SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934 (THE “EXCHANGE ACT”)

For the Fiscal year ended December 31, 2017

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)

Securities registered pursuant to Section 12(b) of the Exchange Act:



TITLE OF EACH CLASS		NAME OF EXCHANGE ON WHICH REGISTERED
6.375% Cumulative Perpetual Series A Preferred Stock		New York Stock Exchange, Inc. (the “NYSE”)

Securities registered pursuant to Section 12(g) of the Exchange Act:

TITLE OF EACH CLASS

None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No þ

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act 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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes þ No ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨

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.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.¨

Indicate by check mark whether the registrant is a shell company (defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold as of the last business day of the registrant’s completed second fiscal quarter: None (as of December 31, 2017, none of Wells Fargo Real Estate Investment Corporation’s voting or nonvoting common equity was held by non-affiliates).

As of February 28, 2018, there were 34,058,028 shares of the registrant’s common stock outstanding.

FORM 10-K

CROSS-REFERENCE INDEX



PART I		Page

Item 1.	Business	2
Item 1A.	Risk Factors	9
Item 1B.	Unresolved Staff Comments	9
Item 2.	Properties	9
Item 3.	Legal Proceedings	9
Item 4.	Mine Safety Disclosures	9

PART II

Item 5.	Market For Registrant’s Common Equity, Related Stockholder Matters And Issuer Purchases Of Equity Securities	10
Item 6.	Selected Financial Data	11
Item 7.	Management’s Discussion And Analysis Of Financial Condition And Results Of Operations	12
Item 7A.	Quantitative And Qualitative Disclosures About Market Risk	46
Item 8.	Financial Statements And Supplementary Data	46
Item 9.	Changes In And Disagreements With Accountants On Accounting And Financial Disclosure	47
Item 9A.	Controls And Procedures	47
Item 9B.	Other Information	47

PART III

Item 10.	Directors, Executive Officers And Corporate Governance	48
Item 11.	Executive Compensation	50
Item 12.	Security Ownership Of Certain Beneficial Owners And Management And Related Stockholder Matters	51
Item 13.	Certain Relationships And Related Transactions, And Director Independence	51
Item 14.	Principal Accountant Fees And Services	53

PART IV

Item 15.	Exhibits and Financial Statement Schedules	54

Signatures		85

Exhibit Index		55

This Annual Report on Form 10-K for the year ended December 31, 2017 (this 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 might differ materially from our forward-looking statements due to several factors. Some of these factors are described in Part II, Item 7 in the Financial Review and in Part II, Item 8 in the Financial Statements and related Notes. For a discussion of other factors, refer to the “Risk Factors” section in Part II, Item 7 of this Report.

“WFREIC,” the “Company,” “we,” “our,” and “us” refer to 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.

Part I

Item 1. Business.

General

We are a Delaware corporation incorporated on August 29, 1996 and have been operating as a real estate investment trust (REIT) for U.S. federal income tax purposes since our formation. We are an indirect subsidiary of Wells Fargo and the Bank.

Our organizational structure as of December 31, 2017 was:



	Wells Fargo & Company (100% of the common stock of Wells Fargo Bank, National Association, directly and indirectly)

	Wells Fargo Bank, National Association (100% of the common stock of Omniplus Capital Corporation and Wells Fargo Insurance Re., Inc., indirectly)

$275,000,000 Aggregate Liquidation Preference Series A Preferred Stock (100% Public Investors)	Common Stock (64.3% Omniplus Capital Corporation 35.7% Wells Fargo Insurance Re., Inc.)	$667,000 Aggregate Liquidation Preference Series B Preferred Stock (81.9% Omniplus Capital Corporation 18.1% Current or Former Wells Fargo Employees and Other Third-Party Investors)

	Wells Fargo Real Estate Investment Corporation
	Wells Fargo Real Estate Investment Corporation

Our principal business is to acquire, hold and manage domestic mortgage assets and other authorized investments. Although we have the authority to acquire interests in real estate loans and other authorized investments from unaffiliated third parties, as of December 31, 2017, substantially all of our interests in mortgages and other assets have been acquired from the Bank pursuant to loan participation and servicing and assignment agreements. The

Bank originated the loans, purchased them from other financial institutions or acquired them as part of the acquisition of other financial institutions. We may also acquire from time to time real estate loans or other assets from unaffiliated third parties. In addition, we may acquire from time to time mortgage-backed securities and a limited amount of additional non-mortgage related securities from the Bank.

In November 2013, the Company’s then parent, Wachovia Preferred Funding Corp. (WPFC), contributed $7.1 billion of loans in the form of an assignment of its participation interests from the bank. The contribution of assets was an equity transaction between entities under common control; therefore, the assets were recorded at the parent's book value, including allowance for credit losses and unamortized premiums and discounts on loans. The parent also contributed $1.5 billion of cash during 2013. We did not issue additional shares of common stock to the parent in respect of these contributions; accordingly, the contributions were recorded as an increase in additional paid-in capital.

On August 26, 2016, the Company issued and sold 21.2 million shares of common stock to affiliates of the Company for an aggregate purchase price of $20.0 billion. Subsequent to the issuance, the Company used the proceeds, as well as proceeds from loan paydowns and payoffs, to acquire $19.1 billion of real estate 1-4 family first mortgage loans and $1.9 billion of commercial secured by real estate loans (Third Quarter 2016 Loan Acquisitions).

Substantially all of the loans in our portfolio are serviced by the Bank pursuant to the terms of loan participation and servicing and assignment agreements. The Bank has delegated servicing responsibility for certain loans to third parties, which are not affiliated with us or the Bank.

General Description of Mortgage Assets and Other Authorized Investments; Investment Policy

General

We do not have lending operations. Instead, we expect to acquire our loans principally from the Bank. See “Assets in General; Participation Interests and Transfers” in this Report.

Authorized Investments

As a REIT, the Internal Revenue Code of 1986, as amended (the Code), requires us to invest at least 75% of the total value of our assets in real estate assets, which includes residential mortgage loans and commercial mortgage loans, including participation interests in residential or commercial mortgage loans, mortgage-backed securities eligible to be held by REITs, cash, cash equivalents, including receivables and government securities, and other real estate assets. We refer to these types of assets as “REIT Qualified Assets.” The Code also requires that not more than 25% (20% with respect to the Company's taxable years beginning after December 31, 2017) of the value of a REIT’s assets constitute securities issued by taxable REIT subsidiaries and that the value of any one issuer’s securities, other than those securities included in the 75% test, may not exceed 5% of the value of the total assets of the REIT. In addition, under the Code, the REIT may not own more than 10% of the voting securities or more than 10% of the value of the outstanding securities of any one issuer, other than those securities included in the 75% test, the securities of wholly-owned qualified REIT subsidiaries or taxable REIT subsidiaries. We make investments and operate our business in such a manner consistent with the requirements of the Code to qualify as a REIT. However, future economic, market, legal, tax or other considerations may cause our board of directors, subject to approval by a majority of our independent directors, to determine that it is in our best interest and the

best interest of our stockholders to revoke our REIT status. The Code prohibits us from electing REIT status for the four taxable years following the year of such revocation. For the tax year ended December 31, 2017, we expect to be taxed as a REIT.

REITs generally are subject to tax at the maximum corporate rate on income from foreclosure property less deductible expenses directly connected with the production of that income. Income from foreclosure property includes gain from the sale of foreclosure property and income from operating foreclosure property, but income that would be qualifying income for purposes of the 75% gross income test is not treated as income from foreclosure property. Qualifying income for purposes of the 75% gross income test includes, generally, rental income and gain from the sale of property not held as inventory or for sale in the ordinary course of a trade or business.

Additionally, we intend to operate in a manner that will not subject us to regulation under the Investment Company Act of 1940 (the Investment Company Act). Therefore, we do not intend to:


•	invest in the securities of other issuers for the purpose of exercising control over such issuers;


•	underwrite securities of other issuers;


•	actively trade in loans or other investments;


•	offer securities in exchange for property; or


•	make loans to third parties, including our officers, directors or other affiliates.

Investment Company Act of 1940

Section 3(a)(1)(A) of the Investment Company Act defines an investment company as any issuer that is or holds itself out as being engaged primarily, or proposes to engage primarily, in the business of investing, reinvesting or trading in securities, which for these purposes includes loans and participation interests therein of the types owned by us. Section 3(a)(1)(C) of the Investment Company Act defines an investment company as any issuer that is engaged or proposes to engage in the business of investing, reinvesting, owning, holding or trading in securities and owns or proposes to acquire investment securities having a value exceeding 40% of the value of the issuer’s total assets (exclusive of U.S. Government securities and cash items) on an unconsolidated basis.

We believe that we qualify, and intend to conduct our operations so as to continue to qualify, for the exclusion from the definition of an investment company provided by Section 3(c)(5)(C) of the Investment Company Act. Section 3(c)(5)(C) excludes from the definition of an investment company entities that are “primarily engaged in the business of purchasing or otherwise acquiring mortgages and other liens on and interests in real estate.” As reflected in a series of no-action letters, the SEC staff’s position on Section 3(c)(5)(C) generally requires that in order to qualify for this exclusion, an issuer must maintain


•	at least 55% of the value of its assets in “mortgages and other liens on and interests in real estate” (Qualifying Interests),


•	at least an additional 25% of its assets in other permitted real estate-type interests (reduced by any amount the issuer held in excess of the 55% minimum requirement for Qualifying Interests), and


•	no more than 20% of its assets in other than Qualifying Interests and real estate-type assets,

and also that the interests in real estate meet other criteria described in such no-action letters. Mortgage loans that were fully and exclusively secured by real property, as well as participation interests in such loans meeting certain criteria described in such no-action letters, including that the holders of the participation interests have (i) approval rights in connection with any material decisions pertaining to the administration and servicing of the loan and with respect to material modifications to the loan agreements, and (ii) in the event that the loan becomes non-performing, effective control over the remedies relating to the enforcement of the mortgage loan, including ultimate control of the foreclosure process, by having the right to (a) appoint the special servicer to manage the resolution of the loan; (b) advise, direct or approve the actions of the special servicer; (c) terminate the special servicer at any time with or without cause; (d) cure the default so that the mortgage loan is no longer non-performing and (e) purchase any senior participation interest in the underlying mortgage loan at par value plus accrued interest such that the holder would then own the entire mortgage loan, are generally qualifying real estate assets for purposes of the Section 3(c)(5)(C) exclusion. We believe that our participation interests in mortgage loans satisfy these criteria and that we otherwise qualify for the exclusion provided by Section 3(c)(5)(C) of the Investment Company Act.

The provisions of the Investment Company Act therefore may limit the assets that we may acquire. We have established a policy of limiting authorized investments that are not Qualifying Interests or other permitted real estate-type assets to no more than 20% of the value of our total assets to comply with these provisions.

Generally, the Code designation for REIT Qualified Assets is less stringent than the Investment Company Act designation for Qualifying Interests or other permitted real estate-type assets, due to the ability under the Code to treat cash and cash equivalents as REIT Qualified Assets and a lower required ratio of REIT Qualified Assets to total assets.

Because we are not deemed to be an investment company in accordance with the exclusion from the definition of an investment company provided by Section 3(c)(5)(C) of the Investment Company Act, Wells Fargo’s and the Bank’s ownership interests in us are therefore not prohibited by the provisions of Section 619 of the Dodd-Frank Act, the so called “Volcker Rule,” and the rules and regulations jointly promulgated thereunder.

Assets in General; Participation Interests and Transfers

We have acquired, or accepted as capital contributions, participation interests in loans both secured and not secured by real estate along with other assets. We anticipate that we will acquire, or receive as capital contributions, loans or other assets from the Bank pursuant to loan participation and servicing and assignment agreements among the Bank, certain of its subsidiaries and us.

Substantially all of our interests in mortgages and other assets have been acquired from the Bank pursuant to loan participation and servicing and assignment agreements. 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.

In general, the Bank initially transfers participation interests in loans to a subsidiary of the Bank that does not have a direct or indirect ownership interest in us, which then transfers such participation interests to the Company. We may from time to time transfer such participation interests back to such a subsidiary, which may ultimately transfer such interests back to the Bank.

Pursuant to the terms of the relevant participation and servicing and assignment agreements, we generally may not sell, transfer, encumber, assign, pledge or hypothecate our participation interests in loans without the prior written consent of the Bank. As such, the transfers do not qualify for sale accounting; however, the assets continue to be classified as loans in our financial statements because the returns and recoverability of these non-recourse receivables are entirely dependent on the performance of the underlying loans. The Company initially measures the non-recourse receivables at the cash proceeds exchanged which represents the fair value of the transferred loans.

We also have the authority to acquire interests in loans and other assets directly from unaffiliated third parties. In addition, we may acquire from time to time mortgage-backed securities and a limited amount of additional non-mortgage related securities from the Bank.

Consumer Loans

Our consumer loan portfolio consists of real estate 1-4 family first mortgage loans and real estate 1-4 family junior lien mortgage loans. We refer to residential mortgage loans typically made for personal, family or household use and evidenced by a promissory note secured by a mortgage or deed of trust or other similar security instrument creating a first lien on 1-4 family real estate property as “real estate 1-4 family first mortgage loans” and those creating a lien junior to a first lien on 1-4 family real estate property as “real estate 1-4 family junior lien mortgage loans” and collectively as “real estate 1-4 family mortgage loans” or “consumer loans.” Our portfolio of real estate 1-4 family mortgage loans consists of both adjustable and fixed rate mortgages.

Our portfolio of real estate 1-4 family first mortgage loans includes loans each secured by a first lien mortgage on the real estate. The properties underlying real estate 1-4 family first mortgage loans consist of single-family detached units, individual condominium units, 2-4 family dwelling units and townhouses. Substantially all of our portfolio of real estate 1-4 family first lien mortgage loans consists of loans that bear interest at fixed rates.

Our portfolio of real estate 1-4 family junior lien mortgage loans includes loans each secured by a junior lien mortgage that typically is on the borrower’s residence and typically are made for reasons such as home improvements, acquisition of furniture and fixtures, purchases of automobiles and debt consolidation. Generally, junior liens are repaid on an amortization basis. Substantially all of our portfolio of real estate 1-4 family junior lien mortgage loans consists of loans that bear interest at fixed rates.

Commercial Loans

Our commercial loan portfolio consists of commercial properties secured by real estate (CSRE) loans and commercial and industrial (C&I) loans. CSRE loans are loans secured by a mortgage or deed of trust on a multi-family residential or commercial real estate property or real estate

construction loans secured by real property. C&I loans are loans for commercial, financial or industrial purposes, whether secured or unsecured, single-payment or installment.

Our CSRE portfolio consists of both mortgage loans and construction loans, where loans are secured by real estate. As of December 31, 2017, C&I loans were less than 1 percent of total loans. All of the loans in our C&I loan portfolio, as measured by the outstanding principal amount, were unsecured. Unsecured loans are more likely than secured loans to result in a loss upon default.

Our commercial loan portfolio consists of both adjustable and fixed rate loans.

Dividend Policy

We expect to distribute annually an aggregate amount of dividends with respect to our outstanding capital stock equal to approximately 100% of our REIT taxable income for U.S. federal income tax purposes. REIT taxable income means the taxable income of a REIT, which generally is computed in the same fashion as the taxable income of any corporation, except that (a) certain deductions are not available, such as the deduction for dividends received, (b) it may deduct dividends paid (or deemed paid) during the taxable year, (c) net capital gains and losses are excluded, and (d) certain other adjustments are made. Such dividend distributions may in some periods exceed net income determined under generally accepted accounting principles (GAAP) due to differences in income and expense recognition for REIT taxable income determination purposes. In order to remain qualified as a REIT, we are required to distribute annually at least 90% of our REIT taxable income to our stockholders.

Dividends will be authorized and declared at the discretion of our board of directors. Factors that would generally be considered by our board of directors in making this determination are our distributable funds, financial condition and capital needs, the impact of current and pending legislation and regulations, Delaware corporation law, economic conditions, tax considerations and our continued qualification as a REIT. Although there can be no assurance, we currently expect that both our cash available for distribution and our REIT taxable income will be in excess of the amounts needed to pay dividends on all of our outstanding series of preferred stock, even in the event of a significant drop in interest rate levels or increase in allowance for loan losses because:


•	substantially all of our assets are interest-bearing;


•	while from time to time we may incur indebtedness, we will not incur an aggregate amount that exceeds 20% of our stockholders’ equity;


•	we expect that our interest-earning assets will continue to exceed the liquidation preference of our preferred stock; and


•	we anticipate that, in addition to cash flows from operations, additional cash will be available from principal payments on the loans we hold.

Accordingly, we expect that we will, after paying the dividends on all of our preferred stock, pay dividends to holders of shares of our common stock in an amount sufficient to comply with applicable requirements regarding qualification as a REIT.

Under certain circumstances, including any determination that the Bank’s relationship to us results in an

unsafe and unsound banking practice, the Office of the Comptroller of the Currency (the OCC) will have the authority to issue an order that restricts our ability to make dividend payments to our common and preferred stockholders. National banking laws and other banking regulations limit the total dividend payments made by a consolidated banking entity to be the sum of earnings for the current year and prior two years less dividends paid during the same periods. Any dividends paid in excess of this amount can only be made with the approval of the Bank’s regulator. In addition, the payment of dividends would be prohibited under the OCC’s prompt corrective action regulations if the Bank becomes or would become “undercapitalized” for purposes of such regulations. As of December 31, 2017, the Bank was “well-capitalized” under applicable regulatory capital adequacy guidelines. Finally, Wells Fargo and its subsidiaries, including WFREIC, are subject to broad prudential supervision by the Board of Governors of the Federal Reserve System (the Federal Reserve), which may result in a limitation on or the elimination of our ability to pay dividends on our common and preferred stock, including, for example, in the event that the OCC had not otherwise restricted the payment of such dividends as described above and the Federal Reserve determines that such payment would constitute an unsafe and unsound practice.

Conflicts of Interest and Related Management Policies and Programs

General

In administering our loan portfolio and other authorized investments pursuant to the loan participation and servicing and assignment agreements, the Bank has a high degree of autonomy. We have, however, adopted certain practices to guide our administration with respect to the acquisition and disposition of assets, use of leverage, credit risk management, and certain other activities. The loan participation and servicing and assignment agreements may be amended, at the discretion of our board of directors and, in certain circumstances subject to the approval of a majority of our independent directors, from time to time without a vote of our stockholders. A majority of the members of our board of directors are considered independent from us and the Bank.

Asset Acquisition and Disposition Policies

Management determines the timing of loan acquisitions by considering available cash and borrowing capacity on our Bank line of credit in conjunction with requirements to maintain our REIT status. Once the decision is made to acquire loans, management works with the respective business lines within the Bank to identify loans to be acquired. These loans are evaluated against credit criteria approved by our board of directors that consumer and commercial loans must meet to be eligible for us to acquire.

The criteria approved for participation interests in consumer loans include:


•	loans must be performing, meaning they are current;


•	the borrower has made at least 3 payments;


•	the borrower’s Fair Isaac Corporation (FICO) score is above established thresholds;


•	the loans must have loan to value (LTV)/combined loan to value (CLTV) below established thresholds;


•	loans must be unencumbered; and


•	loans must be secured by real property such that they are REIT Qualified Assets.

The criteria approved for participation interests in commercial loans include:


•	loans must be performing, meaning they are current;


•	loans must be designated as Pass under the Bank’s borrower and collateral quality ratings; and


•	loans must be secured by real property such that they are REIT Qualified Assets.

The above criteria may be amended from time to time at the discretion of our board of directors.

In addition, the board of directors has limited our acquisitions so that non-Qualifying Interests and other permitted real estate-type assets for purposes of the exclusion from the definition of an investment company provided by Section 3(c)(5)(C) of the Investment Company Act will be no greater than 20% of the total value of our total assets. We do not have specific policies with respect to the percentage of consumer and commercial loans we hold.

We monitor and administer our asset portfolio by investing the proceeds of our assets in other interest earning assets such that our aggregate pro forma funds from operations (FFO) over any period of four fiscal quarters will equal or exceed 150% of the amount that would be required to pay full annual dividends on our Series A and Series B preferred stock, as well as any parity stock, except as may be necessary to maintain our status as a REIT.

We may from time to time acquire whole loans or participation interests in loans directly from unaffiliated third parties. It is our intention that any whole loans or participation interests acquired directly from unaffiliated third parties will meet the same general criteria as the loans or participation interests we acquire from the Bank.

In the past, we have acquired or accepted as capital contributions whole loans and participation interests in loans both secured and not secured by real property along with other assets. We anticipate that we will acquire, or receive as capital contributions, interests in additional real estate secured loans from the Bank. We may use any proceeds received in connection with the repayment or disposition of loans in our portfolio to acquire additional loans. Although we are not precluded from acquiring additional types of whole loans, loan participation interests or other assets, we anticipate that additional loans acquired by us will be of the types described above under the heading “General Description of Mortgage Assets and Other Authorized Investments; Investment Policy.”

We may from time to time acquire a limited amount of other authorized investments, including mortgage-backed securities representing interests in or obligations backed by pools of mortgage loans that are secured by real estate 1-4 family mortgage loans or commercial real estate properties located throughout the U.S. We do not intend to acquire any interest-only or principal-only mortgage-backed securities. As of December 31, 2017, we did not hold any mortgage-backed securities.

We do not have a direct contractual relationship with borrowers under the loan participation and servicing and assignment agreements. As the holder of participation interests in loans, substantially all of which currently are serviced by the Bank, the Company is dependent on the

servicing and efforts of the Bank. See “Servicing” in this Report.

Credit Risk Management Policies

For a description of our credit risk management policies, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Risk Management” in this Report.

Conflict of Interest Policies

Because of the nature of our relationship with the Bank and its affiliates, it is likely that conflicts of interest will arise with respect to certain transactions, including, without limitation, our acquisition of loans from, or disposition of loans to, the Bank, foreclosure on defaulted loans and the modification of loan participation and servicing and assignment agreements. It is our policy that the terms of any financial transactions with the Bank will be consistent with those available from third parties in the lending industry.

Conflicts of interest among us and the Bank or its affiliates may also arise in connection with making decisions that bear upon the credit arrangements that the Bank or its affiliates may have with a borrower under a loan. Conflicts also could arise in connection with actions taken by us or the Bank or its affiliates. In addition, conflicts could arise between the Bank or its affiliates and us in connection with modifications to consumer loans, including under modifications made pursuant to the Bank’s proprietary programs.

It is our intention that any agreements and transactions between us and the Bank or its affiliates, including, without limitation, any loan participation and servicing and assignment agreements, be fair to all parties and consistent with market terms for such types of transactions. Our board of directors consists of mostly independent directors, and the requirement in our amended and restated certificate of incorporation that certain of our actions be approved by a majority of our independent directors is intended to ensure fair dealings among us and the Bank or its affiliates. There can be no assurance, however, that any such agreement or transaction will not differ from terms that could have been obtained from unaffiliated third parties.

There are no provisions in our amended and restated certificate of incorporation limiting any of our officers, directors, stockholders, or affiliates from having any direct or indirect pecuniary interest in any asset to be acquired or disposed of by us or in any transaction in which we have an interest or from engaging in acquiring, holding, and managing our assets or from engaging for their own account in business activities of the type conducted by us. It is expected that the Bank will have direct interests in transactions with us, including, without limitation, the sale of assets to us; however, except as borrowers under consumer loans, none of our officers or directors will have any interests in such mortgage assets.

Other Policies

We may, under certain circumstances, purchase shares of our capital stock in the open market or otherwise. We have no present intention of repurchasing any of our shares of capital stock, and any such action would be taken only in

conformity with applicable federal and state laws and regulations and the requirements for qualifying as a REIT.

Servicing

Substantially all the loans in our portfolio currently are serviced by the Bank pursuant to the terms of loan participation and servicing and assignment agreements. The Bank has delegated servicing responsibility for certain consumer loans to third parties that are not affiliated with us or the Bank or its affiliates.

We pay the Bank monthly loan servicing fees for its services under the terms of the loan participation and servicing and assignment agreements. The amount and terms of the fee are determined by mutual agreement of the Bank and us from time to time during the terms of the loan participation and servicing and assignment agreements.

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. See Note 6 (Transactions with Related Parties) to Financial Statements in this Report for more details.

The loan participation and servicing and assignment agreements require the Bank to service the loans in our portfolio in a manner substantially the same as for similar work performed by the Bank for transactions on its own behalf. The Bank collects and remits principal and interest payments, maintains perfected collateral positions, and submits and pursues insurance claims. The Bank also provides accounting and reporting services required by us for our participation interests and loans. We also may direct the Bank to dispose of any loans that are classified as nonperforming, placed in a nonperforming status or renegotiated due to the financial deterioration of the borrower. The Bank is required to pay all expenses related to the performance of its duties under the loan participation and servicing and assignment agreements, including any payment to its affiliates or third parties for servicing the loans.

In accordance with the terms of the loan participation and servicing and assignment agreements in place, we have the authority to decide whether to foreclose on collateral that secures a loan in the event of a default as well as certain other rights. Upon sale or other disposition of foreclosure property, the Bank will remit to us the proceeds less the cost of holding and selling the foreclosure property. In the event it is determined that it would be uneconomical to foreclose on the related property, the entire outstanding principal balance of the real estate 1-4 family mortgage loan may be charged off. In addition, we may separately agree with the Bank to sell a defaulted loan back to the Bank at its estimated fair value.

We anticipate that the Bank will continue to act as servicer of any additional loans that we acquire from the Bank. We anticipate that any such servicing arrangement that we enter into in the future with the Bank will contain fees and other terms that most likely will differ from, but be substantially equivalent to, those that would be contained in servicing arrangements entered into with unaffiliated third parties. To the extent we acquire loans or participation interests from unaffiliated third parties, we anticipate that such loans or participation interests may be serviced by entities other than the Bank.

It is our policy that any servicing arrangements with unaffiliated third parties will be consistent with standard industry practices.

Pledge of Loans on Behalf of the Bank

The Bank accesses secured borrowing facilities through the Federal Home Loan Banks and through the discount window of the Federal Reserve Banks. The Bank is currently a member of the Federal Home Loan Bank of Des Moines and the Federal Reserve Bank of San Francisco. Federal Home Loan Banks are cooperatives that lending institutions use to finance housing and economic development in local communities. Federal Home Loan Banks make loans, or advances, to their members on the security of mortgages and other eligible collateral pledged by the borrowing member. The discount window of the Federal Reserve Banks generally provides access to short-term, usually overnight, borrowing.

The certificate of designation for the Series A preferred stock limits our ability to pledge 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; provided that, after giving effect to any and all such pledges of assets, the unpaid principal balance of our total unpledged, performing assets (which, for the avoidance of doubt, shall not be pledged in respect of any other indebtedness we incur or otherwise) will equal or exceed three times the sum of the aggregate liquidation preference of our Series A and Series B preferred stock then outstanding plus any other parity stock then outstanding. Performing assets are assets other than nonaccrual loans and foreclosed assets.

A Federal Home Loan Bank has priority over other creditors with respect to assets pledged to it. In the event the Bank defaults on an advance from a Federal Home Loan Bank, the Federal Home Loan Bank will own the pledged assets, and we will lose these assets. In the event the Bank defaults on a discount window advance, the Federal Reserve Bank may take possession of the pledged assets, and we may lose the assets. Although the Bank is obligated to reimburse us for these losses, it is likely that the Bank will be in receivership when such a default occurs. In that case, these losses would be borne by us, which could affect our financial condition, results of operations and cash flows.

In exchange for the pledge of our loan assets, the Bank pays us a fee that is consistent with market terms. Such fee may be renegotiated by us and the Bank from time to time. Any material amendment to the terms of agreements related to the pledge of our loan assets on behalf of the Bank, including with respect to fees, will require the approval of a majority of our independent directors.

Competition

In order to qualify as a REIT under the Code, we can only be a passive investor in real estate loans and certain other assets. Thus, we do not originate loans. We anticipate that we will continue to hold interests in mortgage and other loans in addition to those in the current portfolio and that substantially all of these loans will be obtained from the Bank. The Bank competes with mortgage conduit programs, investment banking firms, savings and loan associations, banks, savings banks, finance companies, mortgage bankers or insurance companies in acquiring and originating loans. To the extent we acquire additional loans or participation interests directly from unaffiliated third parties in the future, we will face competition similar to that which the Bank faces in acquiring such loans or participation interests.

Regulatory Considerations

Economic, market and political conditions during the past few years have led to a significant amount of legislation and regulation in the U.S. and abroad affecting the financial services industry, as well as heightened expectations and scrutiny of financial services companies from banking regulators. Further legislative changes and additional regulations may change our operating environment in substantial and unpredictable ways. We cannot predict whether future legislative proposals will be enacted and, if enacted, the effect that they, or any implementing regulations, would have on our business, results of operations or financial condition. The same uncertainty exists with respect to regulations authorized or required under the Dodd-Frank Act that have not yet been proposed or finalized. Any such new legislation or regulation could be the basis of a regulatory event that would permit us to redeem our Series A preferred stock.

As a REIT, we are subject to regulation under the Code. The Code requires us to invest at least 75% of the total value of our assets in REIT Qualified Assets. In addition, we intend to operate in a manner that will not subject us to regulation under the Investment Company Act. See “– General Description of Mortgage Assets and Other Authorized Investments; Investment Policy” in this Report for more detailed descriptions of the requirements of the Code applicable to us and the requirements we have to follow in order not to be subject to regulation under the Investment Company Act. On December 22, 2017, the Tax Cuts & Jobs Act was enacted resulting in significant changes to the Code, however WFREIC will not be materially impacted as the REIT provisions of the Code were not changed. Any new legislation or new regulations, administrative interpretations or court decisions related to the Code or the Investment Company Act could be the basis of a tax event or an investment company event that would permit us to redeem our Series A preferred stock.

Under certain circumstances, the OCC and the Federal Reserve have the authority to restrict our ability to make dividend payments to our stockholders. See “– Dividend Policy” in this Report for a more detailed description of such restrictions.

Employees

We have two current executive officers who are also executive officers of Wells Fargo. Our non-executive officers are also officers or employees of Wells Fargo and/or certain of its affiliates, including the Bank. We do not anticipate that we will require any additional employees because employees of the Bank are servicing the loans under the participation and servicing and assignment agreements. We maintain corporate records and audited financial statements that are separate from those of the Bank. Except as borrowers under real estate 1-4 family mortgage loans, none of our officers, employees or directors will have any direct or indirect pecuniary interest in any mortgage asset to be acquired or disposed of by us or in any transaction in which we have an interest or will engage in acquiring, holding and managing mortgage assets.

Executive Offices

Our principal executive offices are located at 90 South 7th Street, Minneapolis, Minnesota 55402 (telephone number (855) 825-1437).

Available Information

The Company does not maintain its own website. Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are accessible without charge on the SEC’s website, www.sec.gov and on Wells Fargo’s website, www.wellsfargo.com/invest_relations/filings.


Item 1A.	Risk Factors.

Information in response to this item can be found in Part II, Item 7 “Management's Discussion and Analysis of Financial Condition and Results of Operations – Risk Factors” in this Report, which information is incorporated by reference into this item.

Item 1B. Unresolved Staff Comments.

None.

Item 2. Properties.

The Company does not own any properties and our primary executive offices are used primarily by affiliates of Wells Fargo. Because we do not have any of our own employees who are not also employees of Wells Fargo or the Bank, we do not need office space for such employees. All officers of the Company are also officers of Wells Fargo and/or certain of its affiliates, including the Bank, and perform their services from office space owned or leased by Wells Fargo or the Bank, as applicable.

Item 3. Legal Proceedings.

We are not currently involved in nor, to our knowledge, currently threatened with any material litigation. From time to time we may become involved in routine litigation arising in the ordinary course of business. We do not believe that the eventual outcome of any such routine litigation will, in the aggregate, have a material adverse effect on our financial position or results of operations. However, in the event of unexpected future developments, it is possible that the ultimate resolution of those matters, if unfavorable, may be material to our results of operations for any particular period.


Item 4.	Mine Safety Disclosures.

Not applicable.

Part II


Item 5.	Market For Registrant’s Common Equity, Related Stockholder Matters And Issuer Purchases Of Equity Securities.

General

The Company’s common stock is owned by two subsidiaries of the Bank. The Company’s Series B preferred stock is owned by a subsidiary of the Bank as well as current and former employees of Wells Fargo and other third party investors. The common stock and Series B preferred stock are not listed on any securities exchange. The Company's Series A preferred stock is listed on the NYSE.

Dividends

For the years ended December 31, 2017 and December 31, 2016, the Company declared and paid cash dividends of $35.38 and $36.52 per share on its common stock, respectively. In addition, for the years ended December 31, 2017 and December 31, 2016, the Company declared and paid cash dividends of $1.59 per share on its Series A preferred stock and $85.00 per share on its Series B preferred stock. Please see Part I, Item 1 “Business – Dividend Policy” in this Report for a description of our policies regarding dividends.

Equity Compensation Plans

The Company does not have any equity compensation plans. Our two current executive officers are executive officers of Wells Fargo and receive certain equity-based compensation from Wells Fargo. See Part III, Item 11 “Executive Compensation” in this Report for more information.

Recent Sales of Unregistered Securities

Not applicable.

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

Not applicable.


Item 6.	Selected Financial Data.

As reflected in the following table, selected financial data is derived from our audited financial statements. This data should be read in conjunction with the financial statements, related notes and other financial information presented elsewhere in this Report.



			Year ended December 31,
($ in thousands, except per share data)	2017		2016	2015		2014	2013 (1)	2012
Income statement data
Net interest income	$	1,292,809	867,088	674,674		695,028	297,425	203,422
Noninterest income (2)	55,214		30,112	4,905		653	225	491
Revenue	1,348,023		897,200	679,579		695,681	297,650	203,913
Provision (reversal of provision) for credit losses	13,473		29,855	(26,330	)	6,665	18,235	45,376
Noninterest expense	115,883		83,530	59,931		51,052	21,985	15,445
Net income	1,218,667		783,815	645,978		637,964	257,430	143,092
Diluted earnings per common share (3)	35.27		37.75	48.71		49.37	19.95	11.09
Dividends declared per common share (3)	$	35.38	36.52	44.34		46.74	24.81	14.42
				December 31,
	2017		2016 (4)	2015		2014	2013 (1)	2012
Balance sheet data
Loans	$	35,865,176	31,309,993	13,256,180		12,949,277	13,120,341	4,112,498
Allowance for loan losses	129,360		123,877	120,866		184,437	243,752	65,340
Total assets	35,945,599		32,398,411	13,244,868		12,859,405	12,966,194	4,114,993
Total liabilities	3,555,336		4,227	831,961		502,888	909,563	452,371
Total stockholders’ equity	$	32,390,263	32,394,184	12,412,907		12,356,517	12,056,631	3,662,622


(1)	Includes $7.0 billion asset contribution from WPFC in November 2013.


(2)	Includes $55.3 million, $32.3 million and $4.4 million of pledge fees in 2017, 2016 and 2015, respectively, see Note 6 (Transactions With Related Parties) in this Report for additional details.


(3)	All common share and per share disclosures reflect the 20,000-for-one stock split of the common shares effected in the form of a stock dividend of 19,999 common shares issued for each common share outstanding, paid on June 1, 2015.


(4)	Balances at December 31, 2016, reflect $21.0 billion of loans acquired in the Third Quarter 2016 Loan Acquisitions.


Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Financial Review



Summary Financial Data
($ in thousands, except per share data)	2017			2016	% Change
For the year
Net income	$	1,218,667		783,815	55	%
Net income applicable to common stock	1,201,079			766,227	57
Diluted earnings per common share	35.27			37.75	(7	)
Profitability ratios
Return on average assets	3.63		%	3.72	(2	)
Return on average stockholders’ equity	3.76			4.03	(7	)
Average stockholders’ equity to assets	96.72			92.30	5
Common dividend payout ratio (1)	100.31			96.74	4
Dividend coverage ratio (2)	6,929			4,457	55
Total revenue	$	1,348,023		897,200	50
Average loans	32,264,639			19,762,361	63
Average assets	33,533,580			21,087,962	59
Net interest margin	3.88		%	4.15	(7	)
Net loan charge-offs	$	2,540		20,522	(88	)
As a percentage of average total loans	0.01		%	0.10	(90	)
At year end
Loans	$	35,865,176		31,309,993	15
Allowance for loan losses	129,360			123,877	4
As a percentage of total loans	0.36		%	0.40	(10	)
Total assets	$	35,945,599		32,398,411	11
Total stockholders’ equity	32,390,263			32,394,184	—
Total nonaccrual loans and foreclosed assets	199,767			219,028	(9	)
As a percentage of total loans	0.56		%	0.70	(20	)
Loans 90 days or more past due and still accruing (3)	$	12,905		7,507	72


(1)	Dividend 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 the Bank 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.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the selected financial data set forth in Part II, Item 6 and our audited financial statements and related notes included in Part IV, Item 15 of this Report.

Overview

Our principal business is to acquire, hold and manage 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 December 31, 2017, we had $35.9 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, 2017, we complied with the relevant provisions of 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 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 beginning in 2018 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 enacted December 22, 2017. 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.

Third Quarter 2016 Common Stock Issuance and Related Loan Acquisitions

On August 26, 2016, the Company issued and sold, to affiliates of the Company, 21.2 million shares of common stock, par value $0.01 per share, for an aggregate purchase price of $20.0 billion. Following the issuance, indirect wholly-owned subsidiaries of the Bank continue to own 100% of the Company’s common stock.

We used proceeds from the common stock issuance, as well as proceeds from loan paydowns and payoffs, to acquire $19.1 billion of real estate 1-4 family first mortgage loans and

$1.9 billion of Commercial Secured by Real Estate (CSRE) loans in third quarter 2016 (Third Quarter 2016 Loan Acquisitions).

Financial Performance

We earned net income of $1.2 billion in 2017, or $35.27 diluted earnings per common share, compared with $783.8 million in 2016, or $37.75 diluted earnings per common share, and $646.0 million, or $48.71 diluted earnings per common share, in 2015. The increase in 2017 and 2016 was predominantly attributable to higher interest income resulting from a larger average interest-earning asset base due to the Third Quarter 2016 Loan Acquisitions, partially offset by a decrease in yield.

Loans

Total loans were $35.9 billion at December 31, 2017, compared with $31.3 billion at December 31, 2016. Net loans represented 99% of assets at December 31, 2017, and 96% at December 31, 2016.

Credit quality, as measured by net charge-off rates, nonaccruals and delinquencies, reflected the continued improvement of the housing market. Net charge-offs were $2.5 million in 2017 (0.01% of average loans) compared with $20.5 million in 2016 (0.10% of average loans) and $32.4 million (0.25% of average loans) in 2015. Nonaccrual loans were $197.4 million at December 31, 2017, compared with $216.5 million at December 31, 2016. Loans 90 days or more past due and still accruing were $12.9 million at December 31, 2017, compared with $7.5 million at December 31, 2016. Delinquencies remain a small percentage of our loan balances.

Our provision for credit losses was $13.5 million in 2017, compared with provision for credit losses of $29.9 million in 2016 and a reversal of provision for credit losses of $26.3 million in 2015. The lower level of provision in 2017 compared to a year ago reflected strong performance in our residential real estate portfolio primarily as a result of continued improvement in the housing market. The higher level of provision in 2016 reflected loan growth as well as moderation in the rate of delinquency improvement. 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. See the “Risk Management – Credit Risk Management” section in this Report for more information.

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. In exchange for the pledge of our loan assets, the Bank pays us a fee that is consistent with market terms. At December 31, 2017, the total carrying amount of pledged loans was $24.3 billion, compared with $20.2 billion at December 31, 2016. See Note 6 (Transactions With Related Parties) to Financial Statements in this Report for more details.

Capital Distributions

Dividends declared on our Series A preferred stock totaled $17.5 million each year in 2017, 2016 and 2015. Dividends

declared on our Series B preferred stock totaled $57 thousand each year in 2017, 2016 and 2015.

Dividends declared to holders of our common stock totaled $1.2 billion, $785.0 million and $572.0 million in 2017, 2016 and 2015, respectively. The increase in dividends declared to the

holders of our common stock in 2017 and 2016 was attributable to increased REIT taxable income for federal income tax purposes before dividends paid deduction.

Earnings Performance

Net Income

We earned net income of $1.2 billion, $783.8 million and $646.0 million in 2017, 2016 and 2015, respectively. The increase in 2017 and 2016 was predominantly attributable to higher interest income resulting from a larger average interest-earning asset base due to the Third Quarter 2016 Loan Acquisitions, partially offset by a decrease in yield.

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 income was $1.3 billion in 2017, compared with $867.1 million and $674.7 million in 2016 and 2015, respectively. The increase in 2017 and 2016 was attributable to a larger interest-earning asset base due to the Third Quarter 2016 Loan Acquisitions, partially offset by a decrease in yield.

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 margin was 3.88% in 2017 compared with 4.15% in 2016 and 5.21% in 2015. The decrease in net interest margin in 2017 was predominantly due to the reinvestment of higher yielding loan paydowns and payoffs into lower yielding loans. The decrease in net interest margin in 2016 was attributable to the investment of proceeds from the common stock issuance in third quarter 2016 and proceeds from loan paydowns and payoffs into lower yielding loans, as well as dilution from having higher average interest-bearing deposits. Interest income included net accretion of adjustments on loans of $13.0 million in 2017 compared with $37.4 million in 2016 and $83.0 million in 2015. The decrease in net accretion of adjustments on loans in 2017 compared with 2016 was a result of acquiring high quality loans with a fair value near par. The decrease in 2016 compared with 2015 was attributable to loan acquisitions resulting in a net unamortized premium in 2016. Loan paydowns and payoffs represented 13.8% of average loan balances during 2017 compared with 24.2% and 23.3% during 2016 and 2015, respectively. The lower paydown and payoff rates in 2017 were generally attributable to higher mortgage rates compared with 2016 and 2015.

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. Interest expense related to borrowings on the line of credit was $5.1 million in 2017, compared with $2.7 million in 2016 and $1.2 million in 2015. Average borrowings were $342.8 million for 2017, compared with $524.0 million for 2016 and $318.2 million for 2015. The weighted average interest rate for 2017 was 1.47% compared with 0.52% in 2016 and 0.39% in 2015. The increase in weighted average interest rate in 2017 compared with 2016 and 2015 was attributable to an increase in the average federal funds rate. Effective October 2017, the rate of interest on the line of credit was changed from the average federal funds rate plus 12.5 basis points (0.125%) to the three-month London Interbank Offered Rate (LIBOR) plus 4.4 basis points (0.044%).

Table 1 presents the components of interest-earning assets and interest-bearing liabilities and related average yields to provide an analysis of changes that influenced net interest income.

Table 2 allocates the changes in net interest income on a taxable-equivalent basis to changes in either average balances or average rates for both interest-earning assets and interest-bearing liabilities. Because of the numerous simultaneous volume and rate changes during any period, it is not possible to precisely allocate such changes between volume and rate. For this table, changes that are not solely due to either volume or rate are allocated to these categories on a pro-rata basis based on the absolute value of the change due to average volume and average rate.

Table 1: Interest Income



	Year ended December 31,
					2017						2016
(in thousands)	Average balance		Interest income/expense		Yields/ rates		Average balance		Interest income/expense		Yields/ rates
Earning assets
Commercial loans	$	3,633,640	114,817		3.16	%	$	3,064,190	79,737		2.60	%
Real estate 1-4 family mortgage loans	28,630,999		1,173,599		4.10		16,698,171		785,490		4.70
Interest-bearing deposits and other interest-earning assets	1,057,479		9,443		0.89		1,124,991		4,595		0.41
Total interest-earning assets	$	33,322,118	1,297,859		3.89		$	20,887,352	869,822		4.16
Funding sources
Line of credit with Bank	$	342,767	5,050		1.47		$	523,991	2,734		0.52
Total interest-bearing liabilities	$	342,767	5,050		1.47		$	523,991	2,734		0.52
Net interest margin and net interest income			$	1,292,809	3.88	%			$	867,088	4.15	%



	Year ended December 31,
					2015						2014
(in thousands)	Average balance		Interest income/expense		Yields/ rates		Average balance		Interest income/expense		Yields/ rates
Earning assets
Commercial loans	$	2,939,903	70,403		2.39	%	$	2,723,579	67,760		2.49	%
Real estate 1-4 family mortgage loans	9,897,196		605,198		6.11		9,950,010		628,608		6.32
Interest-bearing deposits and other interest-earning assets	119,881		304		0.25		22,677		57		0.25
Total interest-earning assets	$	12,956,980	675,905		5.22		$	12,696,266	696,425		5.49
Funding sources
Line of credit with Bank	$	318,150	1,231		0.39		$	367,479	1,397		0.38
Total interest-bearing liabilities	$	318,150	1,231		0.39		$	367,479	1,397		0.38
Net interest margin and net interest income			$	674,674	5.21	%			$	695,028	5.47	%

							Year ended December 31,
											2013
(in thousands)							Average balance		Interest income/expense		Yields/ rates
Earning assets
Commercial loans							$	581,607	15,193		2.61	%
Real estate 1-4 family mortgage loans							5,017,931		283,205		5.64
Interest-bearing deposits and other interest-earning assets							93,697		237		0.25
Total interest-earning assets							$	5,693,235	298,635		5.25
Funding sources
Line of credit with Bank							$	318,215	1,210		0.38
Total interest-bearing liabilities							$	318,215	1,210		0.38
Net interest margin and net interest income									$	297,425	5.22	%

Table 2: Analysis of Changes in Interest Income



	Year ended December 31,
	2017 over 2016						2016 over 2015
	Interest income/ expense variance		Variance attributable to				Interest income/ expense variance	Variance attributable to
(in thousands)	Interest income/ expense variance		Rate		Volume		Interest income/ expense variance	Rate		Volume
Commercial loans	$	35,080	18,787		16,293		9,334	6,229		3,105
Real estate 1-4 family mortgage loans	388,109		(112,035	)	500,144		180,292	(187,603	)	367,895
Interest-bearing deposits and other interest-earning assets	4,848		5,140		(292	)	4,291	964		3,327
Total interest-earning assets	$	428,037	(88,108	)	516,145		193,917	(180,410	)	374,327
Line of credit with Bank	$	2,316	3,537		(1,221	)	1,503	568		935
Total interest-bearing liabilities	$	2,316	3,537		(1,221	)	1,503	568		935

Provision for Credit Losses

The provision for credit losses was $13.5 million in 2017, compared with provision for credit losses of $29.9 million in 2016 and reversal of provision for credit losses of $26.3 million in 2015. The lower level of provision in 2017 reflected strong performance in our residential real estate portfolio primarily as a result of continued improvement in the housing market. The higher level of provision in 2016 compared with 2015 reflected loan growth as well as moderation in the rate of delinquency improvement. Please refer to the “Balance Sheet Analysis” and “Risk Management-Credit Risk Management-Allowance for Credit Losses” sections in this Report for additional information on the allowance for credit losses.

Noninterest Income

Noninterest income in 2017 was $55.2 million, compared with $30.1 million in 2016 and $4.9 million in 2015. In 2017 and 2016, noninterest income predominantly consisted of pledge fees.

We may pledge our loans in 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. In exchange for the pledge of our loan assets, the Bank will pay us a fee that is consistent with market terms. We earned $55.3 million in pledge fees during 2017, compared with $32.3 million and $4.4 million in 2016 and 2015, respectively. The increase in both periods was attributable to a higher average pledged loan balance as well as a higher average pledge fee rate. See Note 6 (Transactions With Related Parties) to Financial Statements in this Report for more information.

Other income in 2017 was a net loss of $119 thousand, compared with a net loss of $2.2 million in 2016 and income of $542 thousand in 2015. The loss in 2017 and 2016 was due to $844 thousand and $2.7 million of losses on sales of loans to the Bank, respectively. There were no gains or losses on sales of loans to the Bank in 2015.

Noninterest Expense

Noninterest expense in 2017 was $115.9 million, compared with $83.5 million in 2016 and $59.9 million in 2015. 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 were $79.5 million in 2017, compared with $50.8 million and $35.7 million in 2016 and 2015, respectively. The increase in 2017 and 2016 was attributable to a higher average loan balance, due to the Third Quarter 2016 Loan Acquisitions.

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 $25.7 million in 2017, compared with $18.7 million in 2016 and $11.2 million in 2015. The increase in management fees in 2017 and 2016 reflected an increase in expense allocations based on our higher total average assets due to the common stock issuance in third quarter 2016.

Foreclosed assets expense was $9.6 million in 2017, $12.9 million in 2016, and $11.8 million in 2015. The decrease in 2017 was due to lower costs of maintaining our foreclosed assets, including tax, legal and insurance expenses. The increase in 2016 was due to higher costs of maintaining our foreclosed assets, including tax, legal and insurance expenses. Substantially all of our foreclosed assets consist of residential 1-4 family real estate assets.

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 $35.9 billion at December 31, 2017, and $32.4 billion at December 31, 2016.

Loans

Total loans were $35.9 billion at December 31, 2017, and $31.3 billion at December 31, 2016. In 2017, we acquired $9.2 billion of consumer loans from the Bank at their estimated fair value. In 2016, we acquired $21.4 billion of consumer loans and $1.9 billion of commercial loans from the Bank at their estimated fair value. At December 31, 2017 and 2016, consumer loans represented 91% and 87% of loans, respectively, and commercial loans represented the balance of our loan portfolio.

Allowance for Loan Losses

The allowance for loan losses increased $5.5 million to $129.4 million at December 31, 2017, from $123.9 million at December 31, 2016, due to loan growth through acquisition, partially offset by continued improvement in the housing environment.

At December 31, 2017, the allowance for loan losses included $102.6 million for consumer loans and $26.8 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 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 draw upon our line of credit to finance loan acquisitions. Effective October 2017, our line of credit was increased from $2.2 billion to $5.0 billion. At December 31, 2017 we had $3.6 billion outstanding. There was no outstanding balance at December 31, 2016.

Retained Earnings (Deficit)

We expect to distribute annually 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, 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. The remaining purchase accounting adjustments at December 31, 2017 are not expected to cause a significant variance between GAAP net income and REIT taxable income in future years.

The following table summarizes differences between taxable income before dividends paid deduction reported on our income tax returns and net income as reported in our statement of income.

Table 3: Taxable income before dividends paid deduction



	December 31,
(in thousands)	2017		2016		2015
Net income	$	1,218,667	783,815		645,978
Tax adjustments:
Purchase accounting	1,962		1,795		5,954
Allowance for credit losses	5,633		3,491		(63,636	)
Other	794		(60	)	(436	)
REIT taxable income (1)	$	1,227,056	789,041		587,860
Dividends declared	$	1,222,588	802,588		589,588


(1)	2017 REIT taxable income is an estimate.

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.

Allowance for Credit Losses Approval Governance Committee

As a consolidated subsidiary of Wells Fargo, our loans are subject to the same analysis of appropriateness of allowance for credit losses (ACL) as applied to loans maintained in Wells Fargo's other subsidiaries, including the Bank. The Company’s Allowance for Credit Losses Approval Governance Committee (the Committee) reviews the process and supporting analytics for the allowance for loan losses and the allowance for unfunded credit commitments to help ensure the ACL is maintained at an appropriate level for the Company in conformity with GAAP and regulatory guidelines. The Committee meets its responsibilities principally through its review of the process and supporting analytics employed to establish the allowance. The Committee participates in scheduled meetings during which information is presented, as appropriate, on the following items relating to the ACL:


•	review of the current loss estimates, including the factors and methodologies employed in estimating such amounts;


•	recent reviews, audits, and exams of ACL adequacy, effectiveness, related internal controls and governance process; and


•	recent accounting, regulatory and industry developments affecting the allowance process.

Wells Fargo’s Risk Culture and Risk Framework

As a consolidated subsidiary of Wells Fargo, we are subject to Wells Fargo’s enterprise risk framework, which outlines the enterprise-wide approach to risk management and oversight, and describes the structures and practices employed to manage current and emerging risks inherent to the enterprise. The risk framework consists of three lines of defense – (1) Wells Fargo’s lines of business and certain other enterprise functions, (2) Corporate Risk, Wells Fargo’s primary second-line of defense led by its Chief Risk Officer who currently is our Chief Executive Officer and a director, and (3) Wells Fargo Audit Services, Wells Fargo’s internal audit function which regularly reports to the Company’s Audit Committee.

Key elements of the Wells Fargo risk framework include:


•	Cultivating a strong culture, with key risk management components emphasizing each team member’s ownership of risk and Wells Fargo’s bias for conservatism.


•	Defining and communicating across Wells Fargo an enterprise-wide statement of risk appetite (or, risk tolerance) which serves to guide business and risk leaders as they manage risk on a daily basis.


•	Maintaining a risk management governance structure, including escalation protocols and a committee structure, that enables the comprehensive oversight of the risk program and the effective and efficient escalation of risk issues to the appropriate level of the enterprise for information and decision-making.


•	Maintaining an enterprise risk inventory and promoting a standardized and systematic process to identify risks across the enterprise to guide business decisions and capital planning efforts.


•	Designing risk frameworks, programs, policies, procedures, controls, processes, and practices that are effective and aligned, and facilitate the active and timely management of current and emerging risks across the enterprise.


•	Structuring an effective and independent Corporate Risk function.


•	Maintaining an independent internal audit function.

Wells Fargo has established several management-level governance committees to support its leaders in carrying out their risk management responsibilities. The risk governance committee structure is designed so that significant risk issues are considered and, if necessary, decided upon at the appropriate level of the enterprise and by the appropriate mix of executives. While these committees may not separately consider issues at the Company level, the assets of the Company are inherently subject to the oversight of these committees because its assets are consolidated on the Wells Fargo balance sheet.

The Enterprise Risk Management Committee, chaired by the Wells Fargo Chief Risk Officer, oversees the management of all risk types across the enterprise.

A number of management-level governance committees that are responsible for issues specific to an individual risk type report into the Enterprise Risk Management Committee. In addition, the management of specific risk types is supported by additional management-level governance committees.

Further discussion and specific examples of reporting, measurement and monitoring techniques we use in each risk area are included within the subsequent sub-sections of the Risk Management section.

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 4 represents loans by segment and class of financing receivable and the weighted average maturity for those loans calculated using contractual maturity dates.

Table 4: 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)	Dec 31, 2017		Dec 31, 2016	Dec 31, 2017	Dec 31, 2016
Total commercial	$	3,325,939	3,984,881	3.2	3.4
Consumer:
Real estate 1-4 family first mortgage	31,683,651		26,236,047	25.1	25.2
Real estate 1-4 family junior lien mortgage	855,586		1,089,065	15.4	15.8
Total consumer	32,539,237		27,325,112	24.8	24.8
Total loans	$	35,865,176	31,309,993	22.8	22.1

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.

LOAN PORTFOLIO BY GEOGRAPHY Table 5 is a summary of the geographical distribution of our loan portfolio for the top five states by loans outstanding.

Table 5: Loan Portfolio by Geography



	December 31, 2017
(in thousands)	Commercial		Real estate 1-4 family first mortgage	Real estate 1-4 family junior lien mortgage	Total	% of total loans
California	$	1,515,690	8,852,513	9,759	10,377,962	29	%
New York	14,542		3,269,125	51,751	3,335,418	9
Washington	147,458		2,149,416	1,125	2,297,999	6
Virginia	70,937		1,819,634	88,017	1,978,588	6
Texas	102,349		1,289,634	12,546	1,404,529	4
All other states	1,474,963		14,303,329	692,388	16,470,680	46
Total loans	$	3,325,939	31,683,651	855,586	35,865,176	100	%

COMMERCIAL AND INDUSTRIAL LOANS (C&I) C&I loans were less than 1 percent of total loans at December 31, 2017. We believe the C&I loan 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. All of the loans in our C&I portfolio are unsecured at December 31, 2017.

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 6 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. In future periods, we expect to consider acquisitions of CSRE loans in addition to other REIT qualifying assets such as real estate 1-4 family mortgage loans.

Table 6: CSRE Loans by State and Property Type



	December 31, 2017
(in thousands)	Total CSRE loans		% of total CSRE loans
By state:
California	$	1,515,690	46	%
Florida	307,168		9
Utah	198,649		6
Washington	147,458		4
Oregon	145,880		4
All other states	990,568		31
Total loans	$	3,305,413	100	%
By property type:
Office buildings	$	824,034	25	%
Shopping centers	626,836		19
5+ multifamily residences	519,699		16
Warehouses	449,124		14
Retail establishments (restaurants, stores)	381,579		12
Mini-storage	139,341		4
Motels/hotels	115,022		3
Commercial/industrial (non-residential)	95,831		3
Manufacturing plants	74,784		2
Research and development	52,637		2
Other	26,526		—
Total loans	$	3,305,413	100	%

REAL ESTATE 1-4 FAMILY MORTGAGE LOANS The concentrations of real estate 1-4 family mortgage loans by state and the related LTV ratio for real estate 1-4 family first mortgage and CLTV ratio for real estate 1-4 family junior lien mortgage loans are presented in combination in Table 7. 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 underwriting and 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 comparable and price trends for local market areas. The primary risk associated with the use of AVMs is that the value of an individual property may vary significantly from the average for the market area. We have processes to periodically validate AVMs and specific risk management guidelines addressing the circumstances when AVMs may be used. AVMs are generally used in underwriting to support property values on loan originations only where the

loan amount is under $250,000. We generally require property visitation appraisals by a qualified independent appraiser for larger residential property loans.

We continue to modify real estate 1-4 family mortgage loans to assist homeowners and other borrowers experiencing financial difficulties. Loans are generally underwritten at the time of the modification in accordance with underwriting guidelines established for governmental and proprietary loan modification programs. Under these programs, we may provide concessions such as interest rate reductions, forbearance of principal, and in some cases, principal forgiveness. These programs generally include trial payment periods of three to four months, and after successful completion and compliance with terms during this period, the loan is permanently modified. Loans included under these programs are accounted for as troubled debt restructurings (TDRs) at the start of a trial period or at the time of permanent modification, if no trial period is used.

The credit performance associated with our real estate 1-4 family mortgage portfolio continued to improve in 2017, as measured through net charge-offs and nonaccrual loans. Improvement in the credit performance was driven by an improving housing environment.

Table 7: Real Estate 1-4 Family Mortgage Loans LTV/CLTV by State



	December 31, 2017
(in thousands)	Real estate 1-4 family mortgage		Current LTV/CLTV ratio (1)
California	$	8,862,272	48	%
New York	3,320,876		59
Washington	2,150,541		54
Virginia	1,907,651		64
Texas	1,302,180		59
All other states	14,995,717		61
Total loans	$	32,539,237	57


(1)	Collateral values are generally determined using AVMs and are updated quarterly.

REAL ESTATE 1-4 FAMILY FIRST MORTGAGE LOANS

Net charge-offs as a percentage of average loans improved to 0.01% in 2017, compared with 0.07% in 2016. Nonaccrual loans were $150.4 million at December 31, 2017, compared with $165.1 million at December 31, 2016.

Table 8 summarizes delinquency and loss rates by state for our real estate 1-4 family first mortgage portfolio.

Table 8: Real Estate 1-4 Family First Mortgage Portfolio Performance



	Outstanding balance			% of loans 30 days or more past due			Loss (recovery) rate
	December 31,			December 31,			Year ended December 31,
(in thousands)	2017		2016	2017		2016	2017	2016
California	$	8,852,383	9,012,878	0.15	%	0.06	—	—
New York	3,268,458		2,293,854	0.45		0.68	0.02	0.01
Washington	2,149,416		1,562,147	0.03		0.09	—	(0.01	)
Virginia	1,818,445		1,411,434	0.51		0.76	0.01	0.07
Texas	1,289,611		1,135,109	0.44		0.37	—	0.01
Other	14,296,320		10,808,197	0.90		1.25	0.01	0.14
Total	31,674,633		26,223,619	0.54		0.66	0.01	0.07
PCI	9,018		12,428
Total first mortgages	$	31,683,651	26,236,047

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 as a percentage of average loans improved to 0.16% in 2017 compared with 0.76% for the same period a year ago. Nonaccrual loans were $44.7 million at December 31, 2017, compared with $48.8 million at December 31, 2016.

Table 9 summarizes delinquency and loss rates by state for our junior lien portfolio.

Table 9: Real Estate 1-4 Family Junior Lien Portfolio Performance



	Outstanding balance			% of loans 30 days or more past due			Loss (recovery) rate
			December 31,	December 31,			Year ended December 31,
(in thousands)	2017		2016	2017		2016	2017		2016
New Jersey	$	183,405	227,384	5.42	%	4.82	0.95		1.14
Pennsylvania	133,313		168,829	5.29		4.21	0.60		1.21
Florida	112,437		143,541	2.65		3.40	(0.52	)	0.26
Virginia	88,017		110,712	5.22		3.42	0.14		1.01
Georgia	60,259		80,038	2.70		2.66	(0.71	)	(0.16	)
Other	278,155		357,629	4.73		4.60	(0.11	)	0.67
Total	855,586		1,088,133	4.60		4.17	0.16		0.77
PCI	—		932
Total junior lien mortgages	$	855,586	1,089,065

NONPERFORMING ASSETS (NONACCRUAL LOANS AND FORECLOSED ASSETS) Table 10 summarizes nonperforming assets (NPAs) for the last five years and Table 11 for each of the last four quarters. We generally place loans on nonaccrual status when:


•	the full and timely collection of interest or principal becomes uncertain (generally based on an assessment of the borrower's financial condition and the adequacy of collateral, if any);


•	they are 90 days (120 days with respect to real estate 1-4 family first and junior lien mortgages) past due for interest or principal, unless both well-secured and in the process of collection;


•	part of the principal balance has been charged off;


•	for junior lien mortgages, we have evidence that the related first lien mortgage may be 120 days past due or in the process of foreclosure regardless of the junior lien delinquency status; or


•	consumer loans receive notification of bankruptcy, regardless of their delinquency status.

Note 1 (Summary of Significant Accounting Policies) to Financial Statements describes our accounting policy for nonaccrual and impaired loans.

Table 10: Nonperforming Assets (Nonaccrual Loans and Foreclosed Assets)



	December 31,
(in thousands)		2017			2016	2015	2014	2013
Nonaccrual loans:
Total commercial		$	2,306		2,600	1,706	4,214	8,802
Consumer:
Real estate 1-4 family first mortgage		150,381			165,117	201,531	236,859	310,069
Real estate 1-4 family junior lien mortgage		44,703			48,806	64,718	80,375	104,423
Total consumer		195,084			213,923	266,249	317,234	414,492
Total nonaccrual loans (1)		197,390			216,523	267,955	321,448	423,294
Foreclosed assets		2,377			2,505	1,996	2,547	5,142
Total nonperforming assets		$	199,767		219,028	269,951	323,995	428,436
As a percentage of total loans (2)		0.56		%	0.70	2.04	2.50	3.27


(1)	Excludes PCI loans because they continue to earn interest income from accretable yield, independent of performance in accordance with their contractual terms.


(2)	Decrease at December 31, 2016 reflects benefit of $21.0 billion of high quality loans acquired in the Third Quarter 2016 Loan Acquisitions.

Table 11: Nonperforming Assets by Quarter During 2017



(in thousands)	Dec 31, 2017			Sep 30, 2017		Jun 30, 2017		Mar 31, 2017
Nonaccrual loans:
Total commercial	$	2,306		3,325	2,600,000	3,144	1,706,000	3,473
Consumer:
Real estate 1-4 family first mortgage	150,381			152,861		157,092		159,444
Real estate 1-4 family junior lien mortgage	44,703			42,237		43,378		46,065
Total consumer	195,084			195,098		200,470		205,509
Total nonaccrual loans	197,390			198,423		203,614		208,982
Foreclosed assets	2,377			2,473		1,714		2,903
Total nonperforming assets	$	199,767		200,896		205,328		211,885
As a percentage of total loans	0.56		%	0.61		0.61		0.70

Total NPAs were $199.8 million (0.56% of total loans) at December 31, 2017, and included $197.4 million of nonaccrual loans. Total NPAs were $219.0 million (0.70% of total loans) at December 31, 2016, and included $216.5 million of nonaccrual loans. The decrease in 2017 was due in part to improving economic conditions and the Bank's proactive credit risk management activities.

Typically, changes to nonaccrual loans period-over-period represent inflows for loans that are placed on nonaccrual status in accordance with our policy, offset by reductions for loans that are paid down, charged off while on nonaccrual status, or sold, transferred to foreclosed properties, or are no longer classified

as nonaccrual as a result of continued performance and an improvement in the borrower’s financial condition and loan repayment capabilities. Table 12 provides an analysis of the changes in nonaccrual loans.

If interest due on all nonaccrual loans (including loans that were, but are no longer on nonaccrual status at year end) had been accrued under the original terms, approximately $17.0 million of interest would have been recorded as income on these loans, compared with $11.4 million actually recorded as interest income in 2017, versus $12.8 million and $12.5 million, respectively, in 2016.

Table 12: Analysis of Changes in Nonaccrual Loans



	Quarter ended
	Dec 31,			Sep 30,		Jun 30,		Mar 31,		Year ended Dec 31,
(in thousands)	2017			2017		2017		2017		2017		2016
Commercial:
Balance, beginning of period	$	3,325		3,144		3,473		2,600		2,600		1,706
Inflows	140			214		—		978		1,332		4,757
Outflows	(1,159		)	(33	)	(329	)	(105	)	(1,626	)	(3,863	)
Balance, end of period	2,306			3,325		3,144		3,473		2,306		2,600
Consumer:
Balance, beginning of period	195,098			200,470		205,509		213,923		213,923		266,249
Inflows	36,586			31,201		31,587		33,360		132,734		134,929
Outflows:
Returned to accruing	(18,388		)	(17,063	)	(15,350	)	(20,152	)	(70,953	)	(75,719	)
Foreclosures	(2,596		)	(2,286	)	(3,104	)	(3,018	)	(11,004	)	(13,977	)
Charge-offs	(4,680		)	(3,508	)	(4,366	)	(7,424	)	(19,978	)	(32,056	)
Payment, sales and other	(10,936		)	(13,716	)	(13,806	)	(11,180	)	(49,638	)	(65,503	)
Total outflows	(36,600		)	(36,573	)	(36,626	)	(41,774	)	(151,573	)	(187,255	)
Balance, end of period	195,084			195,098		200,470		205,509		195,084		213,923
Total nonaccrual loans	$	197,390		198,423		203,614		208,982		197,390		216,523

TROUBLED DEBT RESTRUCTURINGS (TDRs) The recorded investment of loans modified in TDRs is provided in Table 13 and Table 14. The allowance for loan losses for TDRs was $56.8 million and $74.6 million at December 31, 2017 and 2016, respectively. See Note 2 (Loans and Allowance for Credit Losses) to Financial Statements in this Report for more information. Those loans discharged in bankruptcy and reported as TDRs have been written down to net realizable collateral value. In those situations where principal is forgiven, the entire amount of such principal forgiveness is immediately charged off to the extent not done so prior to the modification. When we delay the timing on the repayment of a portion of principal (principal forbearance), we charge off the amount of forbearance if that amount is not considered fully collectible.

Our nonaccrual policies are generally the same for all loan types when a restructuring is involved. We typically re-underwrite loans at the time of restructuring to determine whether there is sufficient evidence of sustained repayment capacity based on the borrower’s documented income, debt to income ratios, and other factors. Loans lacking sufficient evidence of sustained repayment capacity at the time of

modification are charged down to the fair value of the collateral, if applicable. For an accruing loan that has been modified, if the borrower has demonstrated performance under the previous terms and the underwriting process shows the capacity to continue to perform under the restructured terms, the loan will generally remain in accruing status. Otherwise, the loan will be placed in nonaccrual status and may be returned to accruing status when the borrower demonstrates a sustained period of performance, generally six consecutive months of payments, or equivalent, inclusive of consecutive payments made prior to modification. Loans will also be placed on nonaccrual status, and a corresponding charge-off is recorded to the loan balance, when we believe that principal and interest contractually due under the modified agreement will not be collectible.

Table 15 provides an analysis of the changes in TDRs. Loans modified more than once are reported as TDR inflows only in the period they are first modified. Other than resolutions such as foreclosures, we may remove loans from TDR classification, but only if they have been refinanced or restructured at market terms and qualify as a new loan.

Table 13: Troubled Debt Restructurings (TDRs)



	December 31,
(in thousands)	2017		2016	2015	2014		2013
Total commercial TDRs	$	2,992	3,236	2,534	2,841	2,777,000	2,777
Consumer:
Real estate 1-4 family first mortgage	309,678		340,895	371,605	386,511		390,309
Real estate 1-4 family junior lien mortgage	89,560		98,380	112,597	121,672		127,680
Trial modifications	7,498		11,795	15,663	15,081		19,953
Total consumer TDRs	406,736		451,070	499,865	523,264		537,942
Total TDRs	$	409,728	454,306	502,399	526,105		540,719
TDRs on nonaccrual status	$	116,885	136,883	159,998	174,065		230,230
TDRs on accrual status	292,843		317,423	342,401	352,040		310,489
Total TDRs	$	409,728	454,306	502,399	526,105		540,719

Table 14: TDRs Balance by Quarter During 2017



(in thousands)	Dec 31, 2017		Sep 30, 2017	Jun 30, 2017	Mar 31, 2017
Total commercial TDRs	$	2,992	3,035	3,078	3,147
Consumer:
Real estate 1-4 family first mortgage	309,678		316,831	326,413	335,037
Real estate 1-4 family junior lien mortgage	89,560		91,534	92,812	96,260
Trial modifications	7,498		8,799	10,165	9,759
Total consumer TDRs	406,736		417,164	429,390	441,056
Total TDRs	$	409,728	420,199	432,468	444,203
TDRs on nonaccrual status	$	116,885	119,122	124,444	128,807
TDRs on accrual status	292,843		301,077	308,024	315,396
Total TDRs	$	409,728	420,199	432,468	444,203

Table 15: Analysis of Changes in TDRs



	Quarter ended
	Dec 31,			Sep 30,		Jun 30,		Mar 31,		Year ended Dec 31,
(in thousands)	2017			2017		2017		2017		2017		2016
Commercial:
Balance, beginning of period	$	3,035		3,078		3,147		3,236		3,236		2,534
Inflows (1)	(34		)	—		—		—		(34	)	3,991
Outflows (2)	(9		)	(43	)	(69	)	(89	)	(210	)	(3,289	)
Balance, end of period	2,992			3,035		3,078		3,147		2,992		3,236
Consumer:
Balance, beginning of period	417,164			429,390		441,056		451,070		451,070		499,865
Inflows (1)	6,187			5,539		6,560		9,706		27,992		36,223
Outflows:
Charge-offs	(269		)	(995	)	(1,653	)	(1,162	)	(4,079	)	(9,078	)
Foreclosures	(640		)	(657	)	(376	)	(1,067	)	(2,740	)	(4,322	)
Payments, sales and other (2)	(14,405		)	(14,747	)	(16,603	)	(15,455	)	(61,210	)	(67,749	)
Net change in trial modifications (3)	(1,301		)	(1,366	)	406		(2,036	)	(4,297	)	(3,869	)
Balance, end of period	406,736			417,164		429,390		441,056		406,736		451,070
Total TDRs	$	409,728		420,199		432,468		444,203		409,728		454,306


(1)	Inflows include loans that modify, even if they resolve, within the period as well as advances on loans that modified in a prior period.


(2)	Other outflows include normal amortization/accretion of loan basis adjustments. No loans were removed from TDR classification in 2017 and 2016 as a result of being refinanced or restructured at market terms and qualifying as new loans.


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

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

Table 16 reflects non-PCI loans 90 days or more past due and still accruing.

Table 16: Loans 90 Days or More Past Due and Still Accruing (1)



	December 31,
(in thousands)	2017		2016	2015	2014	2013
Total commercial	$	990	—	2,252	—	—
Consumer:
Real estate 1-4 family first mortgage	9,001		4,962	8,365	6,020	13,120
Real estate 1-4 family junior lien mortgage	2,914		2,545	2,462	4,240	5,062
Total consumer	11,915		7,507	10,827	10,260	18,182
Total	$	12,905	7,507	13,079	10,260	18,182

(1)

PCI loans of $699 thousand, $2.3 million, $4.4 million, $4.9 million and $7.0 million at December 31, 2017, 2016, 2015, 2014 and 2013, respectively, are excluded from this disclosure even though they are 90 days or more contractually past due. These PCI loans are considered to be accruing because they continue to earn interest from accretable yield, independent of performance in accordance with their contractual terms.

NET CHARGE-OFFS Table 17 presents net charge-offs for the year and quarters of 2017 and 2016. Substantially all net charge-offs (recoveries) were in consumer real estate. Net charge-offs in 2017 were $2.5 million, or 0.01% of average total loans

outstanding, compared with $20.5 million, or 0.10% of average total loans outstanding in 2016.

Table 17: Net Charge-offs (Recoveries)



	Year ended					Quarter ended
	December 31,					December 31,					September 30,					June 30,					March 31,
($ in thousands)	Net loan charge- offs			% of avg. loans (1)		Net loan charge- offs			% of avg. loans (1)(2)		Net loan charge- offs			% of avg. loans (1)(2)		Net loan charge- offs			% of avg. loans (1)(2)		Net loan charge- offs			% of avg. loans (1)(2)
2017
Total commercial	$	(473	)	(0.01	)%	$	(396	)	(0.05	)%	$	(59	)	(0.01	)%	$	(12	)	—	%	$	(6	)	—	%
Consumer:
Real estate 1-4 family first mortgage	1,506			0.01		(1,417		)	(0.02	)	276			—		190			—		2,457			0.04
Real estate 1-4 family junior lien mortgage	1,507			0.16		(978		)	(0.44	)	939			0.40		(440		)	(0.18	)	1,986			0.76
Total consumer	3,013			0.01		(2,395		)	(0.03	)	1,215			0.02		(250		)	—		4,443			0.07
Total	$	2,540		0.01	%	$	(2,791	)	(0.03	)%	$	1,156		0.01	%	$	(262	)	—	%	$	4,437		0.06	%

2016
Total commercial	$	(47	)	—	%	$	20		—	%	$	(48	)	(0.01	)%	$	(1	)	—	%	$	(18	)	—	%
Consumer:
Real estate 1-4 family first mortgage	11,104			0.07		1,767			0.03		2,426			0.06		3,630			0.16		3,281			0.15
Real estate 1-4 family junior lien mortgage	9,465			0.76		3,373			1.19		825			0.27		2,097			0.66		3,170			0.94
Total consumer	20,569			0.12		5,140			0.07		3,251			0.07		5,727			0.22		6,451			0.26
Total	$	20,522		0.10	%	$	5,160		0.06	%	$	3,203		0.06	%	$	5,726		0.18	%	$	6,433		0.20	%


(1)	Decrease beginning in third quarter 2016 reflects benefit of $21.0 billion of high quality loans acquired in the Third Quarter 2016 Loan Acquisitions.


(2)	Quarterly net charge-offs (recoveries) as a percentage of average loans are annualized.

ALLOWANCE FOR CREDIT LOSSES The allowance for credit losses, which consists of the allowance for loan losses and the allowance for unfunded credit commitments, is management’s estimate of credit losses inherent in the loan portfolio and unfunded credit commitments at the balance sheet date, excluding loans carried at fair value. The detail of the changes in the allowance for credit losses by portfolio segment (including charge-offs and recoveries by loan class) is in Note 2 (Loans and Allowance for Credit Losses) to Financial Statements in this Report.

We apply a disciplined process and methodology to establish our allowance for credit losses each quarter. This process takes into consideration many factors, including historical and forecasted loss trends, loan-level credit quality ratings and loan grade-specific characteristics. The process involves subjective and complex judgments. In addition, we review a variety of credit metrics and trends. These credit metrics and trends, however, do not solely determine the amount of the allowance as we use several analytical tools. Our estimation approach for the commercial portfolio reflects the estimated probability of default in accordance with the borrower's financial strength, and the severity of loss in the event of default, considering the quality of any underlying collateral. Probability of default and severity at the time of default are statistically derived through historical observations of defaults and losses after default within each credit risk rating. Our estimation approach for the consumer portfolio uses forecasted losses that represent our best estimate of inherent loss based on historical experience, quantitative and other mathematical techniques.

The ratio of the allowance for credit losses to total nonaccrual loans may fluctuate significantly from period to

period due to such factors as the mix of loan types in the portfolio, borrower credit strength and the value and marketability of collateral. Substantially all of our nonaccrual loans were real estate 1-4 family first and junior lien mortgage loans at December 31, 2017.

We believe the allowance for credit losses of $130.7 million at December 31, 2017, was appropriate to cover credit losses inherent in the loan portfolio, including unfunded credit commitments, at that date. The allowance for credit losses is subject to change and reflects existing factors as of the date of determination, including economic or market conditions and ongoing internal and external examination processes. Due to the sensitivity of the allowance for credit losses to changes in the economic and business environment, it is possible that we will incur incremental credit losses not anticipated as of the balance sheet date. Future allowance levels will be based on a variety of factors, including loan growth, portfolio performance and general economic conditions. Our process for determining the allowance for credit losses is discussed in the “Critical Accounting Policies – Allowance for Credit Losses” section and Note 1 (Summary of Significant Accounting Policies) to Financial Statements in this Report.

Table 18 presents an analysis of the allowance for credit losses.

Table 18: Allocation of the Allowance for Credit Losses (ACL)



	Dec 31, 2017				Dec 31, 2016				Dec 31, 2015
(in thousands)	ACL		Loans as % of total loans		ACL		Loans as % of total loans		ACL		Loans as % of total loans
Total commercial	$	28,085	9	%	$	29,644	13	%	$	17,676	22	%
Consumer:
Real estate 1-4 family first mortgage	71,341		88		61,371		84		56,689		68
Real estate 1-4 family junior lien mortgage	31,235		3		34,014		3		47,173		10
Total consumer	102,576		91		95,385		87		103,862		78
Total	$	130,661	100	%	$	125,029	100	%	$	121,538	100	%




(in thousands)	2017			2016	2015	2014	2013
Components:
Allowance for loan losses	$	129,360		123,877	120,866	184,437	243,752
Allowance for unfunded credit commitments	1,301			1,152	672	737	517
Allowance for credit losses	$	130,661		125,029	121,538	185,174	244,269
Allowance for loan losses as a percentage of total loans (1)	0.36		%	0.40	0.91	1.42	1.86
Allowance for loan losses as a percentage of net charge-offs	5,092.15			603.62	373.38	297.33	703.96
Allowance for credit losses as a percentage of total loans (1)	0.36			0.40	0.92	1.43	1.86
Allowance for credit losses as a percentage of total nonaccrual loans	66.19			57.74	45.36	57.61	57.71


(1)	Decrease at December 31, 2016 reflects benefit of $21.0 billion of high quality loans acquired in the Third Quarter 2016 Loan Acquisitions.

Asset/Liability Management

Asset/liability management involves the evaluation, monitoring and management of interest rate risk, market risk and liquidity and funding.

INTEREST RATE RISK Interest rate risk is the sensitivity of earnings to changes in interest rates. At December 31, 2017, 13% of our loans had variable interest rates. In a declining rate environment, we may experience a reduction in interest income on our loan portfolio and a corresponding decrease in funds available to be distributed to our shareholders. The reduction in interest income may result from downward adjustment of the indices upon which the interest rates on loans are based and from prepayments of loans with fixed interest rates, resulting in reinvestment of the proceeds in lower yielding assets. To manage interest rate risk, we monitor loan paydown rates, portfolio composition, and the rate sensitivity of loans acquired. Our loan acquisition process attempts to balance desirable yields with the quality of loans acquired.

At December 31, 2017, approximately 87% of our loans had fixed interest rates. Such loans increase our interest rate risk. Our methods for evaluating interest rate risk include an analysis of interest-rate sensitivity “gap,” which is defined as the difference between interest-earning assets and interest-bearing liabilities maturing or repricing within a given time period. A gap is considered positive when the amount of interest rate-sensitive assets exceeds the amount of interest rate-sensitive

liabilities. A gap is considered negative when the amount of interest rate-sensitive liabilities exceeds the amount of interest rate-sensitive assets. Our interest rate-sensitive liabilities are generally limited to our line of credit with the Bank.

During a period of rising interest rates, a negative gap would tend to adversely affect net interest income, while a positive gap would tend to result in an increase in net interest income. During a period of falling interest rates, a negative gap would tend to result in an increase in net interest income, while a positive gap would tend to adversely affect net interest income. Because different types of assets and liabilities with the same or similar maturities may react differently to changes in overall market rates or conditions, changes in interest rates may affect net interest income positively or negatively even if an institution is perfectly matched in each maturity category.

At December 31, 2017, 13% of our assets had variable interest rates, and could be expected to reprice with changes in interest rates. At December 31, 2017, our liabilities were 10% of our assets. This positive gap between our assets and liabilities indicates that an increase in interest rates would result in an increase in net interest income and a decrease in interest rates would result in a decrease in net interest income.

Our rate-sensitive assets and liabilities at December 31, 2017 are presented in Table 19. The allowance for loan losses is not included in loans.

Table 19: Rate-sensitive Assets and Liabilities



			December 31, 2017
(In thousands)	Overnight		Within one year	One to three years	Three to five years	Over five years	Total
Rate-sensitive assets
Interest-bearing deposits	$	—	—	—	—	—	—
Loans
Fixed rate	—		16,667	65,177	153,189	31,002,901	31,237,934
Variable rate	—		661,284	1,219,649	706,058	2,040,251	4,627,242
Total rate-sensitive assets	$	—	677,951	1,284,826	859,247	33,043,152	35,865,176
Line of credit with Bank	$	—	—	3,551,426	—	—	3,551,426
Total rate-sensitive liabilities	$	—	—	3,551,426	—	—	3,551,426

LIQUIDITY AND FUNDING The objective of effective liquidity management is to ensure that we can meet customer loan requests and other cash commitments efficiently under both normal operating conditions and under unpredictable circumstances of industry or market stress. To achieve this objective, Wells Fargo’s Corporate Asset/Liability Management Committee establishes and monitors liquidity guidelines that require sufficient asset-based liquidity to cover potential funding requirements and to avoid over-dependence on volatile, less reliable funding markets.

Proceeds received from paydowns of loans are typically sufficient to fund existing lending commitments and loan acquisitions. Depending upon the timing of the loan acquisitions, we may draw on our $5.0 billion revolving line of credit we have with the Bank as a short-term liquidity source. At December 31, 2017, we had $3.6 billion outstanding on our Bank line of credit. The rate of interest on the line of credit is equal to the three-month London Interbank Offered Rate plus 4.4 basis points (0.044%).

Our primary liquidity needs are to pay operating expenses, fund our lending commitments, acquire loans to replace existing loans that mature or repay, and pay dividends. 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. The excess dividend distributions were funded by using cash provided by investing (generally principal payments received on our loans) and financing activities (generally draws on our Bank line of credit). As the remaining purchase accounting adjustments are not expected to cause a significant variance between GAAP net income and REIT taxable income in future years, operating expenses and dividends are expected to be funded through cash generated by operations or paid-in capital. Funding commitments and the acquisition of loans are intended to be funded with the proceeds obtained from repayment of principal balances by individual borrowers and our line of credit with the Bank.

On September 8, 2016, Wells Fargo reached agreements with the Consumer Financial Protection Bureau, the Office of the Comptroller of the Currency, and the Office of the Los Angeles City Attorney, regarding allegations that some of its

retail customers received products and services they did not request. Negative publicity or public opinion resulting from the settlements and related matters and other instances where the Bank’s customers may have experienced financial harm may increase the risk of reputational harm to the business of Wells Fargo and the Bank, including the Bank’s ability to originate loans at the same volumes as we have historically acquired. If in future periods we do not reinvest loan paydowns at sufficient levels, management may request our board of directors to consider a return of capital to the holders of our common stock. Annually, we expect to distribute an aggregate amount of outstanding capital stock dividends equal to approximately 100% of our REIT taxable income for federal tax purposes. Such distributions may exceed net income determined under GAAP.

In 2017, we acquired $9.2 billion of loans from the Bank, compared with $23.3 billion in 2016, which included $19.1 billion of consumer loans and $1.9 billion of CSRE loans acquired in the Third Quarter 2016 Loan Acquisitions using proceeds from common stock issuance and loan paydowns. To the extent that we determine that additional funding is necessary or advisable, we could issue additional common or preferred stock, subject to board of directors approval, raise funds through debt financings, or a combination of these methods. Retention of cash flows does not represent a significant source of funding because any cash flow retention must be consistent with the provisions of the Investment Company Act and the Code, which requires the distribution by a REIT of at least 90% of its REIT taxable income, excluding capital gains, and must take into account taxes that would be imposed on undistributed income.

As of December 31, 2017, our liabilities consisted of our line of credit with the Bank and other liabilities. The certificate of designation for the Series A preferred stock contains a covenant in which we agree not to incur indebtedness for borrowed money, including any guarantees of indebtedness (which does not include any pledges of our assets on behalf of the Bank or our other affiliates), without the consent of the holders of two-thirds of the Series A preferred stock, voting as a separate class, provided that, we may incur indebtedness in an aggregate amount not exceeding 20% of our stockholders’ equity.

Critical Accounting Policy

Our significant accounting policies (see Note 1 (Summary of Significant Accounting Policies) to Financial Statements in this Report) are fundamental to understanding our results of operations and financial condition because they require that we use estimates and assumptions that may affect the value of our assets or liabilities and financial results. We have identified the accounting policy covering allowance for credit losses as critical because it requires management to make difficult, subjective and complex judgments about matters that are inherently uncertain and because it is likely that materially different amounts would be reported under different conditions or using different assumptions.

Management and the Audit Committee of the board of directors have reviewed and approved this critical accounting policy.

Allowance for Credit Losses

As a subsidiary of Wells Fargo, our loans are subject to the same analysis of the appropriateness of the ACL as applied to loans maintained in Wells Fargo’s other subsidiaries, including the Bank. For a description of our ACL accounting policies, see Note 1 (Summary of Significant Accounting Policies) to Financial Statements in this Report.

Changes in the allowance for credit losses and, therefore, in the related provision for credit losses can materially affect net income. In applying the judgment and review required to determine the allowance for credit losses, management considers changes in economic conditions, customer behavior, and collateral value, among other influences. From time to time, economic factors or business decisions, such as the addition or liquidation of a loan product or business unit, may affect the loan portfolio, causing management to provide for or release amounts from the allowance for credit losses. While our methodology attributes portions of the allowance to specific portfolio segments (commercial and consumer), the entire allowance for credit losses is available to absorb credit losses inherent in the total loan portfolio and unfunded credit commitments.

Judgment is specifically applied in:

•

Credit risk ratings applied to individual commercial loans and unfunded credit commitments. We estimate the probability of default in accordance with the borrower’s financial strength using a borrower quality rating and the severity of loss in the event of default using a collateral quality rating. Collectively, these ratings are referred to as credit risk ratings and are assigned to our commercial loans. Probability of default and severity at the time of default are statistically derived through historical observations of defaults and losses after default within each credit risk rating. Commercial loan risk ratings are evaluated based on each situation by experienced senior credit officers and are subject to periodic review by an internal team of credit specialists.


•	Economic assumptions applied to pools of consumer loans (statistically modeled). Losses are estimated using economic variables to represent our best estimate of inherent loss. Our forecasted losses are modeled using a range of economic scenarios.


•	Selection of a credit loss estimation model that fits the credit risk characteristics of its portfolio. We use internally developed models in this process. We often use expected loss, roll rate, net flow or statistical trend models, most with

economic correlations. Management must use judgment in establishing additional input metrics for the modeling processes, considering further stratification into reference data time series, sub-product, origination channel, vintage, loss type, geographic location and other predictive characteristics. The models used to determine the allowance for credit losses are validated in accordance with Company policies by an internal model validation group.


•	Assessment of limitations to credit loss estimation models. We apply our judgment to adjust our modeled estimates to reflect other risks that may be identified from current conditions and developments in selected portfolios.

•

Identification and measurement of impaired loans, including loans modified in a TDR. Our experienced senior credit officers may consider a loan impaired based on their evaluation of current information and events, including loans modified in a TDR. The measurement of impairment is typically based on an analysis of the present value of expected future cash flows. The development of these expectations requires significant management judgment and review.

•

An amount for imprecision or uncertainty which reflects management’s overall estimate of the effect of quantitative and qualitative factors on inherent credit losses. This amount represents management’s judgment of risks inherent in the processes and assumptions used in establishing the allowance for credit losses. This imprecision considers economic environmental factors, modeling assumptions and performance, process risk, and other subjective factors, including industry trends and emerging risk assessments.

SENSITIVITY TO CHANGES Table 20 demonstrates the impact of the sensitivity of our estimates on our allowance for credit losses.

Table 20: Allowance Sensitivity Summary



		December 31, 2017
		Estimated
		increase / (decrease)
(in millions)		in allowance
Assumption:
	Favorable (1)		$	(17.6	)
	Adverse (2)		35.9


(1)	Represents a one risk rating upgrade throughout our commercial portfolio segment and a more optimistic economic outlook for modeled losses on our consumer portfolio segment.


(2)	Represents a one risk rating downgrade throughout our commercial portfolio segment, a more pessimistic economic outlook for modeled losses on our consumer portfolio segment.

The sensitivity analyses provided in the previous table are hypothetical scenarios and are not considered probable. They do not represent management’s view of inherent losses in the portfolio as of the balance sheet date. Because significant judgment is used, it is possible that others performing similar analyses could reach different conclusions. See the “Risk Management – Credit Risk Management – Allowance for Credit Losses” section and Note 2 (Loans and Allowance for Credit Losses) to Financial Statements in this Report for further discussion of our allowance for credit losses.

Current Accounting Developments

Table 21 provides accounting pronouncements applicable to us that have been issued by the FASB but are not yet effective.

Table 21: Current Accounting Developments - Issued Standards



Standard	Description	Effective date and financial statement impact
Accounting Standards Update (ASU or Update) 2016-15 – Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments	The Update addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice for reporting in the Statement of Cash Flows.	We adopted the guidance in first quarter 2018. The Update will not have a material impact on our financial statements.
ASU 2016-13 – Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments	The Update changes the accounting for credit losses on loans by requiring a current expected credit loss (CECL) approach to determine the allowance for credit losses. CECL requires loss estimates for the remaining estimated life of the financial asset using historical experience, current conditions, and reasonable and supportable forecasts. Also, the Update eliminates the existing guidance for purchased credit-impaired (PCI) loans, but requires an allowance for purchased financial assets with more than insignificant deterioration since origination.	The guidance is effective in first quarter 2020 with a cumulative-effect adjustment to retained earnings as of the beginning of the year of adoption. While early adoption is permitted beginning in first quarter 2019, we do not expect to elect that option. We are evaluating the impact of the Update on our financial statements. We expect the Update will result in an increase in the allowance for credit losses given the change to estimated losses over the contractual life adjusted for expected prepayments with an expected material impact from longer duration portfolios. The amount of the increase will be impacted by the portfolio composition and quality at the adoption date as well as economic conditions and forecasts at that time.
ASU 2016-01 - Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities	The Update amends the presentation and accounting for certain financial instruments. The guidance also updates fair value presentation and disclosure requirements for financial instruments measured at amortized cost.	We adopted the Update in first quarter 2018. For purposes of disclosing the fair value of loans carried at amortized cost, we will determine the fair value based on “exit price” as required by the Update. Accordingly, the fair value amounts disclosed for such loans will change upon adoption of the Update.
ASU 2014-09 – Revenue from Contracts With Customers (Topic 606) and subsequent related Updates	The Update modifies the guidance used to recognize revenue from contracts with customers for transfers of goods or services and transfers of nonfinancial assets, unless those contracts are within the scope of other guidance. The Update also requires new qualitative and quantitative disclosures, including disaggregation of revenues and descriptions of performance obligations.	We adopted the guidance in first quarter 2018. Our revenue is predominantly net interest income on financial assets, which is specifically excluded from the scope. Accordingly, the Update will not impact our financial statements.

Forward-Looking Statements

This Report contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements can be identified by words such as “anticipates,” “intends,” “plans,” “seeks,” “believes,” “estimates,” “expects,” “target”, “projects,” “outlook,” “forecast,” “will,” “may,” “could,” “should,” “can” and similar references to future periods. Examples of forward-looking statements include, but are not limited to, statements we make about: future results of WFREIC; expectations for consumer and commercial credit performance and the appropriateness of our allowance for credit losses; our expectations regarding net interest income; expectations regarding loan acquisitions and paydowns; future capital expenditures; future dividends and other capital distributions; the expected outcome and impact of legal, regulatory and legislative developments, as well as our expectations regarding compliance therewith; the outcome of contingencies, such as legal proceedings; and our plans, objectives and strategies.

Forward-looking statements are not based on historical facts but instead represent our current expectations and assumptions regarding our business, the economy and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict. Our actual results may differ materially from those contemplated by the forward-looking statements. We caution, therefore, against relying on any of these forward-looking statements. They are neither statements of historical fact nor guarantees or assurances of future performance. While there is no assurance that any list of risks and uncertainties or risk factors is complete, important factors that could cause actual results to differ materially from those in the forward-looking statements include the following, without limitation:


•	economic conditions that affect the general economy, housing prices, the job market, consumer confidence and spending habits, including our borrowers’ prepayment and repayment of our loans (including the impact of the Tax Cuts & Jobs Act);

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