SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2019

Commission file number 1-36768

Wells Fargo Real Estate Investment Corporation

(Exact name of registrant as specified in its charter)



Delaware		56-1986428
(State of incorporation)		(I.R.S. Employer Identification No.)

90 South 7th Street

Minneapolis, Minnesota 55402

(Address of principal executive offices)

(Zip Code)

(855) 825-1437

(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.



Yes þ		No o

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).



Yes þ		No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company' in Rule 12b-2 of the Exchange Act.



	Large accelerated filer o		Accelerated filer o

	Non-accelerated filer þ		Smaller reporting company o
			Emerging growth company o

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

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



Yes o		No þ

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



Title of Each Class	Trading Symbol	Name of Each Exchange on Which Registered
6.375% Cumulative Perpetual Series A Preferred Stock	WFE.PRA	New York Stock Exchange, Inc.

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

As of April 29, 2019, there were 34,058,028 shares of the registrant’s common stock outstanding.

FORM 10-Q

CROSS-REFERENCE INDEX



PART I	Financial Information

Item 1.	Financial Statements			Page
	Statement of Income			25
	Balance Sheet			26
	Statement of Changes in Equity			27
	Statement of Cash Flows			28
	Notes to Financial Statements
	1	—	Summary of Significant Accounting Policies	29
	2	—	Loans and Allowance for Credit Losses	30
	3	—	Fair Values of Assets and Liabilities	41
	4	—	Common and Preferred Stock	42
	5	—	Transactions with Related Parties	43

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations (Financial Review)
	Summary Financial Data			2
	Overview			3
	Earnings Performance			4
	Balance Sheet Analysis			6
	Risk Management			7
	Critical Accounting Policy			20
	Current Accounting Developments			21
	Forward-Looking Statements			22
	Risk Factors			23

Item 3.	Quantitative and Qualitative Disclosures About Market Risk			18

Item 4.	Controls and Procedures			24

PART II	Other Information

Item 1.	Legal Proceedings			45

Item 1A.	Risk Factors			45

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds			45

Item 6.	Exhibits			46

Signature				47

PART I - FINANCIAL INFORMATION

FINANCIAL REVIEW



Summary Financial Data
								% Change
	Quarter ended							March 31, 2019 from
($ in thousands, except per share data)	Mar 31, 2019			Dec 31, 2018		Mar 31, 2018		Dec 31, 2018		Mar 31, 2018
For the period
Net income	$	303,439		310,153		319,032		(2	)%	(5	)
Net income applicable to common stock	299,042			305,756		314,635		(2	)	(5	)
Diluted earnings per common share	8.78			8.98		9.24		(2	)	(5	)
Profitability ratios
Return on average assets	3.49		%	3.65		3.64		(4	)	(4	)
Return on average stockholders’ equity	3.79			3.78		3.98		—		(5	)
Average stockholders’ equity to average assets	92.14			96.57		91.49		(5	)	1
Common dividend payout ratio (1)	98.63			94.77		103.25		4		(4	)
Dividend coverage ratio (2)	6,948			7,037		7,105		(1	)	(2	)
Total revenue	$	341,468		333,582		343,520		2		(1	)
Average loans	35,003,619			33,506,663		35,326,570		4		(1	)
Average assets	35,230,874			33,699,611		35,569,258		5		(1	)
Net interest margin	3.89		%	3.88		3.83		—		2
Net loan charge-offs (recoveries)	$	(626	)	(513	)	(506	)	22		24
As a percentage of average total loans (annualized)	(0.01		)%	(0.01	)	(0.01	)	—		—
At period end
Loans	$	34,564,299		35,495,068		34,824,594		(3	)	(1	)
Allowance for loan losses	98,158			96,743		122,863		1		(20	)
As a percentage of total loans	0.28		%	0.27		0.35		4		(20	)
Assets	$	34,636,027		35,493,267		34,898,519		(2	)	(1	)
Total stockholders’ equity	32,419,328			32,415,286		32,379,898		—		—
Total nonaccrual loans and foreclosed assets	181,813			180,516		199,449		1		(9	)
As a percentage of total loans	0.53		%	0.51		0.57		4		(7	)
Loans 90 days or more past due and still accruing (3)	$	3,018		6,527		8,272		(54	)	(64	)


(1)	Dividends declared per common share as a percentage of earnings per common share.

(2)

The dividend coverage ratio is considered a non-GAAP financial measure. Management believes the dividend coverage ratio is a useful financial measure because the certificate of designation for the Series A preferred stock limits, among other matters, our ability to pay dividends on our common stock or make any payment of interest or principal on our line of credit with Wells Fargo Bank, National Association, if the dividend coverage ratio for the four prior fiscal quarters is less than 150%. The dividend coverage ratio is expressed as a percentage and calculated by dividing the four prior fiscal quarters' GAAP net income, excluding gains (or losses) from sales of property (consistent with the National Association of Real Estate Investment Trusts definition of “funds from operations”), by the amount that would be required to pay annual dividends on the Series A and Series B preferred stock.


(3)	The carrying value of purchased credit-impaired (PCI) loans contractually 90 days or more past due is excluded. These PCI loans are considered to be accruing because they continue to earn interest from accretable yield, independent of performance in accordance with their contractual terms.

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

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

Financial Review

OVERVIEW

The Company is engaged in acquiring, holding and managing domestic mortgage assets and other authorized investments that generate net income for distribution to our shareholders. We are classified as a real estate investment trust (REIT) for federal income tax purposes and are an indirect subsidiary of Wells Fargo and the Bank.

As of March 31, 2019, we had $34.6 billion in assets, consisting substantially of real estate loan participation interests (loans). Our interests in mortgage and other assets have been acquired from the Bank pursuant to loan participation and servicing and assignment agreements among the Bank, certain of its subsidiaries and us. The Bank originated the loans, purchased them from other financial institutions or acquired them as part of the acquisition of other financial institutions. Substantially all of our loans are serviced by the Bank.

REIT Tax Status

For the tax year ended December 31, 2018, we complied with the relevant provisions of the Internal Revenue Code of 1986, as amended (the Code) to be taxed as a REIT. These provisions for qualifying as a REIT for federal income tax purposes are complex, involving many requirements, including among others, distributing at least 90% of our REIT taxable income to shareholders and satisfying certain asset, income and stock ownership tests. To the extent we meet those provisions, we will not be subject to federal income tax on net income. We continue to monitor each of these complex tests. We believe that we continue to satisfy each of these requirements and therefore continue to qualify as a REIT.

In the event we do not continue to qualify as a REIT, earnings and cash provided by operating activities available for distribution to shareholders would be reduced by the amount of any applicable income tax obligation. Given the level of earning assets, we currently expect there would be sufficient earnings and ample cash to pay preferred dividends. The preferred and common dividends we pay as a REIT are ordinary investment income not eligible for the dividends-received deduction for corporate shareholders or for the favorable qualified dividend tax rate applicable to non-corporate taxpayers, however non-corporate shareholders may be able to deduct 20% of the preferred and common dividends as a deduction for qualified business income under the Tax Cuts and Jobs Act. If we were not a REIT, preferred and common dividends we pay generally would qualify for the dividends received deduction for corporate shareholders and the favorable qualified dividend tax rate applicable to non-corporate taxpayers.

Financial Performance

We earned net income and net income applicable to common stock of $303.4 million and $299.0 million, respectively, in first quarter 2019, or $8.78 diluted earnings per common share, compared with $319.0 million and $314.6 million, respectively, in first quarter 2018, or $9.24 diluted earnings per common share. The decrease in net income in the first quarter of 2019 was attributable to a decrease in pledge fees and increases in both the provision for credit losses and noninterest expense, partially offset by an increase in net interest income.

Loans

Total loans were $34.6 billion at March 31, 2019, compared with $35.5 billion at December 31, 2018. Loans, net of allowance for loan losses, represented 99.5% of assets at March 31, 2019 and 99.7% at December 31, 2018.

Credit quality, as measured by net charge-offs, nonaccrual loans and delinquencies, remained strong during first quarter 2019. Net recoveries were $626 thousand in the first quarter of 2019, compared with $506 thousand in the first quarter of 2018. Nonaccrual loans were $179.7 million at March 31, 2019, compared with $178.9 million at December 31, 2018. Loans 90 days or more past due and still accruing were $3.0 million at March 31, 2019, compared with $6.5 million at December 31, 2018. Delinquencies remain a small percentage of our loan balances.

Provision for credit losses was $1.7 million in the first quarter of 2019, compared with reversal of provision for credit losses of $5.9 million for the same period in 2018. The provision for credit losses was higher in the first quarter of 2019, as the continued portfolio improvement slowed combined with a higher probability of slightly less favorable economic conditions. First quarter 2018 reflected an improvement in our outlook for hurricane-related losses as well as strong performance in our residential real estate portfolio. Future allowance levels will be based on a variety of factors, including loan portfolio composition, size and performance, and the general economic environment, including housing market conditions.

Capital Distributions

Dividends declared to holders of our Series A preferred stock totaled $4.4 million in the first quarter of both 2019 and 2018. Dividends declared to holders of our Series B preferred stock totaled $14 thousand in the first quarter of both 2019 and 2018.

Dividends declared to the holders of our common stock totaled $295.0 million in first quarter 2019, compared with $325.0 million in first quarter 2018. The decrease in dividends declared to the holders of our common stock in the first quarter

of 2019 was attributable to a decrease in estimated REIT taxable income for federal income tax purposes before dividends paid deduction.

Earnings Performance

Net Income

We earned net income of $303.4 million and $319.0 million in first quarter 2019 and 2018, respectively. The decrease in net income for the first quarter of 2019 was attributable to a decrease in pledge fees and increases in both the provision for credit losses and noninterest expense, partially offset by an increase in net interest income.

Net Interest Income

Net interest income is the interest earned on loans and cash and cash equivalents less the interest paid on our Bank line of credit. Net interest margin is the average yield on interest-earning assets minus the average interest paid for funding. Interest-earning assets predominantly consist of loans. Net interest income was $339.7 million in first quarter 2019, compared with $337.3 million for the same period a year ago. Net interest margin was 3.89% in the first quarter of 2019 compared with 3.83% for the same period a year ago. The increase in net interest income and net interest margin for first quarter 2019 was due to an increase in yields on interest-earning assets, partially offset by an increase in interest expense, a result of higher rates. Interest income in the first quarter of 2019 included net accretion of adjustments on loans of $6.8 million, compared with $4.3 million a year ago. Loan paydowns and payoffs annualized represented 10.5% of average loan balances for first quarter 2019 compared with 11.7% during the same period a year ago.

Interest income in any one period can be affected by a variety of factors, including mix and size of the earning asset portfolio. See the “Risk Management - Asset/Liability Management - Interest Rate Risk” section in this Report for more information on interest rates and interest income.

The Company has a $5.0 billion line of credit with the Bank. Average borrowings for first quarter 2019 and 2018 were $2.7 billion and $3.0 billion, respectively, at weighted average interest rates of 2.79% and 1.93%, respectively. Effective March 2019, the Company renewed the line of credit with the Bank and the interest rate increased from three-month London Interbank Offered Rate (LIBOR) plus 4.4 basis points (0.044%) to three-month LIBOR plus 65.0 basis points (0.650%). The change in interest rate was driven by an increase in term, along with a change in underwriting which aligned our credit rating with that of our direct parents rather than the Bank. It is expected that a transition away from the widespread use of LIBOR to alternative benchmark rates will occur by the end of 2021.

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

Table 1: Net Interest Income



	Quarter ended March 31,
					2019						2018
(in thousands)	Average balance		Interest income/expense		Yields/rates		Average balance		Interest income/expense		Yields/rates
Earning assets
Commercial loans	$	2,951,955	33,062		4.54	%	$	3,233,806	30,202		3.79	%
Real estate 1-4 family mortgage loans	32,051,664		325,051		4.06		32,092,764		321,462		4.01
Total interest-earning assets	$	35,003,619	358,113		4.10		$	35,326,570	351,664		3.99
Funding sources
Line of credit with Bank	$	2,667,934	18,387		2.79		$	3,021,064	14,402		1.93
Total interest-bearing liabilities	$	2,667,934	18,387		2.79		$	3,021,064	14,402		1.93
Net interest margin and net interest income			$	339,726	3.89	%			$	337,262	3.83	%

Provision for Credit Losses

First quarter 2019 provision for credit losses was $1.7 million compared with a reversal of provision for credit losses of $5.9 million for the same period a year ago. The provision for credit losses was higher in the first quarter of 2019 compared with a year ago, as the continued portfolio improvement slowed combined with a higher probability of slightly less favorable economic conditions. First quarter 2018 reflected an improvement in our outlook for hurricane-related losses as well as strong performance in our residential real estate portfolio.

See the “Balance Sheet Analysis” and "Risk Management – Allowance for Credit Losses” sections in this Report for additional information on the allowance for credit losses.

Noninterest Income

Noninterest income in first quarter 2019 was $1.7 million, compared with $6.3 million for the same period a year ago. The decrease in the first quarter of 2019 was attributable to a decrease in pledge fees.

The certificate of designation for the Series A preferred stock limits our ability to pledge our loans to an aggregate amount not exceeding 80% of our total assets at any time as collateral on behalf of the Bank for the Bank’s access to secured borrowing facilities through the Federal Home Loan Banks or the discount window of Federal Reserve Banks. However, the Bank's borrowings will differ from loan balances pledged. In exchange for the pledge of our loan assets, the Bank pays us a fee that is consistent with market terms. We earned $1.4 million in pledge fees in the first quarter of 2019 compared with $6.0 million a year ago. The decrease in first quarter 2019 was attributable to a lower average balance pledged.

See Note 5 (Transactions With Related Parties) to Financial Statements in this Report for more details.

Noninterest Expense

Noninterest expense in first quarter 2019 was $36.3 million, compared with $30.3 million for the same period a year ago. Noninterest expense predominantly consists of loan servicing costs, management fees, and foreclosed assets expense.

The loans in our portfolio are predominantly serviced by the Bank pursuant to the terms of participation and servicing and assignment agreements. In limited instances, the Bank has delegated servicing responsibility to third parties that are not affiliated with us or the Bank. Depending on the loan type, the monthly servicing fee charges are based in part on (a) outstanding principal balances, (b) a flat fee per month, or (c) a total loan commitment amount. Loan servicing costs in the first quarter of 2019 were $21.5 million compared with $21.9 million for the same period a year ago.

Management fees represent reimbursements made to the Bank for general overhead expenses, including allocations of technology support and a combination of finance and accounting, risk management and other general overhead expenses incurred on our behalf. Management fees include direct and indirect expense allocations. Indirect expenses are allocated based on ratios that use our proportion of expense activity drivers. The expense activity drivers and ratios may change from time to time. Management fees were $10.7 million in first quarter 2019, compared with $6.3 million a year ago. The increase in first quarter 2019 was driven by an increase in allocations for portfolio credit monitoring and oversight.

Foreclosed assets expense was $3.9 million in the first quarter of 2019 compared with $2.1 million for the same period a year ago. The increase in the first quarter of 2019 is attributable to an increase in property taxes. Substantially all of our foreclosed assets consist of residential 1-4 family real estate assets.

See Note 5 (Transactions With Related Parties) to Financial Statements in this Report for more details.

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 $34.6 billion at March 31, 2019, and $35.5 billion at December 31, 2018.

Loans

Loans were $34.6 billion at March 31, 2019, and $35.5 billion at December 31, 2018. The decrease is attributable to net paydowns and no loans acquired in first quarter 2019. At March 31, 2019 and December 31, 2018, consumer loans represented 92% and 91% of loans, respectively, and commercial loans represented the remaining balance of our loan portfolio.

Allowance for Loan Losses

The allowance for loan losses, increased $1.5 million to $98.2 million at March 31, 2019, from $96.7 million at December 31, 2018, as the continued portfolio improvement slowed combined with a higher probability of slightly less favorable economic conditions. First quarter 2018 reflected an improvement in our outlook for hurricane-related losses as well as strong performance in our residential real estate portfolio.

At March 31, 2019, the allowance for loan losses included $74.5 million for consumer loans and $23.7 million for commercial loans; however, the entire allowance is available to absorb credit losses inherent in the total loan portfolio. The total allowance reflects management’s estimate of credit losses inherent in the loan portfolio at the balance sheet date. See the “Risk Management – Credit Risk Management – Allowance for Credit Losses” section in this Report for a description of how management estimates the allowance for loan losses and the allowance for unfunded credit commitments.

Accounts Payable and Receivable—Affiliates, Net

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

Line of Credit with Bank

We draw upon our $5.0 billion line of credit with the Bank to finance loan acquisitions. At March 31, 2019 and December 31, 2018, we had $2.2 billion and $3.1 billion outstanding, respectively.

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, due to recognition differences for items such as loan losses and purchase accounting adjustments, periodic distributions may exceed our GAAP net income.

The retained deficit included within our balance sheet results from cumulative distributions that have exceeded GAAP net income, predominantly due to the impact on REIT taxable income of purchase accounting adjustments attributable to the Company during the years 2009 through 2013, from the 2008 acquisition of Wachovia Corporation by Wells Fargo.

For further information on the differences between taxable income before dividends paid deduction reported on our income tax returns and net income as reported in our statement of income, see the “Balance Sheet Analysis” section in our 2018 Form 10-K.

Risk Management

Our board of directors has overall responsibility for overseeing the Company’s risk management structure. This oversight is accomplished through the Audit Committee of the Board of Directors and a management-level committee that reviews the allowance for credit losses and is supplemented by certain elements of Wells Fargo’s risk management framework. For more information about how we manage these risks, see the “Risk Management” section in our 2018 Form 10-K. The discussion that follows provides an update regarding these risks.

Credit Risk Management Our assets consist predominantly of loans, and their related credit risk is among the most significant risks we manage. We define credit risk as the risk to earnings associated with a borrower or counterparty default (failure to meet obligations in accordance with agreed upon terms).

Table 2 represents loans by segment and class of financing receivable and the weighted average maturity for those loans calculated using contractual maturity dates.

Table 2: Total Loans Outstanding by Portfolio Segment and Class of Financing Receivable and Weighted Average Contractual Maturity



	Loans outstanding			Weighted average maturity in years
(in thousands)	Mar 31, 2019		Dec 31, 2018	Mar 31, 2019	Dec 31, 2018
Total commercial	$	2,895,857	3,055,423	3.2	3.2
Consumer:
Real estate 1-4 family first mortgage	31,034,572		31,769,813	24.5	24.7
Real estate 1-4 family junior lien mortgage	633,870		669,832	15.0	15.0
Total consumer	31,668,442		32,439,645	24.3	24.5
Total loans	$	34,564,299	35,495,068	22.5	22.6

The discussion that follows provides analysis of the risk elements of our various loan portfolios and our credit risk management and measurement practices. See Note 2 (Loans and Allowance for Credit Losses) to Financial Statements in this Report for more analysis and credit metric information.

In order to maintain our REIT status, the composition of our loan portfolio is highly concentrated in real estate.

We continually evaluate our credit policies and modify as necessary. Measuring and monitoring our credit risk is an ongoing process that tracks delinquencies, collateral values, FICO scores, economic trends by geographic areas, loan-level risk grading for certain portfolios (typically commercial) and other indications of credit risk. Our credit risk monitoring process is designed to enable early identification of developing risk and to support our determination of an appropriate allowance for credit losses.

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

Table 3: Loan Portfolio by Geography



	March 31, 2019
(in thousands)	Commercial		Real estate 1-4 family first mortgage	Real estate 1-4 family junior lien mortgage	Total	% of total loans
California	$	1,318,688	8,260,780	7,196	9,586,664	28	%
New York	10,173		2,977,848	39,927	3,027,948	9
Washington	126,740		2,302,903	877	2,430,520	7
Virginia	49,441		1,920,883	64,087	2,034,411	6
Texas	79,661		1,317,749	7,392	1,404,802	4
Maryland	87,241		1,214,371	29,435	1,331,047	4
Massachusetts	26,818		1,271,026	2,320	1,300,164	4
Pennsylvania	19,834		1,084,239	98,705	1,202,778	3
Illinois	2,994		1,158,468	954	1,162,416	3
Florida	268,164		746,235	83,863	1,098,262	3
Georgia	29,486		1,003,872	42,867	1,076,225	3
Minnesota	67,681		969,248	1,470	1,038,399	3
Oregon	147,209		884,475	490	1,032,174	3
Arizona	59,686		808,927	572	869,185	3
All other states (1)	602,041		5,113,548	253,715	5,969,304	17
Total loans	$	2,895,857	31,034,572	633,870	34,564,299	100	%


(1)	No state is equal to or greater than 3% of total loans.

COMMERCIAL AND INDUSTRIAL LOANS (C&I) C&I loans were less than 1% of total loans at March 31, 2019. We believe the C&I portfolio is appropriately underwritten. Our credit risk management process for this portfolio focuses on a customer's

ability to repay the loan through their cash flows. Substantially all of the loans in our C&I portfolio were unsecured at March 31, 2019.

COMMERCIAL SECURED BY REAL ESTATE (CSRE) The CSRE portfolio consists of both mortgage loans and construction loans, where loans are secured by real estate. Table 4 summarizes CSRE loans by state and property type. To identify and manage newly emerging problem CSRE loans, we employ a high level of monitoring and regular customer interaction to understand and manage the risks associated with these loans,

including regular loan reviews and appraisal updates. We consider the creditworthiness of the customers and collateral valuations when selecting CSRE loans for acquisition. 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 4: CSRE Loans by State and Property Type



	March 31, 2019
(in thousands)	Total CSRE loans		% of total CSRE loans
By state:
California	$	1,318,688	46	%
Florida	267,815		9
Utah	153,066		5
Oregon	147,209		5
Washington	126,740		4
Maryland	87,241		3
New Jersey	81,583		3
Texas	79,661		3
Colorado	68,000		2
Minnesota	67,681		2
Arizona	59,686		2
Missouri	51,599		2
Washington DC	49,911		2
Virginia	47,634		2
All other states (1)	281,918		10
Total loans	$	2,888,432	100	%
By property type:
Office buildings	$	710,635	25	%
Shopping centers	520,821		18
5 + multifamily residences	457,176		16
Warehouses	427,926		15
Retail establishments (restaurants, stores)	302,325		10
Mini-storage	162,495		6
Commercial/industrial (non-residential)	105,194		4
Manufacturing plants	61,593		2
Motels/hotels	60,095		2
Research and development	32,624		1
Other	47,548		1
Total loans	$	2,888,432	100	%


(1)	No state is equal to or greater than 2% of CSRE loans.

REAL ESTATE 1-4 FAMILY MORTGAGE LOANS The concentrations of real estate 1-4 family mortgage loans by state and the related loan-to-value (LTV) ratio for real estate 1-4 family first mortgage and combined loan-to-value (CLTV) ratio for real estate 1-4 family junior lien mortgage loans are presented in combination in Table 5. CLTV means the ratio of the total loan balance of first and junior mortgages to property collateral value. We monitor changes in real estate values and underlying economic or market conditions for all geographic areas of our real estate 1-4 family mortgage portfolio as part of our credit risk management process. Our periodic review of loans secured by residential real estate collateral includes appraisals or estimates from automated valuation models (AVMs) to support property values. AVMs are computer-based tools used to estimate the market value of homes. AVMs are a lower-cost alternative to appraisals and support valuations of large numbers of properties in a short period of time using market comparables and price trends for local market areas. The primary risk associated with the use of AVMs is that the value of an individual property may vary significantly from the average

for the market area. We have processes to periodically validate AVMs and specific risk management guidelines addressing the circumstances when AVMs may be used. Additional information about AVMs and our policy for their use can be found in Note 2 (Loans and Allowance for Credit Losses) to Financial Statements in this Report and the “Risk Management - Credit Risk Management - Real Estate 1-4 Family Mortgage Loans” section in our 2018 Form 10-K.

We modify real estate 1-4 family mortgage loans to assist homeowners and other borrowers experiencing financial difficulties. For more information on our modification programs, see the “Risk Management – Credit Risk Management – Real Estate 1-4 Family Mortgage Loans” section in our 2018 Form 10-K.

The credit performance associated with our real estate 1-4 family mortgage portfolio remained strong in first quarter 2019, as measured through net charge-offs, nonaccrual loans and delinquencies.

Table 5: Real Estate 1-4 Family Mortgage Loans LTV/CLTV by State



	March 31, 2019
(in thousands)	Real estate 1-4 family mortgage		Current LTV\CLTV ratio
California	$	8,267,976	44	%
New York	3,017,775		58
Washington	2,303,780		53
Virginia	1,984,970		62
Texas	1,325,141		58
Massachusetts	1,273,346		59
Maryland	1,243,806		64
Pennsylvania	1,182,944		61
Illinois	1,159,422		68
Georgia	1,046,739		60
Minnesota	970,718		63
Oregon	884,965		59
Florida	830,098		51
Arizona	809,499		59
All other states (1)	5,367,263		56
Total loans	$	31,668,442	55


(1)	No state is equal to or greater than 3% of real estate 1-4 family mortgage loans.

REAL ESTATE 1-4 FAMILY FIRST MORTGAGE LOANS Net charge-offs (recoveries) (annualized) as a percentage of average loans were 0.00% in first quarter 2019, compared with (0.01)% for the same period a year ago. Nonaccrual loans were $144.2 million at March 31, 2019, compared with $142.3 million at December 31, 2018.

Table 6 summarizes delinquency and loss rates by state for our real estate 1-4 family first mortgage portfolio.

Table 6: Real Estate 1-4 Family First Mortgage Portfolio Performance



	Outstanding balance			% of loans 30 days or more past due			Loss (recovery) rate (annualized) quarter ended
(in thousands)	Mar 31, 2019		Dec 31, 2018	Mar 31, 2019		Dec 31, 2018	Mar 31, 2019		Dec 31, 2018		Sep 30, 2018		Jun 30, 2018		Mar 31, 2018
California	$	8,260,775	8,451,050	0.11	%	0.11	—		—		—		—		—
New York	2,977,274		3,028,854	0.42		0.54	0.01		(0.01	)	0.06		0.02		—
Washington	2,302,901		2,348,005	0.17		0.12	—		(0.01	)	(0.01	)	—		(0.01	)
Virginia	1,919,995		1,954,719	0.46		0.47	0.02		0.01		(0.02	)	(0.02	)	(0.02	)
Texas	1,317,726		1,351,937	0.20		0.34	—		0.01		(0.01	)	—		0.02
Massachusetts	1,270,950		1,299,185	0.13		0.22	—		—		(0.02	)	0.01		—
Maryland	1,214,143		1,237,011	0.32		0.44	(0.02	)	—		0.01		0.02		—
Illinois	1,158,468		1,185,911	0.19		0.24	0.05		—		(0.04	)	—		(0.01	)
Pennsylvania	1,082,895		1,109,930	1.93		1.93	0.04		(0.03	)	(0.12	)	0.05		0.17
Georgia	1,003,311		1,030,320	0.32		0.33	(0.02	)	(0.05	)	(0.04	)	(0.15	)	(0.13	)
Minnesota	969,247		987,652	0.02		0.01	—		(0.01	)	(0.02	)	(0.01	)	—
Oregon	884,474		906,070	0.19		0.01	—		—		—		—		—
Arizona	808,926		835,533	0.31		0.21	—		—		—		—		(0.02	)
All other states (1)	5,856,460		6,036,480	1.08		1.09	(0.04	)	0.01		(0.06	)	(0.10	)	(0.07	)
Total	31,027,545		31,762,657	0.44		0.46	—		—		(0.02	)	(0.02	)	(0.01	)
PCI	7,027		7,156
Total first mortgages	$	31,034,572	31,769,813


(1)	No state is equal to or greater than 3% of real estate 1-4 family first mortgage loans.

REAL ESTATE 1-4 FAMILY JUNIOR LIEN MORTGAGE LOANS Our junior lien portfolio includes real estate 1-4 family junior lien mortgage loans secured by real estate. Predominantly all of our junior lien loans are amortizing payment loans with fixed interest rates and repayment periods between 5 to 30 years. Junior lien loans with balloon payments at the end of the repayment term represent less than 1% of our junior lien loans. We frequently monitor the credit performance of our junior lien mortgage portfolio for trends and factors that influence the

frequency and severity of loss. Net charge-offs (recoveries) (annualized) as a percentage of average loans were (0.21)% in the first quarter of 2019 compared with 0.29% for the same period a year ago. Nonaccrual loans were $33.6 million at March 31, 2019, compared with $34.6 million at December 31, 2018.

Table 7 summarizes delinquency and loss rates by state for our junior lien portfolio.

Table 7: Real Estate 1-4 Family Junior Lien Portfolio Performance



	Outstanding balance			% of loans 30 days or more past due			Loss (recovery) rate (annualized) quarter ended
(in thousands)	Mar 31, 2019		Dec 31, 2018	Mar 31, 2019		Dec 31, 2018	Mar 31, 2019		Dec 31, 2018		Sep 30, 2018		Jun 30, 2018		Mar 31, 2018
New Jersey	$	140,957	146,787	5.19	%	4.83	(0.61	)	(0.53	)	1.43		2.31		0.73
Pennsylvania	98,705		104,882	3.23		4.16	(0.18	)	1.50		0.92		0.43		(0.67	)
Florida	83,863		88,122	3.63		3.21	(0.44	)	(1.13	)	(0.14	)	(0.08	)	(1.31	)
Virginia	64,087		68,551	2.84		2.94	0.43		(0.88	)	0.41		(1.30	)	2.59
Georgia	42,867		45,857	1.47		2.64	(2.45	)	(0.07	)	0.16		(0.07	)	(0.78	)
North Carolina	41,560		44,343	5.38		6.36	(0.41	)	(1.04	)	0.13		(0.14	)	(0.42	)
New York	39,927		42,528	3.89		5.56	2.37		0.10		(0.46	)	(0.53	)	0.70
Connecticut	30,847		32,132	3.61		4.40	1.53		(0.53	)	0.13		0.35		1.20
Maryland	29,435		31,099	3.79		4.46	(1.82	)	0.60		2.34		(0.78	)	2.27
All other states (1)	61,622		65,531	2.89		2.46	0.20		(0.01	)	(0.12	)	0.18		0.25
Total	633,870		669,832	3.76		4.05	(0.21	)	(0.18	)	0.58		0.37		0.29
PCI	—		—
Total junior lien mortgages	$	633,870	669,832


(1)	No state is equal to or greater than 3% of real estate 1-4 family junior lien loans.

NONPERFORMING ASSETS (NONACCRUAL LOANS AND FORECLOSED ASSETS) Table 8 summarizes nonperforming assets (NPAs) for each of the last five quarters. For information about when we generally place loans on nonaccrual status, see

Note 1 (Summary of Significant Accounting Policies) to Financial Statements in our 2018 Form 10-K.

Table 8: Nonperforming Assets (Nonaccrual Loans and Foreclosed Assets)



(in thousands)	Mar 31, 2019			Dec 31, 2018	Sep 30, 2018	Jun 30, 2018	Mar 31, 2018
Nonaccrual loans:
Total commercial	$	1,959		1,975	2,016	2,506	2,519
Consumer:
Real estate 1-4 family first mortgage	144,173			142,325	141,953	147,574	152,510
Real estate 1-4 family junior lien mortgage	33,587			34,625	35,948	37,553	42,161
Total consumer	177,760			176,950	177,901	185,127	194,671
Total nonaccrual loans (1)	179,719			178,925	179,917	187,633	197,190
Foreclosed assets	2,094			1,591	2,596	2,503	2,259
Total nonperforming assets	$	181,813		180,516	182,513	190,136	199,449
As a percentage of total loans	0.53		%	0.51	0.56	0.57	0.57


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

Total NPAs were $181.8 million (0.53% of total loans) at March 31, 2019, and included $179.7 million of nonaccrual loans. Total NPAs were $180.5 million (0.51% of total loans) at December 31, 2018, and included $178.9 million of nonaccrual loans.

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, 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 9 provides an analysis of the changes in nonaccrual loans.

Table 9: Analysis of Changes in Nonaccrual Loans



	Quarter ended
(in thousands)	Mar 31, 2019			Dec 31, 2018		Sep 30, 2018		Jun 30, 2018		Mar 31, 2018
Commercial:
Balance, beginning of period	$	1,975		2,016		2,506		2,519		2,306
Inflows	2			46		—		241		252
Outflows	(18		)	(87	)	(490	)	(254	)	(39	)
Balance, end of period	1,959			1,975		2,016		2,506		2,519
Consumer:
Balance, beginning of period	176,950			177,901		185,127		194,671		195,084
Inflows	28,286			23,517		19,111		23,551		32,155
Outflows:
Returned to accruing	(15,705		)	(9,954	)	(12,164	)	(14,291	)	(15,190	)
Foreclosures	(1,910		)	(2,114	)	(3,278	)	(2,326	)	(4,899	)
Charge-offs	(1,501		)	(2,963	)	(2,538	)	(2,277	)	(3,396	)
Payment, sales and other	(8,360		)	(9,437	)	(8,357	)	(14,201	)	(9,083	)
Total outflows	(27,476		)	(24,468	)	(26,337	)	(33,095	)	(32,568	)
Balance, end of period	177,760			176,950		177,901		185,127		194,671
Total nonaccrual loans (excluding PCI)	$	179,719		178,925		179,917		187,633		197,190

TROUBLED DEBT RESTRUCTURINGS (TDRs) The recorded investment of loans modified in TDRs is provided in Table 10. The allowance for loan losses for TDRs was $38.9 million and $37.8 million at March 31, 2019 and December 31, 2018, 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. 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.

For more information on our nonaccrual policies when a restructuring is involved, see the “Risk Management – Credit Risk Management – Troubled Debt Restructurings (TDRs)” section of our 2018 Form 10-K.

Table 11 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 10: Troubled Debt Restructurings (TDRs)



(in thousands)	Mar 31, 2019		Dec 31, 2018	Sep 30, 2018	Jun 30, 2018	Mar 31, 2018
Total commercial TDRs	$	2,183	1,958	2,509	3,124	3,152
Consumer:
Real estate 1-4 family first mortgage	283,651		278,459	289,563	294,171	305,212
Real estate 1-4 family junior lien mortgage	75,902		77,386	78,802	81,578	86,659
Trial modifications	4,530		5,277	5,044	5,980	5,557
Total consumer TDRs	364,083		361,122	373,409	381,729	397,428
Total TDRs	$	366,266	363,080	375,918	384,853	400,580
TDRs on nonaccrual status	$	121,279	109,713	113,893	115,672	118,659
TDRs on accrual status	244,987		253,367	262,025	269,181	281,921
Total TDRs	$	366,266	363,080	375,918	384,853	400,580

Table 11: Analysis of Changes in TDRs



	Quarter ended
(in thousands)	Mar 31, 2019			Dec 31, 2018		Sep 30, 2018		Jun 30, 2018		Mar 31, 2018
Commercial:
Balance, beginning of period	$	1,958		2,509		3,124		3,152		2,992
Inflows (1)	233			—		350		—		203
Outflows (2)	(8		)	(551	)	(965	)	(28	)	(43	)
Balance, end of period	2,183			1,958		2,509		3,124		3,152
Consumer:
Balance, beginning of period	361,122			373,409		381,729		397,428		406,736
Inflows (1)	16,238			2,978		5,872		6,476		7,520
Outflows:
Charge-offs	(305		)	(376	)	(249	)	(388	)	(380	)
Foreclosures	(386		)	(486	)	(1,298	)	(2,734	)	(825	)
Payments, sales and other (2)	(11,839		)	(14,635	)	(11,710	)	(19,476	)	(13,682	)
Net change in trial modifications (3)	(747		)	232		(935	)	423		(1,941	)
Balance, end of period	364,083			361,122		373,409		381,729		397,428
Total TDRs	$	366,266		363,080		375,918		384,853		400,580


(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 the quarters ended March 31, 2019 and December 31, September 30, June 30 and March 31, 2018, 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.

Loans 90 days or more past due and still accruing were less than 1% of loans at both March 31, 2019 and December 31, 2018.

Table 12 reflects non-PCI loans 90 days or more past due and still accruing.

Table 12: Loans 90 Days or More Past Due and Still Accruing (1)



(in thousands)	Mar 31, 2019		Dec 31, 2018	Sep 30, 2018	Jun 30, 2018	Mar 31, 2018
Total commercial	$	—	—	—	—	2,854
Consumer:
Real estate 1-4 family first mortgage	2,259		5,819	4,640	2,321	3,999
Real estate 1-4 family junior lien mortgage	759		708	1,478	320	1,419
Total consumer	3,018		6,527	6,118	2,641	5,418
Total past due (excluding PCI)	$	3,018	6,527	6,118	2,641	8,272

(1)

PCI loans of $381 thousand, $373 thousand, $422 thousand, $504 thousand and $529 thousand at March 31, 2019 and December 31, September 30, June 30 and March 31, 2018, 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 13 presents net charge-offs (recoveries) for first quarter 2019 and the previous four quarters. Substantially all net charge-offs (recoveries) were in

consumer real estate. Net recoveries were $626 thousand and $506 thousand in first quarter 2019 and 2018, respectively.

Table 13: Net Charge-offs (Recoveries)



						Quarter ended
	Mar 31, 2019					Dec 31, 2018					Sep 30, 2018					Jun 30, 2018					Mar 31, 2018
(in thousands)	Net loan charge- offs			% of avg. loans (1)		Net loan charge- offs			% of avg. loans (1)		Net loan charge- offs			% of avg. loans (1)		Net loan charge- offs			% of avg. loans (1)		Net loan charge- offs			% of avg. loans (1)
Total commercial	$	(8	)	—	%	$	(13	)	—	%	$	(12	)	—	%	$	(13	)	—	%	$	(15	)	—	%
Consumer:
Real estate 1-4 family first mortgage	(277		)	—		(181		)	—		(1,171		)	(0.02	)	(1,505		)	(0.02	)	(1,092		)	(0.01	)
Real estate 1-4 family junior lien mortgage	(341		)	(0.21	)	(319		)	(0.18	)	1,064			0.58		732			0.37		601			0.29
Total consumer	(618		)	(0.01	)	(500		)	(0.01	)	(107		)	—		(773		)	(0.01	)	(491		)	(0.01	)
Total	$	(626	)	(0.01	)%	$	(513	)	(0.01	)%	$	(119	)	—	%	$	(786	)	(0.01	)%	$	(506	)	(0.01	)%


(1)	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 March 31, 2019.

The allowance for loan losses increased $1.5 million to $98.2 million at March 31, 2019, from $96.7 million at December 31, 2018, as the continued portfolio improvement slowed combined with a higher probability of slightly less favorable economic conditions. First quarter 2018 reflected an improvement in our outlook for hurricane-related losses as well as strong performance in our residential real estate portfolio.

We believe the allowance for credit losses of $99.7 million at March 31, 2019, 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 Policy” section and Note 1 (Summary of Significant Accounting Policies) to Financial Statements in this Report and in our 2018 Form 10-K.

Table 14 presents an analysis of the allowance for credit losses.

Table 14: Allocation of the Allowance for Credit Losses (ACL)



	Quarter ended
	Mar 31, 2019				Dec 31, 2018				Sep 30, 2018				Jun 30, 2018				Mar 31, 2018
(in thousands)	ACL		Loans as % of total loans		ACL		Loans as % of total loans		ACL		Loans as % of total loans		ACL		Loans as % of total loans		ACL		Loans as % of total loans
Total commercial	$	25,220	10	%	$	26,281	10	%	$	23,722	8	%	$	25,856	9	%	$	27,020	9	%
Consumer:
Real estate 1-4 family first mortgage	55,034		89		51,894		89		59,026		90		61,702		89		67,780		89
Real estate 1-4 family junior lien mortgage	19,416		1		20,093		1		23,454		2		26,178		2		29,266		2
Total consumer	74,450		90		71,987		90		82,480		92		87,880		91		97,046		91
Total	$	99,670	100	%	$	98,268	100	%	$	106,202	100	%	$	113,736	100	%	$	124,066	100	%



	Quarter ended
(in thousands)	Mar 31, 2019			Dec 31, 2018	Sep 30, 2018	Jun 30, 2018	Mar 31, 2018
Components:
Allowance for loan losses	$	98,158		96,743	104,556	112,381	122,863
Allowance for unfunded credit commitments	1,512			1,525	1,646	1,355	1,203
Allowance for credit losses	$	99,670		98,268	106,202	113,736	124,066
Allowance for loan losses as a percentage of total loans	0.28		%	0.27	0.32	0.33	0.35
Allowance for loan losses as a percentage of annualized net charge-offs	NM			NM	NM	NM	NM
Allowance for credit losses as a percentage of total loans	0.29			0.28	0.33	0.34	0.36
Allowance for credit losses as a percentage of total nonaccrual loans	55.46			54.92	59.03	60.62	62.92

NM – Not meaningful

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 March 31, 2019, 11% 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 March 31, 2019, approximately 89% 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 March 31, 2019, 11% of our assets had variable interest rates, and could be expected to reprice with changes in interest rates. At March 31, 2019, our liabilities were 6% 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.

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. 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 March 31, 2019 there was $2.2 billion outstanding on our Bank line of credit. Effective March 2019, the Company renewed the line of credit with the Bank and the interest rate increased from three-month LIBOR plus 4.4 basis points (0.044%) to three-month LIBOR plus 65.0 basis points (0.650%). The change in interest rate was driven by an increase in term, along with a change in underwriting which aligned our credit rating with that of our direct parents rather than the Bank. It is expected that a transition away from the widespread use of LIBOR to alternative benchmark rates will occur by the end of 2021.

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 (CFPB), the Office of the Comptroller of the Currency (OCC), 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. On February 2, 2018, Wells Fargo entered into a consent order with the Board of Governors of the Federal Reserve System (FRB) related to governance oversight and compliance and operational risk management that imposes an asset cap on Wells Fargo until plans to enhance governance oversight and compliance and operational risk management are approved and implemented to the satisfaction of the FRB. On April 20, 2018 Wells Fargo reached agreement on consent orders issued by the CFPB and OCC to resolve matters regarding the compliance risk management program and past practices involving certain automobile collateral protection insurance policies and certain mortgage interest rate lock extensions. On August 1, 2018, Wells Fargo announced an agreement with the U.S. Department of Justice regarding the resolution of claims related to certain 2005-2007 residential mortgage-backed securities activities. Negative publicity or public opinion resulting from the settlements, consent orders, and related matters and other instances where the Bank’s customers may have experienced financial harm as well as from the resolution of other regulatory matters, litigation, or legal actions by Wells Fargo and the Bank 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.

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 operating 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.

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 our 2018 Form 10-K) are fundamental to understanding our results of operations and financial condition because they require that we use estimates and assumptions that may affect the value of our assets or liabilities and financial results. 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. This policy is described in the "Critical Accounting Policy" section in our 2018 Form 10-K.

Current Accounting Developments

Table 15 provides accounting pronouncements applicable to us that have been issued by the FASB but are not yet effective.

Table 15: Current Accounting Developments - Issued Standards



Standard	Description	Effective date and financial statement impact
Accounting Standards Update (ASU or Update) 2016-13 – Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments	The Update changes the accounting for credit losses measurement on loans by requiring a current expected credit loss (CECL) measurement to estimate the allowance for credit losses (ACL). 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 PCI loans, but requires an allowance for purchased financial assets with more than insignificant deterioration since origination.	We expect to adopt the guidance in first quarter 2020. Our implementation process includes loss forecasting model development, evaluation of technical accounting topics, updates to our allowance documentation, reporting processes and related internal controls, and overall operational readiness for our adoption of the Update, which will continue throughout 2019, including parallel runs for CECL alongside our current allowance process. We are in the process of developing, validating, and implementing models used to estimate credit losses under CECL. We have completed all of our loss forecasting models, and we expect to complete the validation process for our loan models during 2019. Our current planned approach for estimating expected life-time credit losses for loans includes the following key components: • An initial forecast period of one year for all portfolio segments and off-balance-sheet credit exposures. This period reflects management’s expectation of losses based on forward-looking economic scenarios over that time. • A historical loss forecast period covering the remaining contractual life, adjusted for prepayments, by portfolio segment and class of financing receivables based on the change in key historic economic variables during representative historical expansionary and recessionary periods. • A reversion period of up to 2 years connecting the initial loss forecast to the historical loss forecast based on economic conditions at the measurement date. • We will utilize discounted cash flow (DCF) methods to measure credit impairment for loans modified in a TDR, unless they are collateral dependent and measured at the fair value of collateral. The DCF methods would obtain estimated life-time credit losses using the conceptual components described above. Based on our portfolio composition as of March 31, 2019, and the current economic environment, we currently estimate an overall decrease in our ACL for loans in the range of $0 to $10 million. The reduction reflects an expected decrease for commercial loans, given their short contractual maturities and benign economic environment, partially offset by an expected increase for longer duration consumer loans. This expected reduction to our ACL does not include the impact of recently issued FASB guidance to consider subsequent increases in fair value of collateral for collateral dependent loans. Application of this guidance is expected to result in a further reduction to our ACL of approximately $50 million, related to residential mortgage loans that were previously written down below current recovery value estimates. We will continue to evaluate and refine the results of our loss estimates throughout 2019. The ultimate effect of CECL on our ACL will depend on the size and composition of our portfolio, the portfolio's credit quality and economic conditions at the time of adoption, as well as any refinements to our models, methodology and other key assumptions. At adoption, we will have a cumulative-effect adjustment to retained earnings for our change in the ACL.

In addition to the list above, the following Updates are applicable to us but are not expected to have a material impact on our financial statements:


•	ASU 2018-13 – Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement

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;


•	losses related to natural disasters, including from damage or loss to our collateral for loans in our consumer and commercial loan portfolios and from the impact on the ability of our borrowers to repay their loans;


•	the effect of the interest rate environment or changes in interest rates on our net interest income;


•	the level and volatility of the capital markets, interest rates, currency values and other market indices that affect the value of our assets and liabilities;


•	the effect of political conditions and geopolitical events;


•	adverse developments in the availability of desirable investment opportunities, whether they are due to competition, regulation or otherwise;


•	the extent of loan modification efforts, as well as the effects of regulatory requirements or guidance regarding loan modifications;


•	the availability and cost of both credit and capital;


•	investor sentiment and confidence in the financial markets;

•

our reputation and the reputation of Wells Fargo and the Bank, including negative effects from the Bank's retail banking sales practices matter and other instances where the Bank’s customers may have experienced financial harm and negative effects from the resolution of regulatory matters, litigation, or other legal actions by Wells Fargo and the Bank, which may result in, among other things, additional costs, fines, penalties, restrictions on Wells Fargo’s or the Bank’s business, reputational harm or other adverse consequences;


•	financial services reform and the impact of other current, pending and future legislation, regulation and legal actions applicable to us, the Bank or Wells Fargo, including the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) and related regulations;


•	changes in accounting standards, rules and interpretations;


•	various monetary and fiscal policies and regulations of the U.S. and foreign governments;


•	a failure in or breach of our, the Bank’s or Wells Fargo’s operational or security systems or infrastructure, or those of third party vendors and other security providers, including as a result of cyber-attacks; and


•	the other factors described in “Risk Factors” in the 2018 Form 10-K.

In addition to the above factors, we also caution that our allowance for credit losses currently may not be appropriate to cover future credit losses, especially if housing prices decline, unemployment worsens, or general economic conditions deteriorate. Increases in loan charge-offs or in the allowance for credit losses and related provision expense could materially adversely affect our financial results and condition.

Any forward-looking statement made by us in this Report speaks only as of the date on which it is made. Factors or events that could cause our actual results to differ may emerge from time to time, and it is not possible for us to predict all of them. We undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future developments or otherwise, except as may be required by law.

Risk Factors

An investment in Wells Fargo Real Estate Investment Corporation involves risk, including the possibility that the value of the investment could fall substantially and that dividends or other distributions on the investment could be reduced or eliminated. For a discussion of risk factors that could adversely affect our financial results and condition and the value of, and return on, an investment in WFREIC, refer to the “Risk Factors” section in our 2018 Form 10-K.

Controls and Procedures



Disclosure Controls and Procedures

The Company's management evaluated the effectiveness, as of March 31, 2019, of the Company's disclosure controls and procedures. The Company's chief executive officer and chief financial officer participated in the evaluation. Based on this evaluation, the Company’s chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective as of March 31, 2019.



Internal Control Over Financial Reporting

Internal control over financial reporting is defined in Rule 13a-15(f) promulgated under the Securities Exchange Act of 1934 as a process designed by, or under the supervision of, the Company’s principal executive and principal financial officers and effected by the Company’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles (GAAP) and includes those policies and procedures that:


•	pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of assets of the Company;


•	provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and


•	provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. No change occurred during first quarter 2019 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

Financial Statements



Wells Fargo Real Estate Investment Corporation
Statement of Income (Unaudited)
	Quarter ended March 31,
(in thousands, except per share amounts)	2019	2018
Interest income	358,113	351,664
Interest expense	18,387	14,402
Net interest income	339,726	337,262
Provision (reversal of provision) for credit losses	1,685	(5,854	)
Net interest income after provision for credit losses	338,041	343,116
Noninterest income
Pledge fees	1,411	6,037
Other	331	221
Total noninterest income	1,742	6,258
Noninterest expense
Loan servicing costs	21,545	21,922
Management fees	10,699	6,260
Foreclosed assets	3,925	2,053
Other	175	107
Total noninterest expense	36,344	30,342
Net income	303,439	319,032
Comprehensive income	303,439	319,032
Dividends on preferred stock	4,397	4,397
Net income applicable to common stock	299,042	314,635
Per common share information
Earnings per common share	8.78	9.24
Diluted earnings per common share	8.78	9.24
Average common shares outstanding	34,058	34,058
Diluted average common shares outstanding	34,058	34,058

The accompanying notes are an integral part of these statements.



Wells Fargo Real Estate Investment Corporation
Balance Sheet
(in thousands, except shares)	Mar 31, 2019			Dec 31, 2018
Assets	(Unaudited)
Cash and cash equivalents	$	—		—
Loans	34,564,299			35,495,068
Allowance for loan losses	(98,158		)	(96,743	)
Net loans	34,466,141			35,398,325
Accounts receivable - affiliates, net	74,053			—
Other assets	95,833			94,942
Total assets	$	34,636,027		35,493,267
Liabilities
Line of credit with Bank	$	2,209,000		3,054,738
Accounts payable - affiliates, net	—			13,798
Other liabilities	7,699			9,445
Total liabilities	2,216,699			3,077,981
Stockholders’ Equity
Preferred stock	110			110
Common stock – $0.01 par value, authorized 100,000,000 shares; issued and outstanding 34,058,028 shares	341			341
Additional paid-in capital	32,550,660			32,550,660
Retained earnings (deficit)	(131,783		)	(135,825	)
Total stockholders’ equity	32,419,328			32,415,286
Total liabilities and stockholders’ equity	$	34,636,027		35,493,267

The accompanying notes are an integral part of these statements.



Wells Fargo Real Estate Investment Corporation
Statement of Changes in Stockholders’ Equity (Unaudited)
(in thousands, except per share data)	Preferred stock		Common stock	Additional paid-in capital	Retained earnings (deficit)		Total stockholders’ equity
Balance, December 31, 2018	$	110	341	32,550,660	(135,825	)	32,415,286
Net income	—		—	—	303,439		303,439
Cash dividends
Series A preferred stock at $0.40 per share	—		—	—	(4,383	)	(4,383	)
Series B preferred stock at $21.25 per share	—		—	—	(14	)	(14	)
Common stock at $8.66 per share	—		—	—	(295,000	)	(295,000	)
Balance, March 31, 2019	$	110	341	32,550,660	(131,783	)	32,419,328
Balance, December 31, 2017	$	110	341	32,550,660	(160,848	)	32,390,263
Net income	—		—	—	319,032		319,032
Cash dividends
Series A preferred stock at $0.40 per share	—		—	—	(4,383	)	(4,383	)
Series B preferred stock at $21.25 per share	—		—	—	(14	)	(14	)
Common stock at $9.54 per share	—		—	—	(325,000	)	(325,000	)
Balance, March 31, 2018	$	110	341	32,550,660	(171,213	)	32,379,898

The accompanying notes are an integral part of these statements.



Wells Fargo Real Estate Investment Corporation
Statement of Cash Flows (Unaudited)
	Quarter ended March 31,
(in thousands)	2019			2018
Cash flows from operating activities:
Net income	$	303,439		319,032
Adjustments to reconcile net income to net cash provided by operating activities:
Net accretion of adjustments on loans	(6,822		)	(4,278	)
Provision (reversal of provision) for credit losses	1,685			(5,854	)
Other operating activities, net	14,254			18,401
Net cash provided by operating activities	312,556			327,301
Cash flows from investing activities:
Increase (decrease) in cash realized from
Loans:
Acquisitions	—			—
Proceeds from payments and sales	828,182			1,042,451
Net cash provided by investing activities	828,182			1,042,451
Cash flows from financing activities:
Increase (decrease) in cash realized from
Draws on line of credit with Bank	319,831			337,358
Repayments of line of credit with Bank	(1,165,569		)	(1,382,110	)
Cash dividends paid	(295,000		)	(325,000	)
Net cash used by financing activities	(1,140,738		)	(1,369,752	)
Net change in cash and cash equivalents	—			—
Cash and cash equivalents at beginning of period	—			—
Cash and cash equivalents at end of period	$	—		—
Supplemental cash flow disclosures:
Change in noncash items:
Transfers from loans to foreclosed assets	$	2,132		2,457
Preferred dividends payable	4,397			4,397
Cash paid for interest	24,597			10,704

The accompanying notes are an integral part of these statements.

Note 1: Summary of Significant Accounting Policies

Wells Fargo Real Estate Investment Corporation (the Company, we, our or us) is an indirect subsidiary of both Wells Fargo & Company (Wells Fargo) and Wells Fargo Bank, National Association (the Bank). The Company, a Delaware corporation, has operated as a real estate investment trust (REIT) since its formation in 1996.

The accounting and reporting policies of the Company are in accordance with U.S. generally accepted accounting principles (GAAP). For discussion of our significant accounting policies, see Note 1 (Summary of Significant Accounting Policies) in our Annual Report on Form 10-K for the year ended December 31, 2018 (2018 Form 10-K). There were no material changes to these policies in first quarter 2019. The preparation of the financial statements in accordance with GAAP requires management to make estimates based on assumptions about future economic and market conditions that affect the reported amounts of assets and liabilities at the date of the financial statements and income and expenses during the reporting period and the related disclosures. Although our estimates contemplate current conditions and how we expect them to change in the future, it is reasonably possible that actual future conditions could be significantly different than anticipated in those estimates, which could materially affect our results of operations and financial condition. Management has made significant estimates related to the allowance for credit losses (Note 2 (Loans and Allowance for Credit Losses)). Actual results could differ from those estimates.

These unaudited interim financial statements reflect all adjustments that are, in the opinion of management, necessary for a fair statement of the results for the periods presented. These adjustments are of a normal recurring nature, unless otherwise disclosed in this Form 10-Q. The results of operations in the interim financial statements do not necessarily indicate the results that may be expected for the full year. The interim financial information should be read in conjunction with our 2018 Form 10-K.

Accounting Standards Adopted in 2019

In first quarter 2019, we did not adopt any new accounting standards.

Subsequent Events

We have evaluated the effects of events that have occurred subsequent to March 31, 2019. There were no material subsequent events requiring adjustment to the financial statements or disclosure in the Notes to Financial Statements.

Note 2: Loans and Allowance for Credit Losses

The Company acquires loans originated or purchased by the Bank. In order to maintain our status as a REIT, the composition of the loans is highly concentrated in real estate. Underlying loans are concentrated primarily in California, New York, Washington, Virginia, Texas, Maryland and Massachusetts. These markets include approximately 62% of our total loan balance at March 31, 2019.

The following table presents total loans outstanding by portfolio segment and class of financing receivable. Total reductions and additions for unamortized premiums, discounts and other adjustments were less than 1% of outstanding balances at March 31, 2019 and December 31, 2018.



(in thousands)	Mar 31, 2019		Dec 31, 2018
Total commercial	$	2,895,857	3,055,423
Consumer:
Real estate 1-4 family first mortgage	31,034,572		31,769,813
Real estate 1-4 family junior lien mortgage	633,870		669,832
Total consumer	31,668,442		32,439,645
Total loans	$	34,564,299	35,495,068

The following table summarizes the proceeds paid or received from the Bank for acquisitions and sales of loans, respectively.



	2019						2018
(in thousands)	Commercial		Consumer		Total		Commercial	Consumer		Total
Quarter ended March 31,
Loan acquisitions	$	—	—		—		—	—		—
Loan sales	—		(11,682	)	(11,682	)	—	(3,641	)	(3,641	)

Commitments to Lend

The contract or notional amount of commercial loan commitments to extend credit was $489.9 million at March 31, 2019 and $462.2 million at December 31, 2018.

Pledged Loans

See Note 5 (Transactions With Related Parties) for additional details on our agreement with the Bank to pledge loans.

Allowance for Credit Losses

The following table presents the allowance for credit losses, which consists of the allowance for loan losses and the allowance for unfunded credit commitments.



	Quarter ended March 31,
(in thousands)	2019			2018
Balance, beginning of period	$	98,268		130,661
Provision (reversal of provision) for credit losses	1,685			(5,854	)
Interest income on certain impaired loans (1)	(909		)	(1,247	)
Loan charge-offs:
Total commercial	—			—
Consumer:
Real estate 1-4 family first mortgage	(1,194		)	(1,092	)
Real estate 1-4 family junior lien mortgage	(1,379		)	(2,798	)
Total consumer	(2,573		)	(3,890	)
Total loan charge-offs	(2,573		)	(3,890	)
Loan recoveries:
Total commercial	8			15
Consumer:
Real estate 1-4 family first mortgage	1,471			2,184
Real estate 1-4 family junior lien mortgage	1,720			2,197
Total consumer	3,191			4,381
Total loan recoveries	3,199			4,396
Net loan recoveries	626			506
Balance, end of period	$	99,670		124,066
Components:
Allowance for loan losses	$	98,158		122,863
Allowance for unfunded credit commitments	1,512			1,203
Allowance for credit losses	$	99,670		124,066
Net loan (recoveries) charge-offs as a percentage of average total loans (2)	(0.01		)%	(0.01	)
Allowance for loan losses as a percentage of total loans	0.28			0.35
Allowance for credit losses as a percentage of total loans	0.29			0.36


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


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

The following table summarizes the activity in the allowance for credit losses by our commercial and consumer portfolio segments.



	2019							2018
(in thousands)	Commercial			Consumer		Total		Commercial		Consumer		Total
Quarter ended March 31,
Balance, beginning of period	$	26,281		71,987		98,268		28,085		102,576		130,661
Provision (reversal of provision) for credit losses	(1,069		)	2,754		1,685		(1,080	)	(4,774	)	(5,854	)
Interest income on certain impaired loans	—			(909	)	(909	)	—		(1,247	)	(1,247	)

Loan charge-offs	—			(2,573	)	(2,573	)	—		(3,890	)	(3,890	)
Loan recoveries	8			3,191		3,199		15		4,381		4,396
Net loan recoveries (charge-offs)	8			618		626		15		491		506
Balance, end of period	$	25,220		74,450		99,670		27,020		97,046		124,066

The following table disaggregates our allowance for credit losses and recorded investment in loans by impairment methodology.



	Allowance for credit losses				Recorded investment in loans
(in thousands)	Commercial		Consumer	Total	Commercial	Consumer	Total
March 31, 2019
Collectively evaluated (1)	$	24,781	35,979	60,760	2,893,674	31,297,332	34,191,006
Individually evaluated (2)	439		38,471	38,910	2,183	364,083	366,266
Purchased credit-impaired (PCI) (3)	—		—	—	—	7,027	7,027
Total	$	25,220	74,450	99,670	2,895,857	31,668,442	34,564,299
December 31, 2018
Collectively evaluated (1)	$	25,839	34,581	60,420	3,053,465	32,071,367	35,124,832
Individually evaluated (2)	442		37,406	37,848	1,958	361,122	363,080
PCI (3)	—		—	—	—	7,156	7,156
Total	$	26,281	71,987	98,268	3,055,423	32,439,645	35,495,068


(1)	Represents loans collectively evaluated for impairment in accordance with Accounting Standards Codification (ASC) 450-20, Loss Contingencies (formerly FAS 5), and pursuant to amendments by ASU 2010-20 regarding allowance for non-impaired loans.


(2)	Represents loans individually evaluated for impairment in accordance with ASC 310-10, Receivables (formerly FAS 114), and pursuant to amendments by ASU 2010-20 regarding allowance for impaired loans.


(3)	Represents the allowance and related loan carrying value determined in accordance with ASC 310-30, Receivables - Loans and Debt Securities Acquired with Deteriorated Credit Quality (formerly SOP 03-3) and pursuant to amendments by ASU 2010-20 regarding allowance for PCI loans.

Credit Quality

We monitor credit quality by evaluating various attributes and utilize such information in our evaluation of the appropriateness of the allowance for credit losses. The following sections provide the credit quality indicators we most closely monitor. The credit quality indicators are generally based on information as of our financial statement date, with the exception of updated Fair Isaac Corporation (FICO) scores and updated loan-to-value (LTV)/combined LTV (CLTV). We obtain FICO scores at loan origination and the scores are generally updated at least quarterly, except in limited circumstances, including compliance with the Fair Credit Reporting Act (FCRA). Generally, the LTV and CLTV indicators are updated in the second month of each quarter, with updates no older than December 31, 2018.

COMMERCIAL CREDIT QUALITY INDICATORS In addition to monitoring commercial loan concentration risk, we manage a consistent process for assessing commercial loan credit quality. Generally commercial loans are subject to individual risk assessment using our internal borrower and collateral quality ratings. Our ratings are aligned to Pass and Criticized categories. The Criticized category includes Special Mention, Substandard, and Doubtful categories which are defined by bank regulatory agencies.

The table below provides a breakdown of outstanding commercial loans by risk category.



(in thousands)	Total
March 31, 2019
By risk category:
Pass	$	2,864,170
Criticized	31,687
Total commercial loans	$	2,895,857
December 31, 2018
By risk category:
Pass	$	3,016,328
Criticized	39,095
Total commercial loans	$	3,055,423

The following table provides past due information for commercial loans, which we monitor as part of our credit risk management practices.

Wells Fargo Real Estate Investment Corp. 10-Q