4,587

i 743

—

i 5,330

Total available-for-sale debt securities

i 13,497

i 248,397

i 1,565

(2)

—

i 263,459

Mortgage loans held for sale

i —

i 15,408

i 1,198

—

i 16,606

Loans held for sale

i —

i 956

i 16

—

i 972

Loans

i —

i 171

—

i 171

Mortgage servicing rights (residential)

i —

i 11,517

—

i 11,517

Derivative assets:

Interest rate contracts

i 26

i 23,792

i 229

—

i 24,047

Commodity contracts

i —

i 1,413

i 8

—

i 1,421

Equity contracts

i 2,946

i 4,135

i 1,455

—

i 8,536

Foreign exchange contracts

i 12

i 5,197

i 5

—

i 5,214

Credit contracts

i —

i 49

i 59

—

i 108

Netting

i —

( i 25,123

)

( i 25,123

)

Total derivative assets

i 2,984

i 34,586

i 1,756

( i 25,123

)

i 14,203

Equity securities – excluding securities at NAV:

Marketable

i 33,702

i 216

i 3

—

i 33,921

Nonmarketable

i —

i 22

i 7,847

—

i 7,869

Total equity securities

i 33,702

i 238

i 7,850

—

i 41,790

Total assets included in the fair value hierarchy

i 82,518

i 346,760

i 24,296

( i 25,123

)

i 428,451

Equity securities at NAV (3)

i 146

Total assets recorded at fair value

i 428,597

Derivative liabilities:

Interest rate contracts

( i 23

)

( i 19,328

)

( i 15

)

—

( i 19,366

)

Commodity contracts

i —

( i 1,746

)

( i 24

)

—

( i 1,770

)

Equity contracts

( i 2,011

)

( i 6,729

)

( i 1,724

)

—

( i 10,464

)

Foreign exchange contracts

( i 11

)

( i 6,213

)

( i 23

)

—

( i 6,247

)

Credit contracts

i —

( i 53

)

( i 30

)

—

( i 83

)

Netting

i —

i 28,851

Total derivative liabilities

( i 2,045

)

( i 34,069

)

( i 1,816

)

i 28,851

( i 9,079

)

Short sale liabilities:

Securities of U.S. Treasury and federal agencies

( i 9,035

)

( i 31

)

i —

—

( i 9,066

)

Mortgage-backed securities

i —

( i 2

)

i —

—

( i 2

)

Corporate debt securities

i —

( i 5,915

)

i —

—

( i 5,915

)

Equity securities

( i 2,447

)

i —

—

( i 2,447

)

Other securities

i —

—

i —

Total short sale liabilities

( i 11,482

)

( i 5,948

)

i —

—

( i 17,430

)

Other liabilities

i —

( i 2

)

—

( i 2

)

Total liabilities recorded at fair value

( i 13,527

)

( i 40,017

)

( i 1,818

)

i 28,851

( i 26,511

)


(1)	Represents balance sheet netting of derivative asset and liability balances, related cash collateral and portfolio level counterparty valuation adjustments. See Note 15 (Derivatives) for additional information.


(2)	A significant portion of the balance consists of securities that are investment grade based on ratings received from the ratings agencies or internal credit grades categorized as investment grade if external ratings are not available. The securities are classified as Level 3 due to limited market activity.


(3)	Consists of certain nonmarketable equity securities that are measured at fair value using NAV per share (or its equivalent) as a practical expedient and are excluded from the fair value hierarchy.

140

Note 16: Fair Values of Assets and Liabilities (continued)

Changes in Fair Value Levels

We monitor the availability of observable market data to assess the appropriate classification of financial instruments within the fair value hierarchy and transfer between Level 1, Level 2, and Level 3 accordingly. Observable market data includes but is not limited to quoted prices and market transactions. Changes in economic conditions or market liquidity generally will drive changes in availability of observable market data. Changes in availability of observable market data, which also may result in

changing the valuation technique used, are generally the cause of transfers between Level 1, Level 2, and Level 3. The amounts reported as transfers represent the fair value as of the beginning of the quarter in which the transfer occurred.

i The changes in Level 3 assets and liabilities measured at fair value on a recurring basis for the quarter ended June 30, 2020, are presented in Table 16.3.

Table 16.3: Changes in Level 3 Fair Value Assets and Liabilities on a Recurring Basis – Quarter ended June 30, 2020

Total net gains

(losses) included in

Purchases,

sales,

issuances

and

settlements,

net (1)

Net unrealized gains (losses) related to assets and liabilities held at period end included in

(in millions)

Balance,

beginning

of period

Net

income

Other

compre-

hensive

income

Transfers into

Level 3 (2)

Transfers

out of

Level 3 (3)

Balance,

end of

period

Net income

(4)

Other compre-hensive income

Quarter ended June 30, 2020

Trading debt securities:

Securities of U.S. states and political subdivisions

i —

Collateralized loan obligations

i 154

i —

i 4

( i 5

)

( i 25

)

i 128

( i 2

)

i —

Corporate debt securities

i 34

( i 7

)

i —

i 1

i —

( i 5

)

i 23

i 1

i —

Mortgage-backed securities

i 177

i 35

i —

( i 148

)

i 4

( i 19

)

i 49

i 12

i —

Other

i 24

i 5

i —

( i 22

)

i 16

i —

i 23

i 3

i —

Total trading debt securities

i 389

i 33

i —

( i 165

)

i 15

( i 49

)

i 223

i 14

(5)

i —

Available-for-sale debt securities:

Securities of U.S. states and political subdivisions

i 351

i 1

i 2

( i 23

)

i 35

( i 15

)

i 351

i —

Mortgage-backed securities:

Residential

i 31

i 5

i —

( i 25

)

i —

( i 11

)

i —

Commercial

i 154

( i 2

)

( i 1

)

( i 1

)

i 31

( i 120

)

i 61

( i 2

)

( i 1

)

Total mortgage-backed securities

i 185

i 3

( i 1

)

( i 26

)

i 31

( i 131

)

i 61

( i 2

)

( i 1

)

Corporate debt securities

i 1,130

( i 2

)

i 43

( i 46

)

i —

( i 74

)

i 1,051

( i 2

)

i 42

Collateralized loan obligations

i 50

i —

( i 1

)

i —

i 10

( i 50

)

i 9

i —

Other

i 696

i 3

( i 27

)

( i 28

)

i 9

( i 27

)

i 626

( i 1

)

( i 28

)

Total available-for-sale debt securities

i 2,412

i 5

i 16

( i 123

)

i 85

( i 297

)

i 2,098

( i 5

)

(6)

i 13

Mortgage loans held for sale

i 3,157

( i 37

)

i —

( i 251

)

i 80

( i 2,198

)

i 751

( i 27

)

(7)

i —

Loans held for sale

i 19

( i 4

)

i —

( i 7

)

i —

( i 1

)

i 7

( i 5

)

(5)

i —

Loans

i 160

( i 2

)

i —

( i 6

)

i —

i 152

( i 4

)

(7)

i —

Mortgage servicing rights (residential)(8)

i 8,126

( i 1,768

)

i —

i 461

i —

i 6,819

( i 1,131

)

(7)

i —

Net derivative assets and liabilities:

Interest rate contracts

i 685

i 460

i —

( i 622

)

i —

i 523

i 291

i —

Commodity contracts

( i 44

)

i 15

i —

i 12

i 18

i —

i 1

i 45

i —

Equity contracts

i 217

( i 277

)

i —

i 79

i —

i 1

i 20

( i 387

)

i —

Foreign exchange contracts

( i 6

)

( i 12

)

i —

i 2

i —

( i 16

)

i 2

i —

Credit contracts

i 47

i 4

i —

( i 1

)

i —

i 50

i —

Total derivative contracts

i 899

i 190

i —

( i 530

)

i 18

i 1

i 578

( i 49

)

(9)

i —

Equity securities:

Marketable

i 3

i —

( i 3

)

i —

Nonmarketable

i 6,751

i 1,414

i —

i 8,165

i 1,414

i —

Total equity securities

i 6,754

i 1,414

i —

( i 3

)

i 8,165

i 1,414

(10)

i —

Short sale liabilities

i —

( i 3

)

i —

( i 3

)

i —

(5)

i —

Other liabilities

( i 2

)

i —

( i 2

)

i —

(7)

i —


(1)	See Table 16.4 for detail.


(2)	All assets and liabilities transferred into level 3 were previously classified within level 2.


(3)	All assets and liabilities transferred out of level 3 are classified as level 2.


(4)	Represents only net gains (losses) that are due to changes in economic conditions and management’s estimates of fair value and excludes changes due to the collection/realization of cash flows over time.


(5)	Included in net gains from trading activities in the income statement.


(6)	Included in net gains from debt securities and provision (reversal of provision) for credit losses - debt securities in the income statement.


(7)	Included in mortgage banking and other noninterest income in the income statement.


(8)	For more information on the changes in mortgage servicing rights, see Note 11 (Mortgage Banking Activities).


(9)	Included in mortgage banking income, net gains from trading activities, net gains (losses) from equity securities and other noninterest income in the income statement.


(10)	Included in net gains (losses) from equity securities in the income statement.

(continued on following page)

141

(continued from previous page)

Table 16.4 presents gross purchases, sales, issuances and settlements related to the changes in Level 3 assets and liabilities measured at fair value on a recurring basis for the quarter ended June 30, 2020.

Table 16.4: Gross Purchases, Sales, Issuances and Settlements – Level 3 – Quarter ended June 30, 2020

(in millions)

Purchases

Sales

Issuances

Settlements

Net

Quarter ended June 30, 2020

Trading debt securities:

Securities of U.S. states and political subdivisions

i —

Collateralized loan obligations

i 86

( i 82

)

i —

i 4

Corporate debt securities

i 22

( i 21

)

i —

i 1

Mortgage-backed securities

i 72

( i 216

)

i —

( i 4

)

( i 148

)

Other

i 6

( i 27

)

i —

( i 1

)

( i 22

)

Total trading debt securities

i 186

( i 346

)

i —

( i 5

)

( i 165

)

Available-for-sale debt securities:

Securities of U.S. states and political subdivisions

i —

( i 23

)

( i 23

)

Mortgage-backed securities:

Residential

( i 1

)

( i 23

)

i —

( i 1

)

( i 25

)

Commercial

i —

( i 1

)

( i 1

)

Total mortgage-backed securities

( i 1

)

( i 23

)

i —

( i 2

)

( i 26

)

Corporate debt securities

i 6

i —

( i 52

)

( i 46

)

Collateralized loan obligations

i —

Other

i —

( i 5

)

i —

( i 23

)

( i 28

)

Total available-for-sale debt securities

i 5

( i 28

)

i —

( i 100

)

( i 123

)

Mortgage loans held for sale

i 32

( i 281

)

i 62

( i 64

)

( i 251

)

Loans held for sale

i —

( i 7

)

i —

( i 7

)

Loans

i —

i 2

( i 8

)

( i 6

)

Mortgage servicing rights (residential) (1)

i —

( i 1

)

i 462

i —

i 461

Net derivative assets and liabilities:

Interest rate contracts

i —

( i 622

)

( i 622

)

Commodity contracts

i —

i 12

Equity contracts

i —

i 79

Foreign exchange contracts

i —

i 2

Credit contracts

i 2

( i 1

)

i —

( i 2

)

( i 1

)

Total derivative contracts

i 2

( i 1

)

i —

( i 531

)

( i 530

)

Equity securities:

Marketable

i —

Nonmarketable

i —

Total equity securities

i —

Short sale liabilities

i —

( i 3

)

i —

( i 3

)

Other liabilities

i —


(1)	For more information on the changes in mortgage servicing rights, see Note 11 (Mortgage Banking Activities).

142

Note 16: Fair Values of Assets and Liabilities (continued)

Table 16.5 presents the changes in Level 3 assets and liabilities measured at fair value on a recurring basis for the quarter ended June 30, 2019.

Table 16.5: Changes in Level 3 Fair Value Assets and Liabilities on a Recurring Basis – Quarter ended June 30, 2019

Balance,

beginning

of period

Total net gains

(losses) included in

Purchases,

sales,

issuances

and

settlements,

net (1)

Net unrealized gains (losses)included in income related to assets and liabilities held at period end

(in millions)

Net

income

Other

compre-

hensive

income

Transfers

into

Level 3 (2)

Transfers

out of

Level 3 (3)

Balance,

end of

period

(4)

Quarter ended June 30, 2019

Trading debt securities:

Securities of U.S. states and political subdivisions

i —

Collateralized loan obligations

i 275

( i 2

)

i —

( i 24

)

i —

i 249

( i 6

)

Corporate debt securities

i 41

i 1

i —

i 3

i —

( i 1

)

i 44

i 1

Mortgage-backed securities

i —

Other

i 15

( i 1

)

i —

i 14

i —

Total trading debt securities

i 331

( i 2

)

i —

( i 21

)

i —

( i 1

)

i 307

( i 5

)

(5)

Available-for-sale debt securities:

Securities of U.S. states and political subdivisions

i 470

i 1

i 2

( i 33

)

i —

( i 49

)

i 391

i —

Mortgage-backed securities:

Residential

i —

Commercial

i 41

i —

i 41

i —

Total mortgage-backed securities

i 41

i —

i 41

i —

Corporate debt securities

i 377

i —

( i 1

)

i 7

i —

i 383

i —

Other

i 1,117

i 7

( i 6

)

( i 128

)

i —

i 990

i —

Total available-for-sale debt securities

i 2,005

i 8

( i 5

)

( i 154

)

i —

( i 49

)

i 1,805

i —

(6)

Mortgage loans held for sale

i 998

i 37

i —

( i 22

)

i 104

( i 2

)

i 1,115

i 39

(7)

Loans held for sale

i 71

i —

( i 3

)

i —

( i 56

)

i 12

i —

(5)

Loans

i 225

i 1

i —

( i 24

)

i —

i 202

( i 2

)

(7)

Mortgage servicing rights (residential) (8)

i 13,336

( i 1,639

)

i —

i 399

i —

i 12,096

( i 1,078

)

(7)

Net derivative assets and liabilities:

Interest rate contracts

i 101

i 237

i —

( i 133

)

i —

i 205

i 141

Commodity contracts

( i 18

)

( i 75

)

i —

i 64

i —

( i 29

)

( i 10

)

Equity contracts

( i 162

)

i 15

i —

( i 66

)

( i 2

)

( i 13

)

( i 228

)

( i 29

)

Foreign exchange contracts

( i 16

)

i 3

i —

i 3

i —

( i 10

)

i 7

Credit contracts

i 49

( i 3

)

i —

( i 1

)

i —

i 45

( i 3

)

Total derivative contracts

( i 46

)

i 177

i —

( i 133

)

( i 2

)

( i 13

)

( i 17

)

i 106

(9)

Equity securities:

Marketable

i —

Nonmarketable

i 6,381

i 724

i —

i 5

i —

i 7,110

i 724

Total equity securities

i 6,381

i 724

i —

i 5

i —

i 7,110

i 724

(10)

Other liabilities

( i 2

)

i —

( i 2

)

i —

(7)


(1)	See Table 16.6 for detail.


(2)	All assets and liabilities transferred into level 3 were previously classified within level 2.


(3)	All assets and liabilities transferred out of level 3 are classified as level 2.


(4)	Represents only net gains (losses) that are due to changes in economic conditions and management’s estimates of fair value and excludes changes due to the collection/realization of cash flows over time.


(5)	Included in net gains from trading activities in the income statement.


(6)	Included in net gains from debt securities in the income statement.


(7)	Included in mortgage banking and other noninterest income in the income statement.


(8)	For more information on the changes in mortgage servicing rights, see Note 11 (Mortgage Banking Activities).


(9)	Included in mortgage banking income, net gains from trading activities, net gains (losses) from equity securities and other noninterest income in the income statement.


(10)	Included in net gains (losses) from equity securities in the income statement.

(continued on following page)

143

(continued from previous page)

Table 16.6 presents gross purchases, sales, issuances and settlements related to the changes in Level 3 assets and liabilities measured at fair value on a recurring basis for the quarter ended June 30, 2019.

Table 16.6: Gross Purchases, Sales, Issuances and Settlements – Level 3 – Quarter ended June 30, 2019

(in millions)

Purchases

Sales

Issuances

Settlements

Net

Quarter ended June 30, 2019

Trading debt securities:

Securities of U.S. states and political subdivisions

i —

Collateralized loan obligations

i 44

( i 65

)

i —

( i 3

)

( i 24

)

Corporate debt securities

i 6

( i 3

)

i —

i 3

Mortgage-backed securities

i —

Other

i —

Total trading debt securities

i 50

( i 68

)

i —

( i 3

)

( i 21

)

Available-for-sale debt securities:

Securities of U.S. states and political subdivisions

i —

i 6

( i 39

)

( i 33

)

Mortgage-backed securities:

Residential

i —

Commercial

i —

Total mortgage-backed securities

i —

Corporate debt securities

i 8

i —

( i 1

)

i 7

Other

i —

( i 2

)

i 57

( i 183

)

( i 128

)

Total available-for-sale debt securities

i 8

( i 2

)

i 63

( i 223

)

( i 154

)

Mortgage loans held for sale

i 30

( i 47

)

i 54

( i 59

)

( i 22

)

Loans held for sale

i —

( i 1

)

i —

( i 2

)

( i 3

)

Loans

i —

i 2

( i 26

)

( i 24

)

Mortgage servicing rights (residential) (1)

i —

( i 1

)

i 400

i —

i 399

Net derivative assets and liabilities:

Interest rate contracts

i —

( i 133

)

( i 133

)

Commodity contracts

i —

i 64

Equity contracts

i —

( i 66

)

( i 66

)

Foreign exchange contracts

i —

i 3

Credit contracts

i 2

( i 3

)

i —

( i 1

)

Total derivative contracts

i 2

( i 3

)

i —

( i 132

)

( i 133

)

Equity securities:

Marketable

i —

Nonmarketable

i —

Total equity securities

i —

Other liabilities

i —


(1)	For more information on the changes in mortgage servicing rights, see Note 11 (Mortgage Banking Activities).

144

Note 16: Fair Values of Assets and Liabilities (continued)

The changes in Level 3 assets and liabilities measured at fair value on a recurring basis for the six months ended June 30, 2020, are presented in Table 16.7.

Table 16.7: Changes in Level 3 Fair Value Assets and Liabilities on a Recurring Basis – Six months ended June 30, 2020

Total net gains

(losses) included in

Purchases,

sales,

issuances

and

settlements,

net (1)

Net unrealized gains (losses)

related to assets and liabilities held at period end included in

(in millions)

Balance,

beginning

of period

Net

income

Other

compre-

hensive

income

Transfers

into

Level 3 (2)

Transfers

out of

Level 3 (3)

Balance,

end of

period

Net income

(4)

Other

compre-

hensive

income

Six months ended June 30, 2020

Trading debt securities:

Securities of U.S. states and political subdivisions

i —

Collateralized loan obligations

i 183

( i 69

)

i —

i 23

i 16

( i 25

)

i 128

( i 62

)

i —

Corporate debt securities

i 38

( i 11

)

i —

i 4

i —

( i 8

)

i 23

i —

Mortgage-backed securities

i —

( i 7

)

i —

i 23

i 52

( i 19

)

i 49

( i 5

)

i —

Other

i 2

i —

( i 28

)

i 47

i —

i 23

( i 2

)

i —

Total trading debt securities

i 223

( i 85

)

i —

i 22

i 115

( i 52

)

i 223

( i 69

)

(5)

i —

Available-for-sale debt securities:

Securities of U.S. states and political subdivisions

i 413

i 1

i —

( i 44

)

i 67

( i 86

)

i 351

i —

Mortgage-backed securities:

Residential

i —

( i 3

)

i 1

i 13

( i 11

)

i —

Commercial

i 42

i 1

( i 14

)

( i 3

)

i 155

( i 120

)

i 61

( i 2

)

( i 2

)

Total mortgage-backed securities

i 42

i 1

( i 17

)

( i 2

)

i 168

( i 131

)

i 61

( i 2

)

( i 2

)

Corporate debt securities

i 367

( i 54

)

i 27

( i 46

)

i 831

( i 74

)

i 1,051

( i 56

)

i 36

Collateralized loan obligations

i —

( i 9

)

i —

i 68

( i 50

)

i 9

i —

Other

i 743

i 6

( i 76

)

( i 58

)

i 38

( i 27

)

i 626

( i 1

)

( i 74

)

Total available-for-sale debt securities

i 1,565

( i 46

)

( i 75

)

( i 150

)

i 1,172

( i 368

)

i 2,098

( i 59

)

( i 40

)

Mortgage loans held for sale

i 1,198

( i 98

)

i —

i 449

i 1,402

( i 2,200

)

i 751

( i 30

)

i —

Loans held for sale

i 16

( i 6

)

i —

( i 9

)

i 7

( i 1

)

i 7

( i 4

)

i —

Loans

i 171

( i 2

)

i —

( i 17

)

i —

i 152

( i 6

)

i —

Mortgage servicing rights (residential) (8)

i 11,517

( i 5,589

)

i —

i 891

i —

i 6,819

( i 4,388

)

i —

Net derivative assets and liabilities:

Interest rate contracts

i 214

i 1,204

i —

( i 895

)

i —

i 523

i 374

i —

Commodity contracts

( i 16

)

( i 65

)

i —

i 70

i 12

i —

i 1

i 18

i —

Equity contracts

( i 269

)

i 153

i —

i 152

( i 10

)

( i 6

)

i 20

i 48

i —

Foreign exchange contracts

( i 18

)

( i 2

)

i —

i 4

i —

( i 16

)

( i 6

)

i —

Credit contracts

i 29

i 19

i —

i 2

i —

i 50

i 21

i —

Total derivative contracts

( i 60

)

i 1,309

i —

( i 667

)

i 2

( i 6

)

i 578

i 455

)

i —

Equity securities:

Marketable

i 3

i —

( i 3

)

i —

Nonmarketable

i 7,847

i 313

i —

i 7

( i 2

)

i 8,165

i 310

i —

Total equity securities

i 7,850

i 313

i —

i 7

( i 5

)

i 8,165

i 310

(10

)

i —

Short sale liabilities

i —

( i 3

)

i —

( i 3

)

i —

)

i —

Other liabilities

( i 2

)

i —

( i 2

)

i —

)

i —


(1)	See Table 16.8 for detail.


(2)	All assets and liabilities transferred into level 3 were previously classified within level 2.


(3)	All assets and liabilities transferred out of level 3 are classified as level 2.


(4)	Represents only net gains (losses) that are due to changes in economic conditions and management’s estimates of fair value and excludes changes due to the collection/realization of cash flows over time.


(5)	Included in net gains from trading activities in the income statement.


(6)	Included in net gains from debt securities and provision (reversal of provision) for credit losses - debt securities in the income statement.


(7)	Included in mortgage banking and other noninterest income in the income statement.


(8)	For more information on the changes in mortgage servicing rights, see Note 11 (Mortgage Banking Activities).


(9)	Included in mortgage banking income, net gains from trading activities, net gains (losses) from equity securities and other noninterest income in the income statement.


(10)	Included in net gains (losses) from equity securities in the income statement.

(continued on following page)

145

(continued from previous page)

Table 16.8 presents gross purchases, sales, issuances and settlements related to the changes in Level 3 assets and liabilities measured at fair value on a recurring basis for six months ended June 30, 2020.

Table 16.8: Gross Purchases, Sales, Issuances and Settlements – Level 3 – Six months ended June 30, 2020

(in millions)

Purchases

Sales

Issuances

Settlements

Net

Six months ended June 30, 2020

Trading debt securities:

Securities of U.S. states and political subdivisions

i —

Collateralized loan obligations

i 171

( i 138

)

i —

( i 10

)

i 23

Corporate debt securities

i 32

( i 28

)

i —

i 4

Mortgage-backed securities

i 267

( i 240

)

i —

( i 4

)

i 23

Other

i 6

( i 33

)

i —

( i 1

)

( i 28

)

Total trading debt securities

i 476

( i 439

)

i —

( i 15

)

i 22

Available-for-sale debt securities:

Securities of U.S. states and political subdivisions

i —

( i 44

)

( i 44

)

Mortgage-backed securities:

Residential

i 25

( i 23

)

i —

( i 1

)

i 1

Commercial

i —

( i 3

)

( i 3

)

Total mortgage-backed securities

i 25

( i 23

)

i —

( i 4

)

( i 2

)

Corporate debt securities

i 6

i —

( i 52

)

( i 46

)

Collateralized loan obligations

i —

Other

i —

( i 10

)

i —

( i 48

)

( i 58

)

Total available-for-sale debt securities

i 31

( i 33

)

i —

( i 148

)

( i 150

)

Mortgage loans held for sale

i 55

( i 350

)

i 905

( i 161

)

i 449

Loans held for sale

i —

( i 8

)

i —

( i 1

)

( i 9

)

Loans

i 1

i —

i 4

( i 22

)

( i 17

)

Mortgage servicing rights (residential) (1)

i —

( i 33

)

i 923

i 1

i 891

Net derivative assets and liabilities:

Interest rate contracts

i —

( i 895

)

( i 895

)

Commodity contracts

i —

i 70

Equity contracts

i —

i 152

Foreign exchange contracts

i —

i 4

Credit contracts

i 8

( i 4

)

i —

( i 2

)

i 2

Total derivative contracts

i 8

( i 4

)

i —

( i 671

)

( i 667

)

Equity securities:

Marketable

i —

Nonmarketable

i —

Total equity securities

i —

Short sale liabilities

i —

( i 3

)

i —

( i 3

)

Other liabilities

i —


(1)	For more information on the changes in mortgage servicing rights, see Note 11 (Mortgage Banking Activities).

146

Note 16: Fair Values of Assets and Liabilities (continued)

The changes in Level 3 assets and liabilities measured at fair value on a recurring basis for six months ended June 30, 2019, are presented in Table 16.9.

Table 16.9: Changes in Level 3 Fair Value Assets and Liabilities on a Recurring Basis – Six months ended June 30, 2019

Balance,

beginning

of period

Total net gains

(losses) included in

Purchases,

sales,

issuances

and

settlements,

net (1)

Net unrealized

gains (losses)

included in

income related

to assets and

liabilities held

at period end

(in millions)

Net

income

Other

compre-

hensive

income

Transfers

into

Level 3 (2)

Transfers

out of

Level 3 (3)

Balance,

end of

period

(4)

Six months ended June 30, 2019

Trading debt securities:

Securities of U.S. states and political subdivisions

i 3

i —

( i 2

)

i —

( i 1

)

i —

Collateralized loan obligations

i 237

( i 5

)

i —

i 17

i —

i 249

( i 4

)

Corporate debt securities

i 34

i 3

i —

i 7

i 1

( i 1

)

i 44

i 3

Mortgage-backed securities

i —

Other

i 16

( i 2

)

i —

i 14

i —

Total trading debt securities

i 290

( i 4

)

i —

i 22

i 1

( i 2

)

i 307

( i 1

)

(5)

Available-for-sale debt securities:

Securities of U.S. states and political subdivisions

i 444

i 1

i 5

( i 10

)

i —

( i 49

)

i 391

i —

Mortgage-backed securities:

Residential

i —

Commercial

i 41

i —

i 41

i —

Total mortgage-backed securities

i 41

i —

i 41

i —

Corporate debt securities

i 370

i 1

i 3

i 9

i —

i 383

i —

Other

i 1,189

i 13

( i 11

)

( i 201

)

i —

i 990

i —

Total available-for-sale debt securities

i 2,044

i 15

( i 3

)

( i 202

)

i —

( i 49

)

i 1,805

i —

(6)

Mortgage loans held for sale

i 997

i 52

i —

( i 88

)

i 160

( i 6

)

i 1,115

i 54

(7)

Loans held for sale

i 60

i —

i 8

i 37

( i 93

)

i 12

i —

(5)

Loans

i 244

i 1

i —

( i 43

)

i —

i 202

( i 4

)

(7)

Mortgage servicing rights (residential) (8)

i 14,649

( i 3,012

)

i —

i 459

i —

i 12,096

( i 1,969

)

(7)

Net derivative assets and liabilities:

Interest rate contracts

i 25

i 424

i —

( i 244

)

i —

i 205

i 220

Commodity contracts

i 4

( i 126

)

i —

i 91

i 2

i —

( i 29

)

( i 26

)

Equity contracts

( i 17

)

( i 104

)

i —

( i 69

)

i 7

( i 45

)

( i 228

)

( i 175

)

Foreign exchange contracts

( i 26

)

i 10

i —

i 6

i —

( i 10

)

i 17

Credit contracts

i 35

i 5

i —

i 5

i —

i 45

i 10

Total derivative contracts

i 21

i 209

i —

( i 211

)

i 9

( i 45

)

( i 17

)

i 46

(9)

Equity securities:

Marketable

i —

Nonmarketable

i 5,468

i 1,650

i —

( i 1

)

i 5

( i 12

)

i 7,110

i 1,650

Total equity securities

i 5,468

i 1,650

i —

( i 1

)

i 5

( i 12

)

i 7,110

i 1,650

(10)

Other liabilities

( i 2

)

i —

( i 2

)

i —

(7)


(1)	See Table 16.10 for detail.


(2)	All assets and liabilities transferred into level 3 were previously classified within level 2.


(3)	All assets and liabilities transferred out of level 3 are classified as level 2.


(4)	Represents only net gains (losses) that are due to changes in economic conditions and management’s estimates of fair value and excludes changes due to the collection/realization of cash flows over time.


(5)	Included in net gains from trading activities in the income statement.


(6)	Included in net gains from debt securities in the income statement.


(7)	Included in mortgage banking and other noninterest income in the income statement.


(8)	For more information on the changes in mortgage servicing rights, see Note 11 (Mortgage Banking Activities).


(9)	Included in mortgage banking income, net gains from trading activities, net gains (losses) from equity securities and other noninterest income in the income statement.


(10)	Included in net gains (losses) from equity securities in the income statement.

(continued on following page)

147

(continued from previous page)

Table 16.10 presents gross purchases, sales, issuances and settlements related to the changes in Level 3 assets and liabilities measured at fair value on a recurring basis for six months ended June 30, 2019.

Table 16.10: Gross Purchases, Sales, Issuances and Settlements – Level 3 – Six months ended June 30, 2019

(in millions)

Purchases

Sales

Issuances

Settlements

Net

Six months ended June 30, 2019

Trading debt securities:

Securities of U.S. states and political subdivisions

i —

( i 2

)

( i 2

)

Collateralized loan obligations

i 174

( i 152

)

i —

( i 5

)

i 17

Corporate debt securities

i 11

( i 4

)

i —

i 7

Mortgage-backed securities

i —

Other

i —

Total trading debt securities

i 185

( i 156

)

i —

( i 7

)

i 22

Available-for-sale debt securities:

Securities of U.S. states and political subdivisions

i —

i 55

( i 65

)

( i 10

)

Mortgage-backed securities:

Residential

i —

Commercial

i —

Total mortgage-backed securities

i —

Corporate debt securities

i 11

i —

( i 2

)

i 9

Other

i —

( i 5

)

i 123

( i 319

)

( i 201

)

Total available-for-sale debt securities

i 11

( i 5

)

i 178

( i 386

)

( i 202

)

Mortgage loans held for sale

i 46

( i 140

)

i 100

( i 94

)

( i 88

)

Loans held for sale

i 12

( i 2

)

i —

( i 2

)

i 8

Loans

i 2

i —

i 5

( i 50

)

( i 43

)

Mortgage servicing rights (residential) (1)

i —

( i 282

)

i 741

i —

i 459

Net derivative assets and liabilities:

Interest rate contracts

i —

( i 244

)

( i 244

)

Commodity contracts

i —

i 91

Equity contracts

i —

( i 69

)

( i 69

)

Foreign exchange contracts

i —

i 6

Credit contracts

i 8

( i 3

)

i —

i 5

Total derivative contracts

i 8

( i 3

)

i —

( i 216

)

( i 211

)

Equity securities:

Marketable

i —

Nonmarketable

i —

( i 1

)

i —

( i 1

)

Total equity securities

i —

( i 1

)

i —

( i 1

)

Other liabilities

i —


(1)	For more information on the changes in mortgage servicing rights, see Note 11 (Mortgage Banking Activities).

Table 16.11 and Table 16.12 provide quantitative information about the valuation techniques and significant unobservable inputs used in the valuation of substantially all of our Level 3 assets and liabilities measured at fair value on a recurring basis for which we use an internal model.

The significant unobservable inputs for Level 3 assets and liabilities inherent in the fair values obtained from third-party vendors are not included in the table, as the specific inputs applied are not provided by the vendor.

In addition, the table excludes the valuation techniques and significant unobservable inputs for certain classes of Level 3 assets and liabilities measured using internal models that we consider, both individually and in the aggregate, insignificant relative to our overall Level 3 assets and liabilities. We made this determination based upon an evaluation of each class, which considered the magnitude of the positions, nature of the unobservable inputs and potential for significant changes in fair value due to changes in those inputs.

Weighted averages of inputs are calculated using outstanding unpaid principal balance for cash instruments, such as loans and securities, and notional amounts for derivative instruments.

For information on how changes in significant unobservable inputs affect the fair values of Level 3 assets and liabilities, see Note 19 (Fair Values of Assets and Liabilities) in our 2019 Form 10-K.

148

Note 16: Fair Values of Assets and Liabilities (continued)

Table 16.11: Valuation Techniques – Recurring Basis – June 30, 2020

($ in millions, except cost to service amounts)

Fair Value Level 3

Valuation Technique(s)

Significant

Unobservable Inputs

Range of Inputs

Positive (Negative)

Weighted

Average

Trading and available-for-sale debt securities:

Securities of U.S. states and

political subdivisions

i 279

Discounted cash flow

Discount rate

i 0.6

i 4.8

i 1.4

i 72

Vendor priced

Collateralized loan obligations

i 127

Market comparable pricing

Comparability adjustment

( i 31.6

)

i 31.0

( i 12.3

)

i 10

Vendor priced

Corporate debt securities

i 852

Discounted cash flow

Discount rate

i 3.6

i 14.8

i 4.2

i 100

Market comparable pricing

Comparability adjustment

( i 29.4

)

i 8.8

( i 22.1

)

i 122

Vendor priced

Mortgage-backed securities

i 49

Market comparable pricing

Comparability adjustment

( i 29.2

)

( i 4.7

)

( i 12.9

)

i 61

Vendor priced

Other debt securities

i 64

Discounted cash flow

Discount rate

i 1.4

i 3.4

i 2.6

i 23

Market comparable pricing

Comparability adjustment

( i 5.4

)

i 9.2

( i 3.0

)

i 562

Vendor priced

Mortgage loans held for sale (residential)

i 735

Discounted cash flow

Default rate

i 0.0

i 27.8

i 1.4

Discount rate

i 2.5

i 6.0

i 5.2

Loss severity

i 0.0

i 32.0

i 21.5

Prepayment rate

i 7.6

i 22.1

i 14.8

i 16

Market comparable pricing

Comparability adjustment

( i 50.0

)

( i 14.3

)

( i 38.1

)

Loans (1)

i 152

Discounted cash flow

Discount rate

i 3.9

i 5.6

i 4.3

Default rate

i 0.0

i 29.6

i 0.6

Prepayment rate

i 8.1

i 100.0

i 85.3

Loss severity

i 0.0

i 41.9

i 14.9

Mortgage servicing rights (residential)

i 6,819

Discounted cash flow

Cost to service per loan (2)

i 65

i 1,138

i 152

Discount rate

i 6.1

i 9.1

i 6.8

Prepayment rate (3)

i 12.7

i 26.4

i 18.5

Net derivative assets and (liabilities):

Interest rate contracts

i 215

Discounted cash flow

Default rate

i 0.0

i 6.0

i 1.6

Loss severity

i 50.0

Prepayment rate

i 2.8

i 22.0

i 14.7

i 13

Market comparable pricing

Comparability adjustment

( i 23.7

)

( i 21.2

)

( i 22.2

)

Interest rate contracts: derivative loan

commitments

i 295

Discounted cash flow

Fall-out factor

i 1.0

i 99.0

i 20.5

Initial-value servicing

(37.1

)

137.0

bps

42.3

Equity contracts

i 171

Discounted cash flow

Conversion factor

( i 8.8

)

i 0.0

( i 7.7

)

Weighted average life

i 0.5

i 2.5

yrs

i 1.1

( i 151

)

Option model

Correlation factor

( i 77.0

)

i 99.0

i 37.7

Volatility factor

i 6.5

i 83.4

i 27.0

Credit contracts

i 38

Market comparable pricing

Comparability adjustment

( i 96.8

)

i 477.6

i 14.8

i 12

Option model

Credit spread

i 0.0

i 86.2

i 2.5

Loss severity

i 12.0

i 60.0

i 45.4

Nonmarketable equity securities

i 8,165

Market comparable pricing

Comparability adjustment

i 4.2

i 22.0

i 13.6

Insignificant Level 3 assets, net of liabilities

( i 13

)

Total level 3 assets, net of liabilities

i 18,788

(4)


(1)	Consists of reverse mortgage loans.


(2)	The high end of the range of inputs is for servicing modified loans. For non-modified loans the range is $ i 65 to $ i 273 per loan.


(3)	Includes a blend of prepayment speeds and expected defaults. Prepayment speeds are influenced by mortgage interest rates as well as our estimation of drivers of borrower behavior.


(4)	Consists of total Level 3 assets of $ i 20.4 billion and total Level 3 liabilities of $ i 1.6 billion, before netting of derivative balances.

149

Table 16.12: Valuation Techniques – Recurring Basis – December 31, 2019

($ in millions, except cost to service amounts)

Fair Value Level 3

Valuation Technique(s)

Significant

Unobservable Inputs

Range of Inputs

Positive (Negative)

Weighted

Average

Trading and available-for-sale debt securities:

Securities of U.S. states and

political subdivisions

i 379

Discounted cash flow

Discount rate

i 1.3

i 5.4

i 2.4

i 34

Vendor priced

Collateralized loan obligations

i 183

Market comparable pricing

Comparability adjustment

( i 15.0

)

i 19.2

i 1.3

Corporate debt securities

i 220

Discounted cash flow

Discount rate

i 3.2

i 14.9

i 9.2

i 60

Market comparable pricing

Comparability adjustment

( i 19.7

)

i 14.0

( i 4.4

)

i 125

Vendor priced

Other debt securities

i 92

Discounted cash flow

Discount rate

i 2.3

i 3.1

i 2.8

i 651

Vendor priced

Mortgage loans held for sale (residential)

i 1,183

Discounted cash flow

Default rate

i 0.0

i 15.5

i 0.7

Discount rate

i 3.0

i 5.6

i 4.5

Loss severity

i 0.0

i 43.5

i 21.7

Prepayment rate

i 5.7

i 15.4

i 7.8

i 15

Market comparable pricing

Comparability adjustment

( i 56.3

)

( i 6.3

)

( i 40.3

)

Loans (1)

i 171

Discounted cash flow

Discount rate

i 3.9

i 4.3

i 4.1

Prepayment rate

i 6.0

i 100.0

i 85.6

Loss severity

i 0.0

i 36.5

i 14.1

Mortgage servicing rights (residential)

i 11,517

Discounted cash flow

Cost to service per loan (2)

i 61

i 495

i 102

Discount rate

i 6.0

i 13.6

i 7.2

Prepayment rate (3)

i 9.6

i 24.4

i 11.9

Net derivative assets and (liabilities):

Interest rate contracts

i 146

Discounted cash flow

Default rate

i 0.0

i 5.0

i 1.7

Loss severity

i 50.0

Prepayment rate

i 2.8

i 25.0

i 15.0

Interest rate contracts: derivative loan

commitments

i 68

Discounted cash flow

Fall-out factor

i 1.0

i 99.0

i 16.7

Initial-value servicing

(32.2

)

149.0

bps

36.4

Equity contracts

i 147

Discounted cash flow

Conversion factor

( i 8.8

)

i 0.0

( i 7.7

)

Weighted average life

i 0.5

i 3.0

yrs

i 1.5

( i 416

)

Option model

Correlation factor

( i 77.0

)

i 99.0

i 23.8

Volatility factor

i 6.8

i 100.0

i 18.7

Credit contracts

i 2

Market comparable pricing

Comparability adjustment

( i 56.1

)

i 10.8

( i 16.0

)

i 27

Option model

Credit spread

i 0.0

i 17.8

i 0.8

Loss severity

i 12.0

i 60.0

i 45.6

Nonmarketable equity securities

i 7,847

Market comparable pricing

Comparability adjustment

( i 20.2

)

( i 4.2

)

( i 14.6

)

Insignificant Level 3 assets, net of liabilities

i 27

Total level 3 assets, net of liabilities

i 22,478

(4)


(1)	Consists of reverse mortgage loans.


(2)	The high end of the range of inputs is for servicing modified loans. For non-modified loans the range is $ i 61 to $ i 231 per loan.


(3)	Includes a blend of prepayment speeds and expected defaults. Prepayment speeds are influenced by mortgage interest rates as well as our estimation of drivers of borrower behavior.


(4)	Consists of total Level 3 assets of $ i 24.3 billion and total Level 3 liabilities of $ i 1.8 billion, before netting of derivative balances.

For information on the valuation techniques and significant unobservable inputs used for our Level 3 assets and liabilities, see Note 19 (Fair Value of Assets and Liabilities) in our 2019 Form 10-K.

150

Note 16: Fair Values of Assets and Liabilities (continued)

Assets and Liabilities Recorded at Fair Value on a Nonrecurring Basis

We may be required, from time to time, to measure certain assets at fair value on a nonrecurring basis in accordance with GAAP. These adjustments to fair value usually result from application of LOCOM accounting, write-downs of individual assets or use of the measurement alternative for nonmarketable equity securities.

Table 16.13 provides the fair value hierarchy and fair value at the date of the nonrecurring fair value adjustment for all assets

that were still held as of June 30, 2020, and December 31, 2019, and for which a nonrecurring fair value adjustment was recorded during the six months ended June 30, 2020, and year ended December 31, 2019.

Table 16.14 presents the increase (decrease) in value of certain assets held at the end of the respective reporting periods presented for which a nonrecurring fair value adjustment was recognized during the periods presented.

Table 16.13: Fair Value on a Nonrecurring Basis

(in millions)

Level 1

Level 2

Level 3

Total

Level 1

Level 2

Level 3

Total

Mortgage loans held for sale (1)

i —

i 981

i 1,791

i 2,772

i —

i 2,034

i 3,803

i 5,837

Loans held for sale

i —

i 29

i —

i 29

i —

i 5

i —

i 5

Loans:

Commercial

i —

i 957

i —

i 957

i —

i 280

i —

i 280

Consumer

i —

i 161

i —

i 161

i —

i 213

i 1

i 214

Total loans

i —

i 1,118

i —

i 1,118

i —

i 493

i 1

i 494

Mortgage servicing rights (commercial)

i —

i 568

i —

Nonmarketable equity securities

i —

i 726

i 788

i 1,514

i —

i 1,308

i 173

i 1,481

Other assets

i —

i 532

i 439

i 971

i —

i 359

i 27

i 386

Total assets at fair value on a nonrecurring basis

i —

i 3,386

i 3,586

i 6,972

i —

i 4,199

i 4,004

i 8,203


(1)	Consists of commercial mortgages and residential real estate 1-4 family first mortgage loans.

Nonmarketable equity securities includes impairment on private equity and venture capital investments and gains or losses under the measurement alternative. Other assets includes impairments of operating lease ROU assets, valuation losses on foreclosed real estate and other collateral owned, and impairment on private equity and venture capital investments in consolidated portfolio companies.

Table 16.14: Change in Value of Assets with Nonrecurring Fair Value Adjustment



	Six months ended June 30,
(in millions)	2020			2019
Mortgage loans held for sale	$	( i 61	)	i 18
Loans held for sale	( i 16		)	( i 2	)
Loans:
Commercial	( i 392		)	( i 106	)
Consumer	( i 128		)	( i 121	)
Total loans	( i 520		)	( i 227	)
Mortgage servicing rights (commercial)	( i 30		)	i —
Nonmarketable equity securities	( i 410		)	i 264
Other assets	( i 394		)	( i 29	)
Total	$	( i 1,431	)	i 24

151

Table 16.15 provides quantitative information about the valuation techniques and significant unobservable inputs used in the valuation of our Level 3 assets that are measured at fair value on a nonrecurring basis primarily using an internal model. The table is limited to financial instruments that had nonrecurring fair value adjustments during the periods presented. Weighted averages of inputs are calculated using outstanding unpaid principal balance for cash instruments, such as loans, and carrying value prior to the nonrecurring fair value measurement for nonmarketable equity securities.

We have excluded from the table valuation techniques and significant unobservable inputs for certain classes of Level 3

assets we consider both individually and in the aggregate, insignificant relative to our overall Level 3 nonrecurring measurements. We made this determination based upon an evaluation of each class that considered the magnitude of the positions, nature of the unobservable inputs and potential for significant changes in fair value due to changes in those inputs.

Table 16.15: Valuation Techniques – Nonrecurring Basis

($ in millions)

Fair Value

Level 3

Valuation

Technique(s) (1)

Significant

Unobservable Inputs (1)

Range of Inputs

Positive (Negative)

Weighted

Average

Residential mortgage loans held for sale

i 1,791

(2)

Discounted cash flow

Default rate

(3)

i 0.6

—

i 65.0

i 26.4

Discount rate

i 0.7

—

i 8.5

i 4.3

Loss severity

i 1.0

—

i 83.9

i 8.7

Prepayment rate

(4)

i 3.4

—

i 100.0

i 42.5

Mortgage servicing rights (commercial)

i 568

Discounted cash flow

Cost to service per loan

i 150

—

i 3,369

i 2,771

Discount rate

i 3.0

—

i 3.0

Prepayment rate

i 5.0

—

i 20.0

i 6.4

Nonmarketable equity securities (5)

i 674

Market comparable pricing

Multiples

0.1x

—

11.6x

5.1x

i 353

Market comparable pricing

Comparability adjustment

( i 100.0

)

—

( i 6.0

( i 44.3

)

i 110

Other

Company risk factor

( i 100.0

)

—

( i 20.0

)

( i 43.4

)

i 87

Discounted cash flow

Discount rate

i 10.0

—

i 20.0

i 11.3

Company risk factor

( i 64.5

)

—

i 0.0

( i 26.6

)

Crude oil prices ($/barrel)

i 48

—

i 48

Natural gas prices ($/MMBtu)

i 2

—

i 2

Insignificant level 3 assets

i 3

Total

i 3,586

Residential mortgage loans held for sale

i 3,803

(2)

Discounted cash flow

Default rate

(3)

i 0.3

—

i 48.3

i 4.6

Discount rate

i 1.5

—

i 9.4

i 4.3

Loss severity

i 0.4

—

i 100.0

i 23.4

Prepayment rate

(4)

i 4.8

—

i 100.0

i 23.2

Insignificant level 3 assets

i 201

Total

i 4,004


(1)	Refer to Note 19 (Fair Value of Assets and Liabilities) in our 2019 Form 10-K for a definition of the valuation technique(s) and significant unobservable inputs used in the valuation of residential mortgage loans held for sale, mortgage servicing rights, and certain nonmarketable equity securities.


(2)	Consists of approximately $ i 1.3 billion of government insured/guaranteed loans purchased from GNMA-guaranteed mortgage securitizations at both June 30, 2020 and December 31, 2019, and approximately $ i 500 million and $ i 2.5 billion, respectively, of other mortgage loans that are not government insured/guaranteed.


(3)	Applies only to non-government insured/guaranteed loans.


(4)	Includes the impact on prepayment rate of expected defaults for government insured/guaranteed loans, which impact the frequency and timing of early resolution of loans.


(5)	Includes $ i 439 million of private equity and venture capital investments in consolidated portfolio companies classified in other assets on the balance sheet.

We typically use a market approach to estimate the fair value of our nonmarketable private equity and venture capital investments in portfolio companies. The market approach bases the fair value measurement on market data (for example, use of market comparable pricing techniques) that are used to derive the enterprise value of the portfolio company. Market comparable pricing techniques include utilization of financial metrics of comparable public companies (multiples), such as ratios of enterprise value or market value of equity to revenue, EBITDA, net income or book value. Comparable company valuation multiples are evaluated and adjusted as necessary to reflect the comparative operational, financial or marketability differences between the public company and subject portfolio company in estimating its fair value. Market comparable pricing

techniques also use recent or anticipated transactions (for example, a financing round, merger, acquisition or bankruptcy) involving the subject portfolio company, or participants in its industry or related industries. Based upon these recent or anticipated transactions, current market conditions and other factors specific to the issuer, we make adjustments to estimate the enterprise value of the portfolio company. As a result of the recent market environment, we also utilized other valuation techniques. These techniques included the use of company risk factors in the estimation of the fair value of certain nonmarketable equity securities. The company risk factors are based upon entity-specific considerations including the debt and liquidity profile, projected cash flow or funding issues as well as other factors that may affect the company’s outlook.

152

Note 16: Fair Values of Assets and Liabilities (continued)

Fair Value Option

The fair value option is an irrevocable election, generally only permitted upon initial recognition of financial assets or liabilities, to measure eligible financial instruments at fair value with changes in fair value reflected in earnings. We may elect the fair value option to align the measurement model with how the financial assets or liabilities are managed or to reduce complexity

or accounting asymmetry. For more information, including the basis for our fair value option elections, see Note 19 (Fair Values of Assets and Liabilities) in our 2019 Form 10-K.

Table 16.16 reflects differences between the fair value carrying amount of the assets for which we have elected the fair value option and the contractual aggregate unpaid principal amount at maturity.

Table 16.16: Fair Value Option

(in millions)

Fair value

carrying

amount

Aggregate

unpaid

principal

Fair value carrying amount less aggregate unpaid principal

Fair value

carrying

amount

Aggregate

unpaid

principal

Fair value

carrying amount less aggregate unpaid principal

Mortgage loans held for sale:

Total loans

i 18,644

i 17,923

i 721

i 16,606

i 16,279

i 327

Nonaccrual loans

i 134

i 165

( i 31

)

i 133

i 157

( i 24

)

Loans 90 days or more past due and still accruing

i 140

i 152

( i 12

)

i 8

i 10

( i 2

)

Loans held for sale:

Total loans

i 1,201

i 1,329

( i 128

)

i 972

i 1,020

( i 48

)

Nonaccrual loans

i 15

i 49

( i 34

)

i 21

i 29

( i 8

)

Loans:

Total loans

i 152

i 183

( i 31

)

i 171

i 201

( i 30

)

Nonaccrual loans

i 118

i 149

( i 31

)

i 129

i 159

( i 30

)

The changes in fair value related to initial measurement and subsequent changes in fair value included in earnings for these assets measured at fair value are shown in Table 16.17 by income

statement line item. Amounts recorded as interest income are excluded from Table 16.17.

Table 16.17: Fair Value Option – Changes in Fair Value Included in Earnings

2020

2019

(in millions)

Mortgage banking noninterest income

Net gains

(losses)

from

trading

activities

Other

noninterest

income

Mortgage

banking

noninterest

income

Net gains (losses)

from

trading

activities

Other

noninterest

income

Quarter ended June 30,

Mortgage loans held for sale

i 749

i —

i 379

i —

Loans held for sale

i —

i 24

i —

( i 4

)

i —

Loans

i —

( i 2

)

i —

i 1

Six months ended June 30,

Mortgage loans held for sale

i 1,097

i —

i 593

i —

Loans held for sale

i —

i 11

i —

i 10

i 1

Loans

i —

( i 2

)

i —

i 1

For performing loans, instrument-specific credit risk gains or losses were derived principally by determining the change in fair value of the loans due to changes in the observable or implied credit spread. Credit spread is the market yield on the loans less the relevant risk-free benchmark interest rate. For

nonperforming loans, we attribute all changes in fair value to instrument-specific credit risk. i Table 16.18 shows the estimated gains and losses from earnings attributable to instrument-specific credit risk related to assets accounted for under the fair value option.

Table 16.18: Fair Value Option – Gains/Losses Attributable to Instrument-Specific Credit Risk



	Quarter ended June 30,					Six months ended June 30,
(in millions)	2020			2019		2020			2019
Gains (losses) attributable to instrument-specific credit risk:
Mortgage loans held for sale	$	( i 35	)	i 16		$	( i 217	)	i 12
Loans held for sale	i 26			( i 3	)	i 14			i 11
Total	$	( i 9	)	i 13		$	( i 203	)	i 23

153

Disclosures about Fair Value of Financial Instruments

Table 16.19 presents a summary of fair value estimates for financial instruments that are not carried at fair value on a recurring basis. Some financial instruments are excluded from scope of this table, such as certain insurance contracts and leases. This table also excludes assets and liabilities that are not financial instruments such as the value of the long-term relationships with our deposit, credit card and trust customers, MSRs, premises and equipment, goodwill and deferred taxes.

Loan commitments, standby letters of credit and commercial and similar letters of credit are not included in Table 16.19. A reasonable estimate of the fair value of these instruments is the carrying value of deferred fees plus the allowance for unfunded credit commitments, which totaled $ i 1.7 billion and $ i 1.0 billion at June 30, 2020 and December 31, 2019, respectively.

The total of the fair value calculations presented does not represent, and should not be construed to represent, the underlying value of the Company.

Table 16.19: Fair Value Estimates for Financial Instruments

Estimated fair value

(in millions)

Carrying amount

Level 1

Level 2

Level 3

Total

Financial assets

Cash and due from banks (1)

i 24,704

i —

i 24,704

Interest-earning deposits with banks (1)

i 237,799

i 237,583

i 216

i —

i 237,799

Federal funds sold and securities purchased under resale agreements (1)

i 79,289

i —

i 79,289

i —

i 79,289

Held-to-maturity debt securities, net

i 169,002

i 50,504

i 125,483

i 895

i 176,882

Mortgage loans held for sale

i 13,711

i —

i 11,987

i 2,321

i 14,308

Loans held for sale

i 138

i —

i 139

i —

i 139

Loans, net (2)

i 899,347

i —

i 55,225

i 854,436

i 909,661

Nonmarketable equity securities (cost method)

i 3,794

i —

i 3,838

Total financial assets

i 1,427,784

i 312,791

i 272,339

i 861,490

i 1,446,620

Financial liabilities

Deposits (3)

i 83,654

i —

i 58,313

i 26,287

i 84,600

Short-term borrowings

i 60,485

i —

i 60,486

i —

i 60,486

Long-term debt (4)

i 230,891

i —

i 230,563

i 1,395

i 231,958

Total financial liabilities

i 375,030

i —

i 349,362

i 27,682

i 377,044

Financial assets

Cash and due from banks (1)

i 21,757

i —

i 21,757

Interest-earning deposits with banks (1)

i 119,493

i 119,257

i 236

i —

i 119,493

Federal funds sold and securities purchased under resale agreements (1)

i 102,140

i —

i 102,140

i —

i 102,140

Held-to-maturity debt securities

i 153,933

i 46,138

i 109,933

i 789

i 156,860

Mortgage loans held for sale

i 6,736

i —

i 2,939

i 4,721

i 7,660

Loans held for sale

i 5

i —

i 5

i —

i 5

Loans, net (2)

i 933,042

i —

i 54,125

i 891,714

i 945,839

Nonmarketable equity securities (cost method)

i 4,790

i —

i 4,823

Total financial assets

i 1,341,896

i 187,152

i 269,378

i 902,047

i 1,358,577

Financial liabilities

Deposits (3)

i 118,849

i —

i 87,279

i 31,858

i 119,137

Short-term borrowings

i 104,512

i —

i 104,513

i —

i 104,513

Long-term debt (4)

i 228,159

i —

i 231,332

i 1,720

i 233,052

Total financial liabilities

i 451,520

i —

i 423,124

i 33,578

i 456,702


(1)	Amounts consist of financial instruments for which carrying value approximates fair value.


(2)	Excludes lease financing with a carrying amount of $ i 16.7 billion and $ i 19.5 billion at June 30, 2020 and December 31, 2019, respectively.


(3)	Excludes deposit liabilities with no defined or contractual maturity of $ i 1.3 trillion and $ i 1.2 trillion at June 30, 2020 and December 31, 2019, respectively.


(4)	Excludes capital lease obligations under capital leases of $ i 30 million and $ i 32 million at June 30, 2020 and December 31, 2019, respectively.

154

Note 17: Preferred Stock (continued)

Note 17: Preferred Stock

We are authorized to issue i 20 million shares of preferred stock and i 4 million shares of preference stock, both without par value. Preferred shares outstanding rank senior to common shares both as to dividends and liquidation preference but have no general voting rights. We have not issued any preference shares under this authorization. If issued, preference shares would be limited to

i one vote per share. i Our total authorized, issued and outstanding preferred stock is presented in the following two tables along with the Employee Stock Ownership Plan (ESOP) Cumulative Convertible Preferred Stock. All classes of preferred stock, except the Dividend Equalization Preferred Shares and the ESOP Cumulative Convertible Preferred Stock, qualify as Tier 1 capital.

Table 17.1: Preferred Stock Shares

Liquidation

preference

per share

authorized

and designated

Liquidation

preference

per share

authorized

and designated

DEP Shares

Dividend Equalization Preferred Shares (DEP)

i 10

i 97,000

i 10

i 97,000

Series I

Floating Class A Preferred Stock (1)

i 100,000

i 25,010

i 100,000

i 25,010

Series K

Floating Non-Cumulative Perpetual Class A Preferred Stock (2)

i —

i 1,000

i 3,500,000

Series L

7.50% Non-Cumulative Perpetual Convertible Class A Preferred Stock (3)

i 1,000

i 4,025,000

i 1,000

i 4,025,000

Series N

5.20% Non-Cumulative Perpetual Class A Preferred Stock

i 25,000

i 30,000

i 25,000

i 30,000

Series O

5.125% Non-Cumulative Perpetual Class A Preferred Stock

i 25,000

i 27,600

i 25,000

i 27,600

Series P

5.25% Non-Cumulative Perpetual Class A Preferred Stock

i 25,000

i 26,400

i 25,000

i 26,400

Series Q

5.85% Fixed-to-Floating Non-Cumulative Perpetual Class A Preferred Stock

i 25,000

i 69,000

i 25,000

i 69,000

Series R

6.625% Fixed-to-Floating Non-Cumulative Perpetual Class A Preferred Stock

i 25,000

i 34,500

i 25,000

i 34,500

Series S

5.90% Fixed-to-Floating Non-Cumulative Perpetual Class A Preferred Stock

i 25,000

i 80,000

i 25,000

i 80,000

Series T

6.00% Non-Cumulative Perpetual Class A Preferred Stock (4)

i 25,000

i 32,200

i 25,000

i 32,200

Series U

5.875% Fixed-to-Floating Non-Cumulative Perpetual Class A Preferred Stock

i 25,000

i 80,000

i 25,000

i 80,000

Series V

6.00% Non-Cumulative Perpetual Class A Preferred Stock

i 25,000

i 40,000

i 25,000

i 40,000

Series W

5.70% Non-Cumulative Perpetual Class A Preferred Stock

i 25,000

i 40,000

i 25,000

i 40,000

Series X

5.50% Non-Cumulative Perpetual Class A Preferred Stock

i 25,000

i 46,000

i 25,000

i 46,000

Series Y

5.625% Non-Cumulative Perpetual Class A Preferred Stock

i 25,000

i 27,600

i 25,000

i 27,600

Series Z

4.750% Non-Cumulative Perpetual Class A Preferred Stock

i 25,000

i 80,500

i —

ESOP

Cumulative Convertible Preferred Stock (5)

i —

i 822,242

i —

i 1,071,418

Total

i 5,583,052

i 9,251,728


(1)	Preferred Stock, Series I, relates to trust preferred securities. See Note 10 (Securitizations and Variable Interest Entities) for additional information. This issuance has a floating interest rate that is the greater of three-month London Interbank Offered Rate (LIBOR) plus 0.93% and 5.56975%.


(2)	Floating rate for Preferred Stock, Series K, is three-month LIBOR plus 3.77%. In first quarter 2020, the remaining $ i 1.8 billion of Preferred Stock, Series K, was redeemed.


(3)	Preferred Stock, Series L, may be converted at any time, at the option of the holder, into i 6.3814 shares of our common stock, plus cash in lieu of fractional shares, subject to anti-dilution adjustments.


(4)	In first quarter 2020, $ i 669 million of Preferred Stock, Series T, was redeemed.


(5)	See the ESOP Cumulative Convertible Preferred Stock section in this Note for additional information about the liquidation preference.

155

Table 17.2: Preferred Stock – Shares Issued and Carrying Value

Restated Certificate of Incorporation, as amended and in effect on the date hereof.

(in millions, except shares)

issued and

outstanding

Liquidation preference

value

Carrying

value

Discount

issued and

outstanding

Liquidation preference

value

Carrying

value

Discount

DEP Shares

Dividend Equalization Preferred Shares (DEP)

i 96,546

i —

i 96,546

i —

Series I (1)

Floating Class A Preferred Stock

i 25,010

i 2,501

i —

i 25,010

i 2,501

i —

Series K (2)

Floating Non-Cumulative Perpetual Class A Preferred Stock

i —

i 1,802,000

i 1,802

i 1,546

i 256

Series L (3)

7.50% Non-Cumulative Perpetual Convertible Class A Preferred Stock

i 3,967,995

i 3,968

i 3,200

i 768

i 3,967,995

i 3,968

i 3,200

i 768

Series N

5.20% Non-Cumulative Perpetual Class A Preferred Stock

i 30,000

i 750

i —

i 30,000

i 750

i —

Series O

5.125% Non-Cumulative Perpetual Class A Preferred Stock

i 26,000

i 650

i —

i 26,000

i 650

i —

Series P

5.25% Non-Cumulative Perpetual Class A Preferred Stock

i 25,000

i 625

i —

i 25,000

i 625

i —

Series Q

5.85% Fixed-to-Floating Non-Cumulative Perpetual Class A Preferred Stock

i 69,000

i 1,725

i —

i 69,000

i 1,725

i —

Series R

6.625% Fixed-to-Floating Non-Cumulative Perpetual Class A Preferred Stock

i 33,600

i 840

i —

i 33,600

i 840

i —

Series S

5.90% Fixed-to-Floating Non-Cumulative Perpetual Class A Preferred Stock

i 80,000

i 2,000

i —

i 80,000

i 2,000

i —

Series T (4)

6.00% Non-Cumulative Perpetual Class A Preferred Stock

i 5,280

i 131

i —

i 32,000

i 800

i —

Series U

5.875% Fixed-to-Floating Non-Cumulative Perpetual Class A Preferred Stock

i 80,000

i 2,000

i —

i 80,000

i 2,000

i —

Series V

6.00% Non-Cumulative Perpetual Class A Preferred Stock

i 40,000

i 1,000

i —

i 40,000

i 1,000

i —

Series W

5.70% Non-Cumulative Perpetual Class A Preferred Stock

i 40,000

i 1,000

i —

i 40,000

i 1,000

i —

Series X

5.50% Non-Cumulative Perpetual Class A Preferred Stock

i 46,000

i 1,150

i —

i 46,000

i 1,150

i —

Series Y

5.625% Non-Cumulative Perpetual Class A Preferred Stock

i 27,600

i 690

i —

i 27,600

i 690

i —

Series Z

4.750% Non-Cumulative Perpetual Class A Preferred Stock

i 80,500

i 2,013

i —

ESOP

Cumulative Convertible Preferred Stock

i 822,242

i 823

i —

i 1,071,418

i 1,072

i —

Total

i 5,494,773

i 21,866

i 21,098

i 768

i 7,492,169

i 22,573

i 21,549

i 1,024


(1)	Floating rate for Preferred Stock, Series I, is the greater of three-month LIBOR plus 0.93% and 5.56975%.


(2)	Floating rate for Preferred Stock, Series K, is three-month LIBOR plus 3.77%. In first quarter 2020, the remaining $ i 1.8 billion of Preferred Stock, Series K, was redeemed.


(3)	Preferred Stock, Series L, may be converted at any time, at the option of the holder, into i 6.3814 shares of our common stock, plus cash in lieu of fractional shares, subject to anti-dilution adjustments.


(4)	In first quarter 2020, $ i 669 million of Preferred Stock, Series T, was redeemed.

156

Note 17: Preferred Stock (continued)

ESOP CUMULATIVE CONVERTIBLE PREFERRED STOCK All shares of our ESOP Cumulative Convertible Preferred Stock (ESOP Preferred Stock) were issued to a trustee acting on behalf of the Wells Fargo & Company 401(k) Plan (the 401(k) Plan). Dividends on the ESOP Preferred Stock are cumulative from the date of initial issuance and are payable quarterly at annual rates based upon the year of issuance. Each share of ESOP Preferred Stock released from the unallocated reserve of the 401(k) Plan is converted into shares of our common stock based on the stated

value of the ESOP Preferred Stock and the then current market price of our common stock. The ESOP Preferred Stock is also convertible at the option of the holder at any time, unless previously redeemed. We have the option to redeem the ESOP Preferred Stock at any time, in whole or in part, at a redemption price per share equal to the higher of (a) $ i 1,000 per share plus accrued and unpaid dividends or (b) the fair market value, as defined in the Certificates of Designation for the ESOP Preferred Stock.

Table 17.3: ESOP Preferred Stock

Shares issued and outstanding

Carrying value

Adjustable dividend rate

(in millions, except shares)

Jun 30,
2020

Dec 31,
2019

Jun 30,
2020

Dec 31,
2019

Minimum

Maximum

ESOP Preferred Stock

$1,000 liquidation preference per share

2018

i 221,945

i 254,945

i 222

i 255

i 7.00

i 8.00

2017

i 163,210

i 192,210

i 163

i 192

i 7.00

i 8.00

2016

i 162,450

i 197,450

i 163

i 198

i 9.30

i 10.30

2015

i 92,904

i 116,784

i 93

i 117

i 8.90

i 9.90

2014

i 99,151

i 136,151

i 99

i 136

i 8.70

i 9.70

2013

i 61,948

i 97,948

i 62

i 98

i 8.50

i 9.50

2012

i 20,634

i 49,134

i 21

i 49

i 10.00

i 11.00

2011

i —

i 26,796

i —

i 27

i 9.00

i 10.00

Total ESOP Preferred Stock (1)

i 822,242

i 1,071,418

i 823

i 1,072

Unearned ESOP shares (2)

( i 875

)

( i 1,143

)


(1)	At June 30, 2020, and December 31, 2019, additional paid-in capital included $ i 52 million and $ i 71 million, respectively, related to ESOP preferred stock.


(2)	We recorded a corresponding charge to unearned ESOP shares in connection with the issuance of the ESOP Preferred Stock. The unearned ESOP shares are reduced as shares of the ESOP Preferred Stock are committed to be released.

157

Note 18: Revenue from Contracts with Customers

Our revenue includes net interest income on financial instruments and noninterest income. i Table 18.1 presents our revenue by operating segment. The “Other” segment for each of the tables below includes the elimination of certain items that are included in more than one business segment, most of which represents

products and services for WIM customers served through Community Banking distribution channels. For additional description of our operating segments, including additional financial information and the underlying management reporting process, see Note 22 (Operating Segments).

Table 18.1: Revenue by Operating Segment

Quarter ended June 30,

Community
Banking

Wholesale
Banking

Wealth and
Investment
Management

Other

Consolidated
Company

(in millions)

2020

2019

2020

2019

2020

2019

2020

2019

2020

2019

Net interest income (1)

i 5,699

i 7,066

i 3,891

i 4,535

i 736

i 1,037

( i 446

)

( i 543

)

i 9,880

i 12,095

Noninterest income:

Service charges on deposit accounts

i 419

i 704

i 511

i 502

i 4

( i 4

)

( i 4

)

i 930

i 1,206

Trust and investment fees:

Brokerage advisory, commissions and other fees

i 433

i 480

i 79

i 74

i 2,039

i 2,248

( i 434

)

( i 484

)

i 2,117

i 2,318

Trust and investment management

i 174

i 199

i 130

i 117

i 568

i 687

( i 185

)

( i 208

)

i 687

i 795

Investment banking

( i 67

)

( i 18

)

i 614

i 475

i 1

( i 1

)

( i 1

)

( i 1

)

i 547

i 455

Total trust and investment fees

i 540

i 661

i 823

i 666

i 2,608

i 2,934

( i 620

)

( i 693

)

i 3,351

i 3,568

Card fees

i 732

i 929

i 65

i 95

i 1

i 2

( i 1

)

( i 1

)

i 797

i 1,025

Other fees:

Lending related charges and fees (1)

i 36

i 65

i 267

i 284

i 2

( i 2

)

( i 2

)

i 303

i 349

Cash network fees

i 88

i 117

i —

i 88

i 117

Commercial real estate brokerage commissions

i —

i 105

i —

i 105

Wire transfer and other remittance fees

i 60

i 71

i 38

i 49

i 2

( i 1

)

( i 1

)

i 99

i 121

All other fees (1)

i 63

i 82

i 25

i 26

i —

i 88

i 108

Total other fees

i 247

i 335

i 330

i 464

i 4

( i 3

)

( i 3

)

i 578

i 800

Mortgage banking (1)

i 253

i 655

i 65

i 104

( i 3

)

( i 3

)

i 2

i 317

i 758

Net gains (losses) from trading activities (1)

i 6

( i 11

)

i 794

i 226

i 6

i 13

i 1

i 807

i 229

Net gains (losses) on debt securities (1)

i 123

i 15

i 89

i 5

i —

i 212

i 20

Net gains (losses) from equity securities (1)

i 388

i 471

( i 16

)

i 116

i 161

i 35

i —

i 533

i 622

Lease income (1)

i —

i 334

i 424

i —

i 334

i 424

Other (1)(2)

i 359

i 980

( i 323

)

( i 72

)

i 143

i 24

( i 82

)

( i 95

)

i 97

i 837

Total noninterest income

i 3,067

i 4,739

i 2,672

i 2,530

i 2,924

i 3,013

( i 707

)

( i 793

)

i 7,956

i 9,489

Revenue

i 8,766

i 11,805

i 6,563

i 7,065

i 3,660

i 4,050

( i 1,153

)

( i 1,336

)

i 17,836

i 21,584

Six months ended June 30,

Community

Banking

Wholesale

Banking

Wealth and

Investment

Management

Other

Consolidated
Company

(in millions)

2020

2019

2020

2019

2020

2019

2020

2019

2020

2019

Net interest income (1)

i 12,486

i 14,314

i 8,027

i 9,069

i 1,603

i 2,138

( i 924

)

( i 1,115

)

i 21,192

i 24,406

Noninterest income:

Service charges on deposit accounts

i 1,119

i 1,314

i 1,019

i 985

i 9

i 8

( i 8

)

( i 7

)

i 2,139

i 2,300

Trust and investment fees:

Brokerage advisory, commissions and other fees

i 951

i 929

i 169

i 152

i 4,436

i 4,372

( i 957

)

( i 942

)

i 4,599

i 4,511

Trust and investment management

i 368

i 409

i 261

i 231

i 1,150

i 1,363

( i 391

)

( i 422

)

i 1,388

i 1,581

Investment banking

( i 166

)

( i 38

)

i 1,104

i 887

i 2

i 4

( i 2

)

( i 4

)

i 938

i 849

Total trust and investment fees

i 1,153

i 1,300

i 1,534

i 1,270

i 5,588

i 5,739

( i 1,350

)

( i 1,368

)

i 6,925

i 6,941

Card fees

i 1,541

i 1,787

i 148

i 181

i 2

i 3

( i 2

)

( i 2

)

i 1,689

i 1,969

Other fees:

Lending related charges and fees (1)

i 86

i 130

i 545

i 566

i 4

( i 4

)

( i 4

)

i 631

i 696

Cash network fees

i 194

i 226

i —

i 194

i 226

Commercial real estate brokerage commissions

i —

i 1

i 186

i —

i 1

i 186

Wire transfer and other remittance fees

i 126

i 135

i 81

i 97

i 4

( i 2

)

( i 2

)

i 209

i 234

All other fees (1)

i 126

i 176

i 49

i 52

i —

i 175

i 228

Total other fees

i 532

i 667

i 676

i 901

i 8

( i 6

)

( i 6

)

i 1,210

i 1,570

Mortgage banking (1)

i 593

i 1,296

i 105

i 172

( i 6

)

( i 6

)

i 4

i 696

i 1,466

Net gains (losses) from trading activities (1)

i 35

( i 6

)

i 835

i 559

( i 1

)

i 32

i 2

i 1

i 871

i 586

Net gains (losses) on debt securities (1)

i 317

i 52

i 132

i 93

i —

i 449

i 145

Net gains (losses) from equity securities (1)

( i 640

)

i 1,072

( i 111

)

i 193

( i 117

)

i 171

i —

( i 868

)

i 1,436

Lease income (1)

i —

i 686

i 867

i —

i 686

i 867

Other (1)(2)

i 1,126

i 1,759

( i 671

)

( i 114

)

i 289

i 36

( i 180

)

( i 174

)

i 564

i 1,507

Total noninterest income

i 5,776

i 9,241

i 4,353

i 5,107

i 5,772

i 5,991

( i 1,540

)

( i 1,552

)

i 14,361

i 18,787

Revenue

i 18,262

i 23,555

i 12,380

i 14,176

i 7,375

i 8,129

( i 2,464

)

( i 2,667

)

i 35,553

i 43,193


(1)	These revenues are related to financial assets and liabilities, including loans, leases, securities and derivatives, with additional details included in other footnotes to our financial statements.


(2)	In second quarter 2020, insurance income was reclassified to other noninterest income. Prior period balances have been revised to conform with the current period presentation.

158

Note 18: Revenue from Contracts with Customers (continued)

We provide services to customers which have related performance obligations that we complete to recognize revenue. Our revenues are generally recognized either immediately upon the completion of our service or over time as we perform services. Any services performed over time generally require that we render services each period and therefore we measure our progress in completing these services based upon the passage of time.

SERVICE CHARGES ON DEPOSIT ACCOUNTS are earned on depository accounts for commercial and consumer customers

and include fees for account and overdraft services. Account charges include fees for periodic account maintenance activities and event-driven services such as stop payment fees. Our obligation for event-driven services is satisfied at the time of the event when the service is delivered, while our obligation for maintenance services is satisfied over the course of each month. Our obligation for overdraft services is satisfied at the time of the overdraft.

Table 18.2 presents our service charges on deposit accounts by operating segment.

Table 18.2: Service Charges on Deposit Accounts by Operating Segment

Quarter ended June 30,

Community

Banking

Wholesale

Banking

Wealth and Investment Management

Other

Consolidated
Company

(in millions)

2020

2019

2020

2019

2020

2019

2020

2019

2020

2019

Overdraft fees

i 243

i 496

i 1

i —

i 1

i —

i 244

i 498

Account charges

i 176

i 208

i 510

i 501

i 4

i 3

( i 4

)

( i 4

)

i 686

i 708

Service charges on deposit accounts

i 419

i 704

i 511

i 502

i 4

( i 4

)

( i 4

)

i 930

i 1,206

Six months ended June 30,

Community
Banking

Wholesale
Banking

Wealth and
Investment
Management

Other

Consolidated
Company

(in millions)

2020

2019

2020

2019

2020

2019

2020

2019

2020

2019

Overdraft fees

i 727

i 913

i 2

i —

i 1

i —

i 729

i 916

Account charges

i 392

i 401

i 1,017

i 983

i 9

i 7

( i 8

)

( i 7

)

i 1,410

i 1,384

Service charges on deposit accounts

i 1,119

i 1,314

i 1,019

i 985

i 9

i 8

( i 8

)

( i 7

)

i 2,139

i 2,300

BROKERAGE ADVISORY, COMMISSIONS AND OTHER FEES are earned for providing full-service and discount brokerage services predominantly to retail brokerage clients. These revenues include fees earned on asset-based and transactional accounts and other brokerage advisory services.

Asset-based revenues are charged based on the market value of the client’s assets. The services and related obligations associated with certain of these revenues, which include investment advice, active management of client assets, or assistance with selecting and engaging a third-party advisory manager, are generally satisfied over a month or quarter. The remaining revenues include trailing commissions which are earned for selling shares to investors. Our obligation associated with earning trailing commissions is satisfied at the time shares are sold. However, these fees are received and recognized over time during the period the customer owns the shares and we remain the broker of record. The amount of trailing commissions is variable based on the length of time the customer holds the shares and on changes in the value of the underlying assets.

Transactional revenues are earned for executing transactions at the client’s direction. Our obligation is generally satisfied upon the execution of the transaction and the fees are based on the size and number of transactions executed.

Other revenues earned from other brokerage advisory services include omnibus and networking fees received from mutual fund companies in return for providing record keeping and other administrative services, and annual account maintenance fees charged to customers.

Table 18.3 presents our brokerage advisory, commissions and other fees by operating segment.

159

Table 18.3: Brokerage Advisory, Commissions and Other Fees by Operating Segment

Quarter ended June 30,

Community
Banking

Wholesale
Banking

Wealth and Investment Management

Other

Consolidated
Company

(in millions)

2020

2019

2020

2019

2020

2019

2020

2019

2020

2019

Asset-based revenue (1)

i 342

i 369

i —

i 1,568

i 1,698

( i 343

)

( i 369

)

i 1,567

i 1,698

Transactional revenue

i 78

i 94

i 2

i 10

i 343

i 390

( i 79

)

( i 98

)

i 344

i 396

Other revenue

i 13

i 17

i 77

i 64

i 128

i 160

( i 12

)

( i 17

)

i 206

i 224

Brokerage advisory, commissions and other fees

i 433

i 480

i 79

i 74

i 2,039

i 2,248

( i 434

)

( i 484

)

i 2,117

i 2,318

Six months ended June 30,

Community
Banking

Wholesale
Banking

Wealth and Investment Management

Other

Consolidated
Company

(in millions)

2020

2019

2020

2019

2020

2019

2020

2019

2020

2019

Asset-based revenue (1)

i 740

i 712

i —

i 3,373

i 3,278

( i 741

)

( i 712

)

i 3,372

i 3,278

Transactional revenue

i 180

i 183

i 5

i 26

i 775

i 777

( i 186

)

( i 196

)

i 774

i 790

Other revenue

i 31

i 34

i 164

i 126

i 288

i 317

( i 30

)

( i 34

)

i 453

i 443

Brokerage advisory, commissions and other fees

i 951

i 929

i 169

i 152

i 4,436

i 4,372

( i 957

)

( i 942

)

i 4,599

i 4,511


(1)	We earned trailing commissions of $ i 257 million and $ i 532 million for the second quarter and first half of 2020, respectively, and $ i 289 million and $ i 569 million for the second quarter and first half of 2019, respectively.

TRUST AND INVESTMENT MANAGEMENT FEES are earned for providing trust, investment management and other related services.

Investment management services include managing and administering assets, including mutual funds, and institutional separate accounts. Fees for these services are generally determined based on a tiered scale relative to the market value of assets under management (AUM). In addition to AUM, we have client assets under administration (AUA) that earn various administrative fees which are generally based on the extent of the services provided to administer the account. Services with AUM and AUA-based fees are generally performed over time.

Trust services include acting as a trustee or agent for corporate trust, personal trust, and agency assets. Obligations for trust services are generally satisfied over time, while obligations for activities that are transactional in nature are satisfied at the time of the transaction.

Other related services include the custody and safekeeping of accounts. Our obligation for these services is generally satisfied over time.

Table 18.4 presents our trust and investment management fees by operating segment.

Table 18.4: Trust and Investment Management Fees by Operating Segment

Quarter ended June 30,

Community
Banking

Wholesale
Banking

Wealth and Investment Management

Other

Consolidated
Company

(in millions)

2020

2019

2020

2019

2020

2019

2020

2019

2020

2019

Investment management fees

i —

( i 1

)

i —

i 474

i 501

i —

i 474

i 500

Trust fees

i 175

i 200

i 81

i 83

i 101

i 175

( i 185

)

( i 208

)

i 172

i 250

Other revenue

( i 1

)

i —

i 49

i 34

( i 7

)

i 11

i —

i 41

i 45

Trust and investment management fees

i 174

i 199

i 130

i 117

i 568

i 687

( i 185

)

( i 208

)

i 687

i 795

Six months ended June 30,

Community
Banking

Wholesale
Banking

Wealth and Investment Management

Other

Consolidated
Company

(in millions)

2020

2019

2020

2019

2020

2019

2020

2019

2020

2019

Investment management fees

i —

i 963

i 978

i —

i 963

i 978

Trust fees

i 369

i 409

i 170

i 165

i 203

i 343

( i 391

)

( i 422

)

i 351

i 495

Other revenue

( i 1

)

i —

i 91

i 66

( i 16

)

i 42

i —

i 74

i 108

Trust and investment management fees

i 368

i 409

i 261

i 231

i 1,150

i 1,363

( i 391

)

( i 422

)

i 1,388

i 1,581

INVESTMENT BANKING FEES are earned for underwriting debt and equity securities, arranging loan syndications and performing other advisory services. Our obligation for these services is generally satisfied at closing of the transaction. Substantially all of these fees are in the Wholesale Banking operating segment.

CARD FEES include credit and debit card interchange and network revenues and various card-related fees. Credit and debit card interchange and network revenues are earned on credit and debit card transactions conducted through payment networks such as Visa, MasterCard, and American Express. Our obligation is satisfied concurrently with the delivery of services on a daily basis.

160

Note 18: Revenue from Contracts with Customers (continued)

Table 18.5 presents our card fees by operating segment.

Table 18.5: Card Fees by Operating Segment

Quarter ended June 30,

Community
Banking

Wholesale
Banking

Wealth and Investment Management

Other

Consolidated
Company

(in millions)

2020

2019

2020

2019

2020

2019

2020

2019

2020

2019

Credit card interchange and network revenues (1)

i 154

i 209

i 65

i 95

i 1

i 2

( i 1

)

( i 1

)

i 219

i 305

Debit card interchange and network revenues

i 479

i 546

i —

i 479

i 546

Late fees, cash advance fees, balance transfer fees, and annual fees

i 99

i 174

i —

i 99

i 174

Card fees

i 732

i 929

i 65

i 95

i 1

i 2

( i 1

)

( i 1

)

i 797

i 1,025

Six months ended June 30,

Community
Banking

Wholesale
Banking

Wealth and Investment Management

Other

Consolidated
Company

(in millions)

2020

2019

2020

2019

2020

2019

2020

2019

2020

2019

Credit card interchange and network revenues (1)

i 288

i 398

i 148

i 181

i 2

i 3

( i 2

)

( i 2

)

i 436

i 580

Debit card interchange and network revenues

i 992

i 1,053

i —

i 992

i 1,053

Late fees, cash advance fees, balance transfer fees, and annual fees

i 261

i 336

i —

i 261

i 336

Card fees

i 1,541

i 1,787

i 148

i 181

i 2

i 3

( i 2

)

( i 2

)

i 1,689

i 1,969


(1)	The cost of credit card rewards and rebates of $ i 266 million and $ i 651 million for the second quarter and first half of 2020, respectively, and $ i 375 million and $ i 729 million for the second quarter and first half of 2019, respectively, are presented net against the related revenues.

CASH NETWORK FEES are earned for processing ATM transactions. Our obligation is completed daily upon settlement of ATM transactions. All of these fees are included in the Community Banking operating segment.

COMMERCIAL REAL ESTATE BROKERAGE COMMISSIONS are earned for assisting customers in the sale of real estate property. Our obligation is satisfied upon the successful brokering of a transaction. Fees are based on a fixed percentage of the sales price. All of these fees are included in the Wholesale Banking operating segment. In October 2019, we sold our commercial real estate brokerage business (Eastdil).

WIRE TRANSFER AND OTHER REMITTANCE FEES consist of fees earned for funds transfer services and issuing cashier’s checks and money orders. Our obligation is satisfied at the time of the funds transfer services or upon issuance of the cashier’s check or money order. Substantially all of these fees are included in in the Community Banking and Wholesale Banking operating segments.

ALL OTHER FEES include various types of fees for products or services such as merchant payment services, safe deposit boxes, and loan syndication agency services. These fees are generally recognized over time as we perform the services. Most of these fees are included in the Community Banking operating segment.

161

Note 19: Employee Benefits and Other Expenses

We sponsor a frozen noncontributory qualified defined benefit retirement plan, the Wells Fargo & Company Cash Balance Plan (Cash Balance Plan), which covers eligible employees of Wells Fargo. The Cash Balance Plan was frozen on July 1, 2009, and i no new benefits have accrued after that date. For additional information on our pension and postretirement plans, including plan assumptions, investment strategy and asset allocation, projected benefit payments, and valuation methodologies used for assets measured at fair value, see Note 23 (Employee Benefits and Other Expenses) in our 2019 Form 10-K.

We recognize settlement losses for our Cash Balance Plan based on an assessment of whether lump sum benefit payments will, in aggregate for the year, exceed the sum of its annual service and interest cost. Settlement losses of $ i 70 million were recognized during second quarter 2020 representing the pro rata portion of the net loss in cumulative other comprehensive income

based on the percentage reduction in the Cash Balance Plan’s projected benefit obligation attributable to lump sum benefit payments during the first half of 2020. As a result of the settlement losses, we re-measured the Cash Balance Plan obligation and plan assets as of June 30, 2020, and used a discount rate of i 2.75% based on our consistent methodology of determining our discount rate using a yield curve with maturity dates that closely match the estimated timing of the expected benefit payments. The result of the settlement losses and re-measurement increased the Cash Balance Plan liability by $ i 674 million and decreased other comprehensive income by $ i 604 million (pre tax) in second quarter 2020.

Table 19.1 presents the components of net periodic benefit cost. Service cost is reported in personnel expense and all other components of net periodic benefit cost are reported in other noninterest expense on the consolidated statement of income.

Table 19.1: Net Periodic Benefit Cost

2020

2019

Pension benefits

(in millions)

Qualified

Non-qualified

Other

benefits

Qualified

Non-qualified

Other

benefits

Quarter ended June 30,

Service cost

i 4

i —

i 3

i —

Interest cost

i 86

i 4

i 104

i 5

i 6

Expected return on plan assets

( i 149

)

i —

( i 5

)

( i 142

)

i —

( i 7

)

Amortization of net actuarial loss (gain)

i 35

i 3

( i 4

)

i 37

i 3

( i 4

)

Amortization of prior service credit

i —

( i 3

)

i —

( i 3

)

Settlement loss

i 70

i —

Net periodic benefit cost

i 46

i 7

( i 8

)

i 2

i 8

( i 8

)

Six months ended June 30,

Service cost

i 7

i —

i 6

i —

Interest cost

i 172

i 8

i 209

i 11

Expected return on plan assets

( i 297

)

i —

( i 11

)

( i 284

)

i —

( i 14

)

Amortization of net actuarial loss (gain)

i 71

i 7

( i 9

)

i 74

i 5

( i 8

)

Amortization of prior service credit

i —

( i 5

)

i —

( i 5

)

Settlement loss

i 70

i 3

i —

i 2

i —

Net periodic benefit cost

i 23

i 18

( i 17

)

i 5

i 18

( i 16

)

Other Expenses

Table 19.2 separately presents other expenses exceeding 1% of the sum of net interest income and total noninterest income in any of the periods presented.

Table 19.2: Other Expenses

Quarter ended June 30,

Six months ended June 30,

(in millions)

2020

2019

2020

2019

Operating losses

i 1,219

i 247

i 1,683

i 485

Outside professional services

i 758

i 821

i 1,485

i 1,499

Contract services (1)

i 634

i 590

i 1,219

i 1,120

Leases (2)

i 244

i 311

i 504

i 597

Advertising and promotion

i 137

i 329

i 318

i 566

Other

i 1,028

i 1,146

i 1,983

i 2,287

Total other noninterest expense

i 4,020

i 3,444

i 7,192

i 6,554


(1)	In second quarter 2020, 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 assets we lease to customers.

162

Note 20: Earnings and Dividends Per Common Share

Table 20.1 shows earnings per common share and diluted earnings per common share and reconciles the numerator and denominator of both earnings per common share calculations.

See Note 1 (Summary of Significant Accounting Policies) for discussion on share repurchases.

Table 20.1: Earnings Per Common Share Calculations

Quarter ended June 30,

Six months ended June 30,

(in millions, except per share amounts)

2020

2019

2020

2019

Wells Fargo net income (loss)

( i 2,379

)

i 6,206

( i 1,726

)

i 12,066

Less: Preferred stock dividends and other (1)

i 315

i 358

i 926

i 711

Wells Fargo net income (loss) applicable to common stock (numerator)

( i 2,694

)

i 5,848

( i 2,652

)

i 11,355

Earnings (loss) per common share

Average common shares outstanding (denominator)

i 4,105.5

i 4,469.4

i 4,105.2

i 4,510.2

Per share

( i 0.66

)

i 1.31

( i 0.65

)

i 2.52

Diluted earnings (loss) per common share

Average common shares outstanding

i 4,105.5

i 4,469.4

i 4,105.2

i 4,510.2

Add: Stock options (2)

i —

i 0.1

i —

i 1.4

Restricted share rights (2)

i —

i 25.5

i —

i 28.5

Diluted average common shares outstanding (denominator)

i 4,105.5

i 4,495.0

i 4,105.2

i 4,540.1

Per share

( i 0.66

)

i 1.30

( i 0.65

)

i 2.50


(1)	The six months ended June 30, 2020, balance includes $ i 272 million from the elimination of discounts or issuance costs associated with redemptions of preferred stock.


(2)	Calculated using the treasury stock method. In the second quarter and first half of 2020, diluted average common shares outstanding equaled average common shares outstanding because our securities convertible into common shares had an anti-dilutive effect.

Table 20.2 presents the outstanding securities that were anti-dilutive and therefore not included in the calculation of diluted earnings per common share.

Table 20.2: Outstanding Anti-Dilutive Securities



	Weighted-average shares
	Quarter ended June 30,		Six months ended June 30,
(in millions)	2020	2019	2020	2019
Convertible Preferred Stock, Series L (1)	i 25.3	i 25.3	i 25.3	i 25.3
Restricted share rights (2)	i 35.9	i —	i 0.9	i —


(1)	Calculated using the if-converted method.


(2)	Calculated using the treasury stock method. Since we had net losses attributable to common shareholders for the second quarter and first half of 2020, all RSRs outstanding were anti-dilutive. Weighted average RSRs outstanding were i 50.7 million and i 54.7 million for the second quarter and first half of 2020, respectively.

Table 20.3 presents dividends declared per common share.

Table 20.3: Dividends Declared Per Common Share



	Quarter ended June 30,			Six months ended June 30,
	2020		2019	2020		2019
Per common share	$	i 0.51	i 0.45	$	i 1.02	i 0.90

163

Note 21: Other Comprehensive Income

Table 21.1 provides the components of OCI, reclassifications to net income by income statement line item, and the related tax effects.

Table 21.1: Summary of Other Comprehensive Income

Quarter ended June 30,

Six months ended June 30,

2020

2019

2020

2019

(in millions)

Before

tax

Tax

effect

Net of

tax

Before

tax

Tax

effect

Net of

tax

Before

tax

Tax

effect

Net of

tax

Before

tax

Tax

effect

Net of

tax

Debt securities:

Net unrealized gains arising during the period

i 1,596

( i 395

)

i 1,201

i 1,709

( i 422

)

i 1,287

i 1,486

( i 373

)

i 1,113

i 4,540

( i 1,117

)

i 3,423

Reclassification of net (gains) losses to net income:

Interest income on debt securities (1)

i 123

( i 31

)

i 92

i 61

( i 15

)

i 46

i 189

( i 47

)

i 142

i 106

( i 26

)

i 80

Net gains on debt securities

( i 212

)

i 63

( i 149

)

( i 20

)

i 5

( i 15

)

( i 449

)

i 111

( i 338

)

( i 145

)

i 36

( i 109

)

Other noninterest income

( i 1

)

i —

( i 1

)

( i 2

)

i 1

( i 1

)

( i 2

)

i —

( i 2

)

( i 3

)

i 1

( i 2

)

Subtotal reclassifications to net income

( i 90

)

i 32

( i 58

)

i 39

( i 9

)

i 30

( i 262

)

i 64

( i 198

)

( i 42

)

i 11

( i 31

)

Net change

i 1,506

( i 363

)

i 1,143

i 1,748

( i 431

)

i 1,317

i 1,224

( i 309

)

i 915

i 4,498

( i 1,106

)

i 3,392

Derivative and hedging activities:

Fair Value Hedges:

Change in fair value of excluded components on fair value hedges (2)

( i 57

)

i 13

( i 44

)

i 56

( i 14

)

i 42

i 87

( i 22

)

i 65

i 30

( i 7

)

i 23

Cash Flow Hedges:

Net unrealized gains (losses) arising during the period on cash flow hedges

i 5

( i 1

)

i 4

i 1

i —

i 1

( i 15

)

i 4

( i 11

)

( i 8

)

i 2

( i 6

)

Reclassification of net losses to net income on cash flow hedges:

Interest income on loans

i 53

( i 12

)

i 41

i 77

( i 19

)

i 58

i 109

( i 26

)

i 83

i 155

( i 38

)

i 117

Interest expense on long-term debt

i 2

i —

i 2

( i 1

)

i 1

i 4

( i 1

)

i 3

( i 1

)

i 2

Subtotal reclassifications to net income

i 55

( i 12

)

i 43

i 79

( i 20

)

i 59

i 113

( i 27

)

i 86

i 158

( i 39

)

i 119

Net change

i 3

i —

i 3

i 136

( i 34

)

i 102

i 185

( i 45

)

i 140

i 180

( i 44

)

i 136

Defined benefit plans adjustments:

Net actuarial and prior service losses arising during the period

( i 674

)

i 167

( i 507

)

i —

( i 671

)

i 166

( i 505

)

( i 4

)

i 1

( i 3

)

Reclassification of amounts to non interest expense (3):

Amortization of net actuarial loss

i 34

( i 9

)

i 25

i 36

( i 9

)

i 27

i 69

( i 17

)

i 52

i 71

( i 17

)

i 54

Settlements and other

i 67

( i 16

)

i 51

( i 3

)

i 2

( i 1

)

i 68

( i 16

)

i 52

( i 3

)

i 2

( i 1

)

Subtotal reclassifications to non interest expense

i 101

( i 25

)

i 76

i 33

( i 7

)

i 26

i 137

( i 33

)

i 104

i 68

( i 15

)

i 53

Net change

( i 573

)

i 142

( i 431

)

i 33

( i 7

)

i 26

( i 534

)

i 133

( i 401

)

i 64

( i 14

)

i 50

Foreign currency translation adjustments:

Net unrealized gains (losses) arising during the period

i 51

i —

i 51

i 14

( i 1

)

i 13

( i 144

)

i 2

( i 142

)

i 56

( i 3

)

i 53

Net change

i 51

i —

i 51

i 14

( i 1

)

i 13

( i 144

)

i 2

( i 142

)

i 56

( i 3

)

i 53

Other comprehensive income

i 987

( i 221

)

i 766

i 1,931

( i 473

)

i 1,458

i 731

( i 219

)

i 512

i 4,798

( i 1,167

)

i 3,631

Less: Other comprehensive loss from noncontrolling interests, net of tax

i —

( i 1

)

i —

Wells Fargo other comprehensive income, net of tax

i 766

i 1,458

i 513

i 3,631


(1)	Represents net unrealized gains and losses amortized over the remaining lives of securities that were transferred from the available-for-sale portfolio to the held-to-maturity portfolio.


(2)	Represents changes in fair value of cross-currency swaps attributable to changes in cross-currency basis spreads, which are excluded from the assessment of effectiveness recorded in other comprehensive income.


(3)	These items are included in the computation of net periodic benefit cost (see Note 19 (Employee Benefits) for more information).

164

Note 21: Other Comprehensive Income (continued)

Table 21.2: Cumulative OCI Balances

(in millions)

Debt

securities

Fair value hedges (1)

Cash flow hedges (2)

Defined

benefit

plans

adjustments

Foreign

currency

translation

adjustments

Cumulative

other

comprehensive

income

Quarter ended June 30, 2020

Balance, beginning of period

i 1,324

( i 71

)

( i 270

)

( i 2,193

)

( i 354

)

( i 1,564

)

Net unrealized gains (losses) arising during the period

i 1,201

( i 44

)

i 4

( i 507

)

i 51

i 705

Amounts reclassified from accumulated other comprehensive income

( i 58

)

i —

i 43

i 76

i —

i 61

Net change

i 1,143

( i 44

)

i 47

( i 431

)

i 51

i 766

Less: Other comprehensive loss from noncontrolling interests

i —

Balance, end of period

i 2,467

( i 115

)

( i 223

)

( i 2,624

)

( i 303

)

( i 798

)

Quarter ended June 30, 2019

Balance, beginning of period

( i 566

)

( i 197

)

( i 454

)

( i 2,272

)

( i 193

)

( i 3,682

)

Net unrealized gains arising during the period

i 1,287

i 42

i 1

i —

i 13

i 1,343

Amounts reclassified from accumulated other comprehensive income

i 30

i —

i 59

i 26

i —

i 115

Net change

i 1,317

i 42

i 60

i 26

i 13

i 1,458

Balance, end of period

i 751

( i 155

)

( i 394

)

( i 2,246

)

( i 180

)

( i 2,224

)

Six months ended June 30, 2020

Balance, beginning of period

i 1,552

( i 180

)

( i 298

)

( i 2,223

)

( i 162

)

( i 1,311

)

Net unrealized gains (losses) arising during the period

i 1,113

i 65

( i 11

)

( i 505

)

( i 142

)

i 520

Amounts reclassified from accumulated other comprehensive income

( i 198

)

i —

i 86

i 104

i —

( i 8

)

Net change

i 915

i 65

i 75

( i 401

)

( i 142

)

i 512

Less: Other comprehensive loss from noncontrolling interests

i —

( i 1

)

( i 1

)

Balance, end of period

i 2,467

( i 115

)

( i 223

)

( i 2,624

)

( i 303

)

( i 798

)

Six months ended June 30, 2019

Balance, beginning of period

( i 3,122

)

( i 178

)

( i 507

)

( i 2,296

)

( i 233

)

( i 6,336

)

Transition adjustment (3)

i 481

i —

i 481

Balance, January 1, 2019

( i 2,641

)

( i 178

)

( i 507

)

( i 2,296

)

( i 233

)

( i 5,855

)

Net unrealized gains (losses) arising during the period

i 3,423

i 23

( i 6

)

( i 3

)

i 53

i 3,490

Amounts reclassified from accumulated other comprehensive income

( i 31

)

i —

i 119

i 53

i —

i 141

Net change

i 3,392

i 23

i 113

i 50

i 53

i 3,631

Balance, end of period

i 751

( i 155

)

( i 394

)

( i 2,246

)

( i 180

)

( i 2,224

)


(1)	Substantially all of the beginning and end of period amounts for fair value hedges are foreign exchange contracts.


(2)	Substantially all of the beginning and end of period amounts for cash flow hedges are interest rate contracts.


(3)	The transition adjustment relates to the adoption of ASU 2017-08 – Receivables – Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities. For more information see Note 1 (Summary of Significant Accounting Policies) in our 2019 Form 10-K.

165

Note 22: Operating Segments

As of June 30, 2020, we were organized for management reporting purposes into i 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 i 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. For a description of our operating segments, see Note 27 (Operating Segments) in our 2019 Form 10-K. i Table 22.1 presents our results by operating segment.

Table 22.1: Operating Segments

Community
Banking

Wholesale

Banking

Wealth and

Investment

Management

Other (1)

Consolidated

Company

(income/expense in millions, average balances in billions)

2020

2019

2020

2019

2020

2019

2020

2019

2020

2019

Quarter ended June 30,

Net interest income (2)

i 5,699

i 7,066

i 3,891

i 4,535

i 736

i 1,037

( i 446

)

( i 543

)

i 9,880

i 12,095

Provision (reversal of provision) for credit losses

i 3,378

i 479

i 6,028

i 28

i 257

( i 1

)

( i 129

)

( i 3

)

i 9,534

i 503

Noninterest income

i 3,067

i 4,739

i 2,672

i 2,530

i 2,924

i 3,013

( i 707

)

( i 793

)

i 7,956

i 9,489

Noninterest expense

i 8,346

i 7,212

i 3,963

i 3,882

i 3,153

i 3,246

( i 911

)

( i 891

)

i 14,551

i 13,449

Income (loss) before income tax expense (benefit)

( i 2,958

)

i 4,114

( i 3,428

)

i 3,155

i 250

i 805

( i 113

)

( i 442

)

( i 6,249

)

i 7,632

Income tax expense (benefit) (3)

( i 2,666

)

i 838

( i 1,286

)

i 365

i 63

i 201

( i 28

)

( i 110

)

( i 3,917

)

i 1,294

Net income (loss) before noncontrolling interests

( i 292

)

i 3,276

( i 2,142

)

i 2,790

i 187

i 604

( i 85

)

( i 332

)

( i 2,332

)

i 6,338

Less: Net income (loss) from noncontrolling interests

i 39

i 129

i 1

i 7

i 2

i —

i 47

i 132

Net income (loss)

( i 331

)

i 3,147

( i 2,143

)

i 2,789

i 180

i 602

( i 85

)

( i 332

)

( i 2,379

)

i 6,206

Average loans

i 449.3

i 457.7

i 504.3

i 474.0

i 78.7

i 75.0

( i 61.0

)

( i 59.2

)

i 971.3

i 947.5

Average assets

i 1,059.8

i 1,024.8

i 863.2

i 852.2

i 87.7

i 83.8

( i 61.8

)

( i 60.2

)

i 1,948.9

i 1,900.6

Average deposits

i 848.5

i 777.6

i 441.2

i 410.4

i 171.8

i 143.5

( i 74.8

)

( i 62.5

)

i 1,386.7

i 1,269.0

Six months ended June 30,

Net interest income (2)

i 12,486

i 14,314

i 8,027

i 9,069

i 1,603

i 2,138

( i 924

)

( i 1,115

)

i 21,192

i 24,406

Provision (reversal of provision) for credit losses

i 5,096

i 1,189

i 8,316

i 162

i 265

i 3

( i 138

)

( i 6

)

i 13,539

i 1,348

Noninterest income

i 5,776

i 9,241

i 4,353

i 5,107

i 5,772

i 5,991

( i 1,540

)

( i 1,552

)

i 14,361

i 18,787

Noninterest expense

i 15,462

i 14,901

i 7,726

i 7,720

i 6,256

i 6,549

( i 1,845

)

( i 1,805

)

i 27,599

i 27,365

Income (loss) before income tax expense (benefit)

( i 2,296

)

i 7,465

( i 3,662

)

i 6,294

i 854

i 1,577

( i 481

)

( i 856

)

( i 5,585

)

i 14,480

Income tax expense (benefit) (3)

( i 2,022

)

i 1,262

( i 1,832

)

i 734

i 216

i 393

( i 120

)

( i 214

)

( i 3,758

)

i 2,175

Net income (loss) before noncontrolling interests

( i 274

)

i 6,203

( i 1,830

)

i 5,560

i 638

i 1,184

( i 361

)

( i 642

)

( i 1,827

)

i 12,305

Less: Net income (loss) from noncontrolling interests

( i 98

)

i 233

i 2

i 1

( i 5

)

i 5

i —

( i 101

)

i 239

Net income (loss)

( i 176

)

i 5,970

( i 1,832

)

i 5,559

i 643

i 1,179

( i 361

)

( i 642

)

( i 1,726

)

i 12,066

Average loans

i 456.0

i 457.9

i 494.4

i 475.2

i 78.6

i 74.7

( i 60.8

)

( i 59.1

)

i 968.2

i 948.7

Average assets

i 1,049.5

i 1,020.1

i 874.1

i 848.4

i 87.9

i 83.5

( i 61.7

)

( i 60.1

)

i 1,949.8

i 1,891.9

Average deposits

i 823.5

i 771.6

i 448.9

i 410.1

i 161.6

i 148.3

( i 71.7

)

( i 64.5

)

i 1,362.3

i 1,265.5


(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.

(2)

Net interest income is the difference between interest earned on assets and the cost of liabilities to fund those assets. Interest earned includes actual interest earned on segment assets as well as interest credits for any funding of a segment available to be provided to other segments. The cost of liabilities includes actual interest expense on segment liabilities as well as funding charges for any funding provided from other segments.


(3)	Income tax expense (benefit) for our Wholesale Banking operating segment included income tax credits related to low-income housing and renewable energy investments of $ i 465 million and $ i 956 million for the second quarter and first half of 2020, respectively, and $ i 423 million and $ i 850 million for the second quarter and first half of 2019, respectively.

166

Note 23: Regulatory and Agency Capital Requirements

The Company and each of its subsidiary banks are subject to regulatory capital adequacy requirements promulgated by federal banking regulators. The Federal Reserve establishes capital requirements for the consolidated financial holding company, and the OCC has similar requirements for the Company’s national banks, including Wells Fargo Bank, N.A. (the Bank).

Table 23.1 presents regulatory capital information for Wells Fargo & Company and the Bank in accordance with Basel III capital requirements. We must report the lower of our Common Equity Tier 1 (CET1), tier 1 and total capital ratios calculated under the Standardized Approach and under the Advanced Approach in the assessment of our capital adequacy. The Standardized Approach applies assigned risk weights to broad risk categories, while the calculation of risk-weighted assets (RWAs) under the Advanced Approach differs by requiring applicable banks to utilize a risk-sensitive methodology, which relies upon the use of internal credit models, and includes an operational risk component. The

Basel III capital requirements for calculating CET1 and tier 1 capital, along with RWAs, are fully phased-in. However, the requirements for determining tier 2 and total capital are still in accordance with Transition Requirements and are scheduled to be fully phased-in by the end of 2021. Accordingly, the information presented below reflects fully phased-in CET1 capital, tier 1 capital, and RWAs, but reflects total capital still in accordance with Transition Requirements.

At June 30, 2020, the Bank and our other insured depository institutions were considered well-capitalized under the requirements of the Federal Deposit Insurance Act.

The Bank is an approved seller/servicer of mortgage loans and is required to maintain minimum levels of shareholders’ equity, as specified by various agencies, including the United States Department of Housing and Urban Development, GNMA, FHLMC and FNMA. At June 30, 2020, the Bank met these requirements.

Table 23.1: Regulatory Capital Information (1)

Wells Fargo & Company

Wells Fargo Bank, N.A.

(in millions, except ratios)

Advanced Approach

Standardized

Approach

Advanced Approach

Standardized
Approach

Advanced Approach

Standardized
Approach

Advanced Approach

Standardized
Approach

Regulatory capital:

Common equity tier 1

i 133,055

i 138,760

i 147,774

i 145,149

Tier 1

i 152,871

i 158,949

i 147,774

i 145,149

Total

i 182,831

i 192,619

i 188,333

i 196,223

i 162,657

i 172,031

i 158,615

i 166,056

Assets:

Risk-weighted assets (2)

i 1,195,423

i 1,213,062

i 1,165,079

i 1,245,853

i 1,050,496

i 1,106,875

i 1,047,054

i 1,152,791

Adjusted average assets (3)

i 1,922,429

i 1,913,297

i 1,750,476

i 1,695,807

Regulatory capital ratios:

Common equity tier 1 capital (2)

i 11.13

i 10.97

i 11.91

i 11.14

i 14.07

i 13.35

i 13.86

i 12.59

Tier 1 capital (2)

i 12.79

i 12.60

i 13.64

i 12.76

i 14.07

i 13.35

i 13.86

i 12.59

Total capital (2)

i 15.29

i 15.88

i 16.16

i 15.75

i 15.48

i 15.54

i 15.15

i 14.40

Tier 1 leverage (3)

i 7.95

i 8.31

i 8.44

i 8.56

Wells Fargo & Company

Wells Fargo Bank, N.A.

Supplementary leverage (4):

Total leverage exposure

i 2,032,249

i 2,247,729

i 2,057,422

i 2,006,180

Supplementary leverage ratio

i 7.52

i 7.07

i 7.18

i 7.24

*Denotes the lowest capital ratio as determined under the Advanced and Standardized Approaches.

(1)

In second quarter 2020, the Company elected to apply a modified transition provision issued by federal banking regulators in March 2020 related to the impact of CECL on regulatory capital. The rule permits certain banking organizations to exclude from regulatory capital the initial adoption impact of CECL, plus 25% of the cumulative changes in the ACL under CECL for each period until December 31, 2021, followed by a three-year phase-out of the benefits. The impact of the CECL transition provision on the regulatory capital of the Company at June 30, 2020, was an increase in capital of $ i 1.9 billion, reflecting a $ i 991 million (post-tax) increase in capital recognized upon our initial adoption of CECL, offset by 25% of the $ i 11.4 billion increase in our ACL under CECL from January 1, 2020, through June 30, 2020. The impact of the CECL transition provision on the regulatory capital of the Bank at June 30, 2020, was an increase in capital of $ i 1.8 billion.


(2)	RWAs and capital ratios for December 31, 2019, have been revised as a result of a decrease in RWAs under the Advanced Approach due to the correction of duplicated operational loss amounts.

RWAs for the Company and the Bank include an increase of $ i 1.5 billion under both the Advanced Approach and Standardized Approach related to the impact of the CECL transition provision on the excess allowance for credit losses as of June 30, 2020.


(3)	The leverage ratio consists of Tier 1 capital divided by total average assets, excluding goodwill and certain other items.


(4)	The supplementary leverage ratio (SLR) consists of Tier 1 capital divided by total leverage exposure. Total leverage exposure consists of total average assets, less goodwill and other permitted Tier 1 capital deductions (net of deferred tax liabilities), plus certain off-balance sheet exposures.

167

Table 23.2 presents the minimum required regulatory capital ratios under Transition Requirements to which the Company and

the Bank were subject as of June 30, 2020, and

December 31, 2019.

Table 23.2: Minimum Required Regulatory Capital Ratios – Transition Requirements (1)



	Wells Fargo & Company			Wells Fargo Bank, N.A.
	June 30, 2020		December 31, 2019	June 30, 2020	December 31, 2019
Regulatory capital ratios:
Common equity tier 1 capital	i 9.000	%	i 9.000	i 7.000	i 7.000
Tier 1 capital	i 10.500		i 10.500	i 8.500	i 8.500
Total capital	i 12.500		i 12.500	i 10.500	i 10.500
Tier 1 leverage	i 4.000		i 4.000	i 4.000	i 4.000
Supplementary leverage (2)	i 5.000		i 5.000	i 6.000	i 6.000

(1)

At June 30, 2020, under transition requirements, the CET1, tier 1 and total capital minimum ratio requirements for the Company include a capital conservation buffer of i 2.500% and a global systemically important bank (G-SIB) surcharge of i 2.000%. Only the i 2.500% capital conservation buffer applies to the Bank at June 30, 2020. Effective October 1, 2020, the i 2.500% capital conservation buffer will be replaced under the Standardized Approach by a stress capital buffer that is calculated annually as part of the FRB's supervisory stress test and related Comprehensive Capital Analysis and Review (CCAR).


(2)	The Company is required to maintain a SLR of at least i 5.000% (comprised of a i 3.000% minimum requirement plus a supplementary leverage buffer of i 2.000%) to avoid restrictions on capital distributions and discretionary bonus payments. The Bank is required to maintain a SLR of at least i 6.000% to be considered well-capitalized under applicable regulatory capital adequacy guidelines.

168



Glossary of Acronyms

ACL	Allowance for credit losses	LCR	Liquidity coverage ratio
AFS	Available-for-sale	LHFS	Loans held for sale
ALCO	Asset/Liability Management Committee	LIBOR	London Interbank Offered Rate
ARM	Adjustable-rate mortgage	LIHTC	Low income housing tax credit
ASC	Accounting Standards Codification	LOCOM	Lower of cost or fair value
ASU	Accounting Standards Update	LTV	Loan-to-value
AUA	Assets under administration	MBS	Mortgage-backed security
AUM	Assets under management	MLHFS	Mortgage loans held for sale
AVM	Automated valuation model	MSR	Mortgage servicing right
BCBS	Basel Committee on Bank Supervision	NAV	Net asset value
BHC	Bank holding company	NPA	Nonperforming asset
CCAR	Comprehensive Capital Analysis and Review	NSFR	Net stable funding ratio
CD	Certificate of deposit	OCC	Office of the Comptroller of the Currency
CDS	Credit default swaps	OCI	Other comprehensive income
CECL	Current expected credit loss	OTC	Over-the-counter
CET1	Common Equity Tier 1	OTTI	Other-than-temporary impairment
CFPB	Consumer Financial Protection Bureau	PCD	Purchased credit-deteriorated
CLO	Collateralized loan obligation	PCI	Purchased credit-impaired
CLTV	Combined loan-to-value	PTPP	Pre-tax pre-provision profit
CPI	Collateral protection insurance	RBC	Risk-based capital
CRE	Commercial real estate	RMBS	Residential mortgage-backed securities
DPD	Days past due	ROA	Wells Fargo net income to average total assets
ESOP	Employee Stock Ownership Plan	ROE	Wells Fargo net income applicable to common stock
FASB	Financial Accounting Standards Board		to average Wells Fargo common stockholders’ equity
FDIC	Federal Deposit Insurance Corporation	ROTCE	Return on average tangible common equity
FHA	Federal Housing Administration	RWAs	Risk-weighted assets
FHLB	Federal Home Loan Bank	SEC	Securities and Exchange Commission
FHLMC	Federal Home Loan Mortgage Corporation	S&P	Standard & Poor’s Global Ratings
FICO	Fair Isaac Corporation (credit rating)	SLR	Supplementary leverage ratio
FNMA	Federal National Mortgage Association	SOFR	Secured Overnight Financing Rate
FRB	Board of Governors of the Federal Reserve System	SPE	Special purpose entity
GAAP	Generally accepted accounting principles	TDR	Troubled debt restructuring
GNMA	Government National Mortgage Association	TLAC	Total Loss Absorbing Capacity
GSE	Government-sponsored entity	VA	Department of Veterans Affairs
G-SIB	Global systemically important bank	VaR	Value-at-Risk
HQLA	High-quality liquid assets	VIE	Variable interest entity
HTM	Held-to-maturity	WIM	Wealth and Investment Management

169

PART II – OTHER INFORMATION

Item 1. Legal Proceedings

Information in response to this item can be found in Note 14 (Legal Actions) to Financial Statements in this Report which information is incorporated by reference into this item.

Item 1A. Risk Factors

Information in response to this item can be found under the “Financial Review – Risk Factors” section in this Report which information is incorporated by reference into this item.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

The following table shows Company repurchases of its common stock for each calendar month in the quarter ended June 30, 2020. In second quarter 2020, share repurchases were limited to repurchases in connection with the Wells Fargo & Company Stock Purchase Plan and Wells Fargo's deferred compensation plans.



Calendar month	Total number of shares repurchased (1)	Weighted-average price paid per share		Maximum number of shares that may yet be repurchased under the authorization
April	9,065	$	29.00	167,539,651
May	12,280	25.50		167,527,371
June	24,521	28.46		167,502,850
Total	45,866


(1)	All shares were repurchased under an authorization covering up to 350 million shares of common stock approved by the Board of Directors and publicly announced by the Company on July 23, 2019. Unless modified or revoked by the Board, this authorization does not expire.

170


Item 6.	Exhibits

A list of exhibits to this Form 10-Q is set forth below.

The Company’s SEC file number is 001-2979. On and before November 2, 1998, the Company filed documents with the SEC under the name Norwest Corporation. The former Wells Fargo & Company filed documents under SEC file number 001-6214.

Exhibit

Number

Description

Location

3(a)

Amendment to Wachovia Corporation Savings Restoration Plan, effective January 1, 2020.

3(b)

By-Laws.

Incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed March 1, 2018.

4(a)

See Exhibits 3(a) and 3(b).

4(b)

The Company agrees to furnish upon request to the Commission a copy of each instrument defining the rights of holders of senior and subordinated debt of the Company.

10(a)

Amendment to Supplemental 401(k) Plan, effective January 1, 2020.

10(b)

Amendment to Supplemental Cash Balance Plan, effective January 1, 2020.

10(c)

Certification of principal executive officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31(a)

Certification of principal financial officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31(b)

Certification of Periodic Financial Report by Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and 18 U.S.C. § 1350.

32(a)

Furnished herewith.

32(b)

Certification of Periodic Financial Report by Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and 18 U.S.C. § 1350.

Furnished herewith.

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