Company Quick10K Filing
Quick10K
Wells Fargo Real Estate Investment
10-Q 2019-09-30 Quarter: 2019-09-30
10-Q 2019-06-30 Quarter: 2019-06-30
10-Q 2019-03-31 Quarter: 2019-03-31
10-K 2018-12-31 Annual: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
10-Q 2015-09-30 Quarter: 2015-09-30
10-Q 2015-06-30 Quarter: 2015-06-30
10-Q 2015-03-31 Quarter: 2015-03-31
10-K 2014-12-31 Annual: 2014-12-31
8-K 2019-11-01 Other Events, Exhibits
8-K 2018-11-26 Exhibits
8-K 2018-03-01 Officers
8-K 2018-01-30 Officers
HGBL Heritage Global 21
BBLS Petrolia Energy 13
ISCO International Stem Cell 7
MGTI MGT Capital Investments 7
SGBI Sangui Biotech International 4
EVTN Enviro Technologies 2
INMD InMode 0
GFA Gafisa 0
RHNO Rhino Resource Partners 0
GLFH Galenfeha 0
WFE 2019-09-30
Part I - Financial Information
Note 1: Summary of Significant Accounting Policies
Note 2: Loans and Allowance for Credit Losses
Note 3: Fair Values of Assets and Liabilities
Note 4: Common and Preferred Stock
Note 5: Transactions with Related Parties
Part II - Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 6. Exhibits
EX-31.A wfe-20190930xex31a.htm
EX-31.B wfe-20190930xex31b.htm
EX-32.A wfe-20190930xex32a.htm
EX-32.B wfe-20190930xex32b.htm

Wells Fargo Real Estate Investment Earnings 2019-09-30

WFE 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

Document
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q

(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2019
 
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________

Commission file number 1-36768
Wells Fargo Real Estate Investment Corporation
(Exact name of registrant as specified in its charter)
Delaware
 
56-1986428
(State of incorporation)
 
(I.R.S. Employer Identification No.)    
90 South 7th Street
Minneapolis, Minnesota 55402
(Address of principal executive offices)
(Zip Code)

(855) 825-1437
(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Exchange Act:
Title of Each Class
Trading Symbol
Name of Each Exchange
on Which Registered
6.375% Cumulative Perpetual Series A Preferred Stock
WFE.PRA
New York Stock Exchange


Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes þ   No ¨

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes þ   No ¨
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company' in Rule 12b-2 of the Exchange Act.
            
Large accelerated filer  ¨                    Accelerated filer  ¨ 
Non-accelerated filer  þ                    Smaller reporting company  
Emerging growth company   
          
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes      No þ

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

As of October 28, 2019, there were 34,058,028 shares of the registrant’s common stock outstanding.
 



FORM 10-Q
CROSS-REFERENCE INDEX
 
PART I
Financial Information
 
 
 
 
Item 1.
Financial Statements
Page
  
  
  
  
  
Notes to Financial Statements
 
  
1


  
2


  
3


  
4


  
5


 
 
 
 
 
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations (Financial Review)
 
  
  
  
  
  
  
  
  
  
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
 
PART II
Other Information
 
 
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 6.
 
 
 
 
 
 
 
 
 
 
 
 






1



PART I - FINANCIAL INFORMATION
FINANCIAL REVIEW
Summary Financial Data
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
% Change
 
 
 
 
 
 
 
  
Quarter ended
 
 
September 30, 2019 from
 
 
Nine months ended
 
 
 
($ in thousands, except per share data)
Sep 30,
2019

 
Jun 30,
2019

 
Sep 30,
2018

 
Jun 30,
2019

 
Sep 30,
2018

 
Sep 30,
2019

 
Sep 30,
2018

 
% Change

For the period
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
$
327,223

 
334,945

 
301,123

 
(2
)%
 
9

 
$
965,607

 
927,458

 
4
 %
Net income applicable to common stock
322,826

 
330,548

 
296,726

 
(2
)
 
9

 
952,416

 
914,267

 
4

Diluted earnings per common share
9.47

 
9.71

 
8.71

 
(2
)
 
9

 
27.96

 
26.84

 
4

Profitability ratios
 
 


 


 


 


 
 
 


 


Return on average assets
3.94
 %
 
3.93

 
3.59

 

 
10

 
3.78
 %
 
3.60

 
5

Return on average stockholders’ equity
3.98

 
4.12

 
3.68

 
(3
)
 
8

 
3.97

 
3.82

 
4

Average stockholders’ equity to average assets
98.80

 
95.26

 
97.42

 
4

 
1

 
95.35

 
94.35

 
1

Common dividend payout ratio (1)
100.84

 
93.72

 
96.10

 
8

 
5

 
97.68

 
98.99

 
(1
)
Dividend coverage ratio (2)
7,254

 
7,105

 
7,064

 
2

 
3

 
7,254

 
7,064

 
3

Total revenue
$
352,593

 
360,116

 
330,025

 
(2
)
 
7

 
$
1,054,177

 
1,007,049

 
5

Average loans
32,575,859

 
33,923,658

 
33,024,229

 
(4
)
 
(1
)
 
33,825,485

 
34,186,792

 
(1
)
Average assets
32,986,937

 
34,191,626

 
33,288,067

 
(4
)
 
(1
)
 
34,128,259

 
34,443,845

 
(1
)
Net interest margin
4.00
 %
 
3.92

 
3.99

 
2

 

 
3.94
 %
 
3.90

 
1

Net loan charge-offs (recoveries)
$
(906
)
 
(1,594
)
 
(119
)
 
(43
)
 
661

 
$
(3,126
)
 
(1,411
)
 
122

As a percentage of average total loans (annualized)
(0.01
)%
 
(0.02
)
 

 
(50
)
 
(100
)
 
(0.01
)%
 
(0.01
)
 

At period end
 
 


 


 


 


 
 
 


 


Loans
$
31,859,049

 
33,352,794

 
32,510,311

 
(4
)
 
(2
)
 
$
31,859,049

 
32,510,311

 
(2
)
Allowance for loan losses
78,743

 
87,885

 
104,556

 
(10
)
 
(25
)
 
78,743

 
104,556

 
(25
)
As a percentage of total loans
0.25
 %
 
0.26

 
0.32

 
(4
)
 
(22
)
 
0.25
 %
 
0.32

 
(22
)
Assets
$
32,440,391

 
33,377,272

 
32,589,234

 
(3
)
 

 
$
32,440,391

 
32,589,234

 

Total stockholders’ equity
32,437,702

 
32,439,876

 
32,399,530

 

 

 
32,437,702

 
32,399,530

 

Total nonaccrual loans and foreclosed assets
142,340

 
161,415

 
182,513

 
(12
)
 
(22
)
 
142,340

 
182,513

 
(22
)
As a percentage of total loans
0.45
 %
 
0.48

 
0.56

 
(6
)
 
(20
)
 
0.45
 %
 
0.56

 
(20
)
Loans 90 days or more past due and still accruing (3)
$
4,341

 
3,460

 
6,118

 
25

 
(29
)
 
$
4,341

 
6,118

 
(29
)
(1)
Dividends declared per common share as a percentage of earnings per common share.
(2)
The dividend coverage ratio is considered a non-GAAP financial measure. Management believes the dividend coverage ratio is a useful financial measure because the certificate of designation for the Series A preferred stock limits, among other matters, our ability to pay dividends on our common stock or make any payment of interest or principal on our line of credit with Wells Fargo Bank, National Association, if the dividend coverage ratio for the four prior fiscal quarters is less than 150%. The dividend coverage ratio is expressed as a percentage and calculated by dividing the four prior fiscal quarters' GAAP net income, excluding gains (or losses) from sales of property (consistent with the National Association of Real Estate Investment Trusts definition of “funds from operations”), by the amount that would be required to pay annual dividends on the Series A and Series B preferred stock.
(3)
The carrying value of purchased credit-impaired (PCI) loans contractually 90 days or more past due is excluded. These PCI loans are considered to be accruing because they continue to earn interest from accretable yield, independent of performance in accordance with their contractual terms.



2


This Quarterly Report, including the Financial Review and the Financial Statements and related Notes, contains forward-looking statements, which may include forecasts of our financial results and condition, expectations for our operations and business, and our assumptions for those forecasts and expectations. Do not unduly rely on forward-looking statements. Actual results may differ materially from our forecasts and expectations due to several factors. Factors that could cause our results to differ materially from our forward looking statements are described in this Report, including in the “Forward-Looking Statements” section, and the “Risk Factors” section in our Annual Report on Form 10-K for the year ended December 31, 2018 (2018 Form 10-K).

When we refer to “WFREIC,” the “Company,” “we,” “our,” and “us” in this Report, we mean Wells Fargo Real Estate Investment Corporation, and where relevant, Wells Fargo Bank, National Association, acting on our behalf; the “Bank” refers to Wells Fargo Bank, National Association; and “Wells Fargo” refers to Wells Fargo & Company.

Financial Review
OVERVIEW

The Company is engaged in acquiring, holding and managing domestic mortgage assets and other authorized investments that generate net income for distribution to our shareholders. We are classified as a real estate investment trust (REIT) for federal income tax purposes and are an indirect subsidiary of Wells Fargo and the Bank.
As of September 30, 2019, we had $32.4 billion in assets, consisting substantially of real estate loan participation interests (loans). Our interests in mortgage and other assets have been acquired from the Bank pursuant to loan participation and servicing and assignment agreements among the Bank, certain of its subsidiaries and us. The Bank originated the loans, purchased them from other financial institutions or acquired them as part of the acquisition of other financial institutions. Substantially all of our loans are serviced by the Bank.
REIT Tax Status
For the tax year ended December 31, 2018, we complied with the relevant provisions of the Internal Revenue Code of 1986, as amended (the Code) to be taxed as a REIT. These provisions for qualifying as a REIT for federal income tax purposes are complex, involving many requirements, including among others, distributing at least 90% of our REIT taxable income to shareholders and satisfying certain asset, income and stock ownership tests. To the extent we meet those provisions, we will not be subject to federal income tax on net income. We continue to monitor each of these complex tests. We believe that we continue to satisfy each of these requirements and therefore continue to qualify as a REIT in 2019.
In the event we do not continue to qualify as a REIT, earnings and cash provided by operating activities available for distribution to shareholders would be reduced by the amount of any applicable income tax obligation. Given the level of earning assets, we currently expect there would be sufficient earnings and ample cash to pay preferred dividends. The preferred and common dividends we pay as a REIT are ordinary investment income not eligible for the dividends-received deduction for corporate shareholders or for the favorable qualified dividend tax rate applicable to non-corporate taxpayers, however non-corporate shareholders may be able to deduct 20% of the preferred and common dividends as a deduction for qualified business income under the Tax Cuts and Jobs Act. If we were not a REIT, preferred and common dividends we pay generally would qualify for the dividends received deduction for corporate shareholders and the favorable qualified dividend tax rate applicable to non-corporate taxpayers.
 
Financial Performance
We earned net income and net income applicable to common stock of $327.2 million and $322.8 million, respectively, in third quarter 2019, or $9.47 diluted earnings per common share, compared with $301.1 million and $296.7 million, respectively, in third quarter 2018, or $8.71 diluted earnings per common share. For the first nine months of 2019, net income and net income applicable to common stock were $965.6 million and $952.4 million, respectively, or $27.96 diluted earnings per common share, compared with $927.5 million and $914.3 million, respectively, for the same period a year ago, or $26.84 diluted earnings per common share. The increase in net income in the third quarter and first nine months of 2019 was predominantly attributable to an increase in noninterest income due to an $18.9 million gain on the sale of consumer loans, with a carrying value of $19.3 million, to the Bank in the third quarter of 2019. The increase in net income in the first nine months of 2019 was also attributable to a $25.7 million gain on the sale of real estate 1-4 family first mortgage loans to the Bank in the second quarter of 2019. These loans were previously written down to the fair value of the underlying collateral and are below their current recovery value.
Loans
Total loans were $31.9 billion at September 30, 2019, compared with $35.5 billion at December 31, 2018. Loans, net of allowance for loan losses, represented 98.0% of assets at September 30, 2019 and 99.7% at December 31, 2018.
Credit quality, as measured by net charge-offs, nonaccrual loans and delinquencies, remained strong during third quarter 2019. Net recoveries were $906 thousand and $3.1 million in the third quarter and first nine months of 2019, respectively, compared with $119 thousand and $1.4 million in the third quarter and first nine months of 2018. Nonaccrual loans were $141.4 million at September 30, 2019, compared with $178.9 million at December 31, 2018. Loans 90 days or more past due and still accruing were $4.3 million at September 30, 2019, compared with $6.5 million at December 31, 2018. Delinquencies remain a small percentage of our loan balances.

3


Reversal of provision for credit losses was $8.5 million and $16.6 million in the third quarter and first nine months of 2019, respectively, compared with $6.8 million and $22.9 million for the same periods in 2018. The higher reversal of provision for credit losses for the first nine months of 2018 reflected the improvement in our outlook for hurricane-related losses. Future allowance levels will be based on a variety of factors, including loan portfolio composition, size and performance, and the general economic environment, including housing market conditions.
Capital Distributions
Dividends declared to holders of our Series A preferred stock totaled $4.4 million and $13.1 million in the third quarter and first nine months, respectively, of 2019 and 2018. Dividends declared to holders of our Series B preferred stock totaled $14 thousand and $42 thousand in the third quarter and first nine months, respectively, of 2019 and 2018.
Dividends declared to the holders of our common stock increased to $325.0 million and $930.0 million in the third
 
quarter and first nine months of 2019, respectively, compared with $285.0 million and $905.0 million in the third quarter and first nine months of 2018, respectively, due to an increase in estimated REIT taxable income for federal income tax purposes before dividends paid deduction attributable to the gain on sale of consumer loans in 2019.

Subsequent Events
On November 1, 2019, the Board of Directors approved the redemption of the Series A and Series B preferred stock to occur on December 11, 2019, at the redemption price of $25 and $1,000 per share, respectively, plus any authorized, declared, and any accumulated but unpaid dividends to the date of redemption. As a result of the redemption of the preferred stock, the Company will no longer qualify as a REIT after 2019 and will join Wells Fargo’s consolidated tax return on January 1, 2020.


Earnings Performance

Net Income
We earned net income of $327.2 million and $301.1 million in the third quarter of 2019 and 2018, respectively. For the first nine months of 2019, net income was $965.6 million, compared with $927.5 million, respectively, for the same periods a year ago. The increase in net income in the third quarter and first nine months of 2019 was attributable to an increase in noninterest income due to an $18.9 million gain on the sale of consumer loans, with a carrying value of $19.3 million, to the Bank in the third quarter of 2019. The increase in net income in the first nine months of 2019 was also attributable to a $25.7 million gain on the sale of real estate 1-4 family first mortgage loans to the Bank in the second quarter of 2019. These loans were previously written down to the fair value of the underlying collateral and are below their current recovery value.

Net Interest Income
Net interest income is the interest earned on loans and cash and cash equivalents less the interest paid on our Bank line of credit. Net interest margin is the average yield on interest-earning assets minus the average interest paid for funding. Interest-earning assets predominantly consist of loans. Net interest income was $326.8 million and $999.2 million in the third quarter and first nine months of 2019, respectively, compared with $329.9 million and $1.0 billion for the same periods a year ago. Net interest margin was 4.00% and 3.94% in the third quarter and first nine months of 2019, respectively, compared with 3.99% and 3.90% for the same periods a year ago. The increase in net interest margin for the third quarter and first nine months of 2019 was due to an increase in yields on interest-earning assets. Interest income in the third quarter and first nine months of 2019 included net accretion of adjustments on loans of $4.4 million and $17.2 million, respectively, compared with $5.0 million and $14.3 million a year ago.


 
Interest income in any one period can be affected by a variety of factors, including mix and size of the earning asset portfolio. See the “Risk Management - Asset/Liability Management - Interest Rate Risk” section in this Report for more information on interest rates and interest income.
The Company has a $5.0 billion line of credit with the Bank. Average borrowings for third quarter 2019 and 2018 were $393.4 million and $757.5 million, respectively, at weighted average interest rates of 2.95% and 2.41%, respectively. Average borrowings for the first nine months of 2019 and 2018 were $1.6 billion and $1.9 billion, respectively, at weighted average interest rates of 2.96% and 2.16%, respectively. Effective March 2019, the Company renewed the line of credit with the Bank and the interest rate increased from three-month London Interbank Offered Rate (LIBOR) plus 4.4 basis points (0.044%) to three-month LIBOR plus 65.0 basis points (0.650%). The change in interest rate was driven by an increase in term, along with a change in underwriting which aligned our credit rating with that of our direct parent rather than the Bank. It is expected that a transition away from the widespread use of LIBOR to alternative benchmark rates will occur by the end of 2021.
Table 1 presents the components of interest-earning assets and interest-bearing liabilities and related average yields to provide an analysis of year-over-year changes that influenced net interest income.



4


Table 1: Net Interest Income
 
Quarter ended September 30,
 
 
 
 
 
 
2019

 
 
 
 
 
2018

(in thousands)
Average
balance

 
Interest
income/expense

 
Yields/rates

 
Average
balance

 
Interest
income/expense

 
Yields/rates

Earning assets
 
 
 
 
 
 
 
 
 
 
 
Commercial loans
$
2,642,384

 
27,807

 
4.18
%
 
$
2,763,794

 
29,401

 
4.22
%
Real estate 1-4 family mortgage loans
29,933,475

 
301,434

 
4.03

 
30,260,435

 
305,072

 
4.03

Interest-bearing deposits
102,742

 
525

 
2.03

 
2,243

 
12

 
2.07

Total interest-earning assets
$
32,678,601

 
329,766

 
4.03

 
$
33,026,472

 
334,485

 
4.04

Funding sources
 
 
 
 
 
 
 
 
 
 
 
Line of credit with Bank
$
393,434

 
2,927

 
2.95

 
$
757,455

 
4,604

 
2.41

Total interest-bearing liabilities
$
393,434

 
2,927

 
2.95

 
$
757,455

 
4,604

 
2.41

Net interest margin and net interest income
 
 
$
326,839

 
4.00
%
 
 
 
$
329,881

 
3.99
%
 
Nine months ended September 30,
 
 
 
 
 
 
2019

 
 
 
 
 
2018

(in thousands)
Average
balance

 
Interest
income/expense

 
Yields/rates

 
Average
balance

 
Interest
income/expense

 
Yields/rates

Earning assets
 
 
 
 
 
 
 
 
 
 
 
Commercial loans
$
2,795,950

 
91,976

 
4.40
%
 
$
3,008,863

 
90,250

 
4.01
%
Real estate 1-4 family mortgage loans
31,029,535

 
940,986

 
4.04

 
31,177,929

 
941,094

 
4.03

Interest-bearing deposits

34,624

 
525

 
2.03

 
756

 
12

 
2.07

Total interest-earning assets
$
33,860,109

 
1,033,487

 
4.07

 
$
34,187,548

 
1,031,356

 
4.02

Funding sources
 
 
 
 
 
 
 
 
 
 
 
Line of credit with Bank
$
1,550,692

 
34,299

 
2.96

 
$
1,907,366

 
30,866

 
2.16

Total interest-bearing liabilities
$
1,550,692

 
34,299

 
2.96

 
$
1,907,366

 
30,866

 
2.16

Net interest margin and net interest income
 
 
$
999,188

 
3.94
%
 
 
 
$
1,000,490

 
3.90
%


Reversal of Provision for Credit Losses
Reversal of provision for credit losses was $8.5 million and $16.6 million in the third quarter and first nine months of 2019, respectively, compared with $6.8 million and $22.9 million for the same periods a year ago. The higher reversal of provision for credit losses for the first nine months of 2018 reflected the improvement in our outlook for hurricane-related losses. See the “Balance Sheet Analysis” and "Risk Management – Allowance for Credit Losses” sections in this Report for additional information on the allowance for credit losses.


5


Noninterest Income
Noninterest income was $25.8 million and $55.0 million in the third quarter and first nine months of 2019, respectively, compared with $144 thousand and $6.6 million for the same periods a year ago. The increase in the third quarter and first nine months of 2019 was attributable to a gain on the sales of consumer loans to the Bank.
The certificate of designation for the Series A preferred stock limits our ability to pledge our loans to an aggregate amount not exceeding 80% of our total assets at any time as collateral on behalf of the Bank for the Bank’s access to secured borrowing facilities through the Federal Home Loan Banks or the discount window of Federal Reserve Banks. However, the Bank's borrowings will differ from loan balances pledged. In exchange for the pledge of our loan assets, the Bank pays us a fee that is consistent with market terms. We earned $6.5 million and $9.3 million in pledge fees in the third quarter and first nine months of 2019, respectively. We did not earn pledge fees in third quarter 2018. Pledge fees were $6.0 million for the first nine months of 2018. The increase in the first nine months of 2019 was attributable to a higher average balance pledged.
See Note 5 (Transactions With Related Parties) to Financial Statements in this Report for more details.


 
Noninterest Expense
Noninterest expense was $33.9 million and $105.2 million in the third quarter and first nine months of 2019, respectively, compared with $35.7 million and $102.5 million for the same periods a year ago. Noninterest expense predominantly consists of loan servicing costs, management fees, and foreclosed assets expense.
The loans in our portfolio are predominantly serviced by the Bank pursuant to the terms of participation and servicing and assignment agreements. In limited instances, the Bank has delegated servicing responsibility to third parties that are not affiliated with us or the Bank. Depending on the loan type, the monthly servicing fee charges are based in part on (a) outstanding principal balances, (b) a flat fee per month, or (c) a total loan commitment amount. Loan servicing costs in the third quarter and first nine months of 2019 were $20.3 million and $62.9 million, respectively, compared with $20.6 million and $63.8 million for the same periods a year ago.
Management fees represent reimbursements made to the Bank for general overhead expenses, including allocations of technology support and a combination of finance and accounting, risk management and other general overhead expenses incurred on our behalf. Management fees include direct and indirect expense allocations. Indirect expenses are allocated based on ratios that use our proportion of expense activity drivers. The expense activity drivers and ratios may change from time to time. Management fees were $11.7 million and $34.7 million in the third quarter and first nine months of 2019, respectively, compared with $11.0 million and $29.0 million for the same periods a year ago. The increase in the first nine months of 2019 was driven by an increase in allocations for portfolio credit monitoring and oversight.
Foreclosed assets expense was $1.7 million and $7.0 million in the third quarter and first nine months of 2019, respectively, compared with $4.0 million and $9.2 million for the same periods a year ago. The decrease in the third quarter and first nine months of 2019 was due to a decline in property taxes. Substantially all of our foreclosed assets consist of residential 1-4 family real estate assets.
See Note 5 (Transactions With Related Parties) to Financial Statements in this Report for more details.


6


Balance Sheet Analysis

Total Assets
Our assets predominantly consist of commercial and consumer loans, although we have the authority to hold assets other than loans. Total assets were $32.4 billion at September 30, 2019, and $35.5 billion at December 31, 2018.
Loans
Loans were $31.9 billion at September 30, 2019, and $35.5 billion at December 31, 2018. The decrease is attributable to net paydowns in the first nine months of 2019. Real estate 1-4 family mortgage loans represented over 90% of our loan portfolio at both September 30, 2019 and December 31, 2018, respectively.
Allowance for Loan Losses
The allowance for loan losses decreased $18.0 million to $78.7 million at September 30, 2019, from $96.7 million at December 31, 2018, reflecting more favorable economic conditions, continued portfolio improvement, and declining balances due to sales to the Bank as well as natural attrition.
At September 30, 2019, the allowance for loan losses included $58.0 million for consumer loans and $20.7 million for commercial loans; however, the entire allowance is available to absorb credit losses inherent in the total loan portfolio. The total allowance reflects management’s estimate of credit losses inherent in the loan portfolio at the balance sheet date. See the “Risk Management – Credit Risk Management – Allowance for Credit Losses” section in this Report for a description of how management estimates the allowance for loan losses and the allowance for unfunded credit commitments.

 
Accounts Payable and Receivable—Affiliates, Net
Accounts payable and receivable from affiliates result from intercompany transactions in the normal course of business related to loan paydowns and payoffs, interest receipts, servicing costs, management fees and other transactions with the Bank or its affiliates.

Line of Credit with Bank
We have the ability to draw upon our $5.0 billion line of credit with the Bank to finance loan acquisitions. At September 30, 2019 we had no outstanding balance on our line of credit, compared with $3.1 billion at December 31, 2018. In the third quarter of 2019 we paid off our line of credit using loan paydowns.

Retained Earnings (Deficit)
We expect to distribute an aggregate amount of dividends with respect to outstanding capital stock equal to approximately 100% of our REIT taxable income for federal income tax purposes before dividends paid deduction. Because our net income determined under GAAP may vary from the determination of REIT taxable income, due to recognition differences for items such as loan losses and purchase accounting adjustments, periodic distributions may exceed our GAAP net income.
The retained deficit included within our balance sheet results from cumulative distributions that have exceeded GAAP net income, predominantly due to the impact on REIT taxable income of purchase accounting adjustments attributable to the Company during the years 2009 through 2013, from the 2008 acquisition of Wachovia Corporation by Wells Fargo.
For further information on the differences between taxable income before dividends paid deduction reported on our income tax returns and net income as reported in our statement of income, see the “Balance Sheet Analysis” section in our 2018 Form 10-K.
    

        


7


Risk Management

Our board of directors has overall responsibility for overseeing the Company’s risk management structure. This oversight is accomplished through the Audit Committee of the Board of Directors and a management-level committee that reviews the allowance for credit losses and is supplemented by certain elements of Wells Fargo’s risk management framework. For more information about how we manage risk, see the “Risk Management” section in our 2018 Form 10-K. The discussion that follows supplements our discussion of the management of certain risks contained in the "Risk Management" section in our 2018 Form 10-K.
 
Credit Risk Management Our assets consist predominantly of loans, and their related credit risk is among the most significant risks we manage. We define credit risk as the risk to earnings associated with a borrower or counterparty default (failure to meet obligations in accordance with agreed upon terms).
Table 2 represents loans by segment and class of financing receivable and the weighted average maturity for those loans calculated using contractual maturity dates.
Table 2: Total Loans Outstanding by Portfolio Segment and Class of Financing Receivable and Weighted Average Contractual Maturity
 
Loans outstanding
 
 
Weighted average maturity in years
 
(in thousands)
Sep 30, 2019

 
Dec 31, 2018

 
Sep 30, 2019

 
Dec 31, 2018

Total commercial
$
2,585,200

 
3,055,423

 
3.3

 
3.2

Consumer:
 
 
 
 
 
 
 
Real estate 1-4 family first mortgage
28,721,017

 
31,769,813

 
24.0

 
24.7

Real estate 1-4 family junior lien mortgage
552,832

 
669,832

 
14.7

 
15.0

Total consumer
29,273,849

 
32,439,645

 
23.9

 
24.5

Total loans
$
31,859,049

 
35,495,068

 
22.2

 
22.6

The discussion that follows provides analysis of the risk elements of our various loan portfolios and our credit risk management and measurement practices. See Note 2 (Loans and Allowance for Credit Losses) to Financial Statements in this Report for more analysis and credit metric information.
In order to maintain our REIT status, the composition of our loan portfolio is highly concentrated in real estate.
 
We continually evaluate our credit policies and modify as necessary. Measuring and monitoring our credit risk is an ongoing process that tracks delinquencies, collateral values, FICO scores, economic trends by geographic areas, loan-level risk grading for certain portfolios (typically commercial) and other indications of credit risk. Our credit risk monitoring process is designed to enable early identification of developing risk and to support our determination of an appropriate allowance for credit losses.




8


LOAN PORTFOLIO BY GEOGRAPHY Table 3 is a summary of the geographical distribution of our loan portfolio for the top fifteen states by loans outstanding.

Table 3: Loan Portfolio by Geography
 
September 30, 2019
 
(in thousands)
Commercial

 
Real estate
1-4 family
first
mortgage

 
Real estate
1-4 family
junior lien
mortgage

 
Total

 
% of
total
loans

California
$
1,223,082

 
7,684,529

 
5,584

 
8,913,195

 
28
%
New York
10,036

 
2,801,063

 
35,897

 
2,846,996

 
9

Washington
105,782

 
2,138,680

 
696

 
2,245,158

 
7

Virginia
47,686

 
1,792,569

 
54,918

 
1,895,173

 
6

Texas
65,156

 
1,216,588

 
6,301

 
1,288,045

 
4

Maryland
71,090

 
1,130,113

 
25,866

 
1,227,069

 
4

Massachusetts
26,508

 
1,186,372

 
1,978

 
1,214,858

 
4

Pennsylvania
18,780

 
1,003,286

 
86,964

 
1,109,030

 
3

Illinois
2,863

 
1,039,238

 
764

 
1,042,865

 
3

Florida
271,229

 
673,487

 
71,883

 
1,016,599

 
3

Georgia
24,899

 
928,076

 
36,700

 
989,675

 
3

Oregon
129,005

 
820,442

 
377

 
949,824

 
3

Minnesota
24,449

 
898,948

 
1,227

 
924,624

 
3

Arizona
55,112

 
740,398

 
526

 
796,036

 
2

New Jersey
87,194

 
383,583

 
124,608

 
595,385

 
2

All other states (1)
422,329

 
4,283,645

 
98,543

 
4,804,517

 
16

Total loans
$
2,585,200

 
28,721,017

 
552,832

 
31,859,049

 
100
%
(1)
No state is greater than 2% of total loans.

 
COMMERCIAL AND INDUSTRIAL LOANS (C&I) C&I loans were less than 1% of total loans at September 30, 2019. We believe the C&I portfolio is appropriately underwritten. Our credit risk management process for this portfolio focuses on a customer's
 
ability to repay the loan through their cash flows. Substantially all of the loans in our C&I portfolio were unsecured at September 30, 2019.



9


COMMERCIAL SECURED BY REAL ESTATE (CSRE) The CSRE portfolio consists of both mortgage loans and construction loans, where loans are secured by real estate. Table 4 summarizes CSRE loans by state and property type. To identify and manage newly emerging problem CSRE loans, we employ a
 
high level of monitoring and regular customer interaction to understand and manage the risks associated with these loans, including regular loan reviews and appraisal updates. We consider the creditworthiness of the customers and collateral valuations when selecting CSRE loans for acquisition.

Table 4: CSRE Loans by State and Property Type
 
September 30, 2019
 
(in thousands)
Total
CSRE loans

 
% of
total
CSRE loans

By state:
 
 
 
California
$
1,223,082

 
48
%
Florida
270,908

 
11

Utah
151,479

 
6

Oregon
129,005

 
5

Washington
105,782

 
4

New Jersey
79,045

 
3

Maryland
71,090

 
3

Texas
65,156

 
3

Colorado
62,988

 
2

Arizona
55,112

 
2

Washington DC
49,891

 
2

Virginia
44,950

 
2

North Carolina
36,090

 
1

Rhode Island
33,002

 
1

Massachusetts
26,508

 
1

All other states (1)
168,903

 
6

Total loans
$
2,572,991

 
100
%
By property type:
 
 
 
Office buildings
$
565,000

 
22
%
Shopping centers
497,124

 
19

5 + multifamily residences
428,454

 
17

Warehouses
362,115

 
14

Retail establishments (restaurants, stores)
283,880

 
11

Mini-storage
142,516

 
6

Commercial/industrial (non-residential)
99,650

 
4

Motels/hotels
57,509

 
2

Manufacturing plants
56,494

 
2

Research and development
30,598

 
1

Other
49,651

 
2

Total loans
$
2,572,991

 
100
%
(1)
No state is greater than 1% of CSRE loans.


10


REAL ESTATE 1-4 FAMILY MORTGAGE LOANS The concentrations of real estate 1-4 family mortgage loans by state and the related loan-to-value (LTV) ratio for real estate 1-4 family first mortgage and combined loan-to-value (CLTV) ratio for real estate 1-4 family junior lien mortgage loans are presented in combination in Table 5. CLTV means the ratio of the total loan balance of first and junior mortgages to property collateral value. We monitor changes in real estate values and underlying economic or market conditions for all geographic areas of our real estate 1-4 family mortgage portfolio as part of our credit risk management process. Our periodic review of loans secured by residential real estate collateral includes appraisals or estimates from automated valuation models (AVMs) to support property values. AVMs are computer-based tools used to estimate the market value of homes. AVMs are a lower-cost alternative to appraisals and support valuations of large numbers of properties in a short period of time using market comparables and price trends for local market areas. The primary risk associated with the use of AVMs is that the value of
 
an individual property may vary significantly from the average for the market area. We have processes to periodically validate AVMs and specific risk management guidelines addressing the circumstances when AVMs may be used. Additional information about AVMs and our policy for their use can be found in Note 2 (Loans and Allowance for Credit Losses) to Financial Statements in this Report and the “Risk Management - Credit Risk Management - Real Estate 1-4 Family Mortgage Loans” section in our 2018 Form 10-K.
We modify real estate 1-4 family mortgage loans to assist homeowners and other borrowers experiencing financial difficulties. For more information on our modification programs, see the “Risk Management – Credit Risk Management – Real Estate 1-4 Family Mortgage Loans” section in our 2018 Form 10-K.
The credit performance associated with our real estate 1-4 family mortgage portfolio remained strong in third quarter 2019, as measured through net charge-offs, nonaccrual loans and delinquencies.

Table 5: Real Estate 1-4 Family Mortgage Loans LTV/CLTV by State
 
September 30, 2019
 
(in thousands)
Real estate
1-4 family
mortgage

 
Current
LTV\CLTV
ratio 

California
$
7,690,113

 
43
%
New York
2,836,960

 
57

Washington
2,139,376

 
50

Virginia
1,847,487

 
60

Texas
1,222,889

 
56

Massachusetts
1,188,350

 
57

Maryland
1,155,979

 
62

Pennsylvania
1,090,250

 
59

Illinois
1,040,002

 
65

Georgia
964,776

 
58

Minnesota
900,175

 
60

Oregon
820,819

 
57

Florida
745,370

 
51

Arizona
740,924

 
55

Colorado
518,052

 
43

All other states (1)
4,372,327

 
56

Total loans
$
29,273,849

 
53

(1)
No state is greater than 2% of real estate 1-4 family mortgage loans.


11


REAL ESTATE 1-4 FAMILY FIRST MORTGAGE LOANS Net charge-offs (recoveries) (annualized) as a percentage of average loans were 0.00% in both the third quarter and first nine months of 2019, respectively, compared with (0.02)% for the same periods a year ago. Nonaccrual loans were $113.0 million at
 
September 30, 2019, compared with $142.3 million at December 31, 2018.
Table 6 summarizes delinquency and loss rates by state for our real estate 1-4 family first mortgage portfolio.
Table 6: Real Estate 1-4 Family First Mortgage Portfolio Performance
 
Outstanding balance
 
 
% of loans
30 days
or more past due
 
Loss (recovery) rate (annualized) quarter ended
 
(in thousands)
Sep 30,
2019

 
Dec 31,
2018

 
Sep 30,
2019

 
Dec 31,
2018
 
Sep 30,
2019

 
Jun 30,
2019

 
Mar 31,
2019

 
Dec 31,
2018

 
Sep 30,
2018

California
$
7,684,517

 
8,451,050

 
0.12
%
 
0.11
 

 

 

 

 

New York
2,800,462

 
3,028,854

 
0.50

 
0.54
 
0.03

 
0.02

 
0.01

 
(0.01
)
 
0.06

Washington
2,138,678

 
2,348,005

 
0.08

 
0.12
 

 

 

 
(0.01
)
 
(0.01
)
Virginia
1,791,785

 
1,954,719

 
0.40

 
0.47
 
0.02

 

 
0.02

 
0.01

 
(0.02
)
Texas
1,216,564

 
1,351,937

 
0.42

 
0.34
 
(0.03
)
 

 

 
0.01

 
(0.01
)
Massachusetts
1,186,291

 
1,299,185

 
0.08

 
0.22
 

 

 

 

 
(0.02
)
Maryland
1,129,870

 
1,237,011

 
0.33

 
0.44
 
(0.01
)
 

 
(0.02
)
 

 
0.01

Illinois
1,039,237

 
1,185,911

 
0.27

 
0.24
 

 
(0.02
)
 
0.05

 

 
(0.04
)
Pennsylvania
1,001,955

 
1,109,930

 
1.81

 
1.93
 
0.05

 
0.02

 
0.04

 
(0.03
)
 
(0.12
)
Georgia
927,530

 
1,030,320

 
0.29

 
0.33
 
(0.01
)
 

 
(0.02
)
 
(0.05
)
 
(0.04
)
Minnesota
898,945

 
987,652

 
0.01

 
0.01
 

 

 

 
(0.01
)
 
(0.02
)
Oregon
820,440

 
906,070

 
0.07

 
0.01
 

 

 

 

 

Arizona
740,396

 
835,533

 
0.32

 
0.21
 

 

 

 

 

Florida
672,425

 
777,733

 
1.08

 
1.68
 
(0.06
)
 
0.03

 
(0.27
)
 
(0.14
)
 
(0.17
)
Colorado
516,746

 
594,932

 

 
0.06
 

 

 

 
0.02

 
0.01

All other states (1)
4,148,404

 
4,663,815

 
1.00

 
1.12
 

 
(0.01
)
 
(0.01
)
 
0.03

 
(0.05
)
Total
28,714,245

 
31,762,657

 
0.41

 
0.46
 

 

 

 

 
(0.02
)
PCI
6,772

 
7,156

 
 
 
 
 
 
 
 
 
 
 
 
 
 
  Total first mortgages
$
28,721,017

 
31,769,813

 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1)
No state is greater than 1% of real estate 1-4 family first mortgage loans.



12


REAL ESTATE 1-4 FAMILY JUNIOR LIEN MORTGAGE LOANS Our junior lien portfolio includes real estate 1-4 family junior lien mortgage loans secured by real estate. Predominantly all of our junior lien loans are amortizing payment loans with fixed interest rates and repayment periods between 5 to 30 years. Junior lien loans with balloon payments at the end of the repayment term represent less than 1% of our junior lien loans. We frequently monitor the credit performance of our junior lien mortgage portfolio for trends and factors that influence the frequency and
 
severity of loss. Net charge-offs (recoveries) (annualized) as a percentage of average loans were (1.19)% and (0.80)% in the third quarter and first nine months of 2019, respectively, compared with 0.58% and 0.41% for the same periods a year ago. Nonaccrual loans were $26.9 million at September 30, 2019, compared with $34.6 million at December 31, 2018.
Table 7 summarizes delinquency and loss rates by state for our junior lien portfolio.
Table 7: Real Estate 1-4 Family Junior Lien Portfolio Performance
 
Outstanding balance
 
 
% of loans
30 days
or more past due
 
Loss (recovery) rate (annualized) quarter ended
 
(in thousands)
Sep 30,
2019

 
Dec 31,
2018

 
Sep 30,
2019

 
Dec 31,
2018
 
Sep 30,
2019

 
Jun 30,
2019

 
Mar 31,
2019

 
Dec 31,
2018

 
Sep 30,
2018

New Jersey
$
124,608

 
146,787

 
5.03
%