Mini-case Assignment #1 Receivables and Securitization Wells Fargo, 2019 Attached please nd Income Statement, Balance Sheet, Statement of Cash ows, and Table 10.7 from footnote 10 on Securitizations and VIEs of Wells Fargo's 2019 annual report. Focus on the \"Total loans\" columns in the Table. These are the loans that have been sold or securitized, and are not included on Wells Fargo's Balance Sheet. Answer the following questions, for 2019 only. Wells Fargo's cumulative pro-tax gains on securitizations is $7,257. 1. Calculate the rm's ratio of CFO/0E. Use \"Total equity\" for the denominator. 2. Calculate the rm's ratio of total liabilities/total assets. 3. Recalculate the ratio in #1 if the sales and securitizations in Table 10.7 had been accounted for as borrowings. Assume that there have been no gains on loan sales or securitizations. 4. Recalculate the ratio in #2 if the sales and seeuritizations in Table 10.7 had been accounted for as borrowings. Assume that there have been no gains on loan sales or securitizations. 5. Redo #3 accounting for the securitization gains (ignore taxes). Wells Fargo & Company and Subsidiaries Consolidated Statement of Income Year ended December 31, (in millions, except per share amounts) 2019 2018 2017 Interest income Debt securities 14,955 14,406 12,946 Mortgage loans held for sale 313 777 786 Loans held for sale 79 140 50 Loans 14,146 $3.974 $1,388 Equity securities 962 992 799 Other interest income 5,128 4,358 2,940 Total interest income 66,083 $4,647 58,909 Interest expense Deposit 8,63 5,622 3,013 Short-term borrowings 2,316 1,717 758 Long-term debt 7,350 6,703 5,157 Other interest expense 55 610 424 Total interest expense 18,85 14,652 9,352 Net interest income 47,231 49,995 49,557 Provision for credit losses 2,687 1,744 2,528 Net interest income after provision for credit losses 44,544 18,251 47,029 Noninterest income Service charges on deposit accounts 4,798 4,716 5,111 Trust and investment fees 14,07 14,509 14,495 Card fees 4,016 3,907 3,960 Other fees 3,084 3,384 3,557 Mortgage banking 2,715 3,017 4,350 Insurance 378 425 1.049 let gains from trading activities 993 602 542 Net gains on debt securities (1) 140 108 479 Net gains from equity securities (2) 2,843 1,515 1,779 Lease income ,612 1,753 1,907 Other SECURITIZATIONS ? 3,181 2,473 1,603 2#7259 Total noninterest income 37,832 36,413 38,832 Noninterest expense salaries 18,387 17,834 17,363 Commission and incentive compensation 10,828 10,264 10,442 Employee benefits 5,874 4,926 5,566 Technology and equipment 2,76 2,444 2,237 Net occupancy 2.945 2.888 2.849 Core deposit and other intangibles 108 1,058 1,152 FDIC and other deposit assessments 526 1,110 1,287 Other 16,752 15,602 17,588 Total noninterest expense 58,178 56,126 58,484 Income before income tax expense 24,198 8,53 27,377 income tax expense 4,157 5,662 1,917 Net income before noncontrolling Interests 20,041 22,876 2,460 Less: Net income from noncontrolling interests 492 483 277 Wells Fargo net income 19,549 22,393 2,183 Less: Preferred stock dividends and other 1,611 1,704 1,629 Wells Fargo net income applicable to common stock $ 17,938 0,689 20,554 Per share information Earnings per common share 4.08 4.31 4.14 Diluted earnings per common share 4.0 4.28 4.10 Average common shares outstanding 4,393.1 4,799.7 4,964.6 Diluted average common shares outstanding 4,425.4 4,838.4 5,017.3 1) Total other-than-temporary impairment (OTTII losses were $64 million, $17 million and $205 million for the years ended December 31, 2019, 2018 and 2017, respectively. Of total OTTI, losses of $63 million, $28 million and $262 million were recognized in earnings, and losses (reversal of losses) of $1 million, $(11) million and $(57) million were recognized as non-credit-related OTTI in other comprehensive income for the years ended December 31, 2019, 2018 and 2017, respectively. 2) Includes OTTI losses of $245 million, $352 million and $344 million for the years ended December 31, 2019. 2018 and 2017, respectively. The accompanying notes are an integral part of these statements.Wells Fargo & Company and Subsidiaries Consolidated Balance Sheet Dec 31, Dec 31, (in millions, except shares) 2019 2018 Assets Cash and due from banks 21,757 23,551 Interest-earning deposits with banks 119,493 149,736 Total cash, cash equivalents, and restricted cash 141,250 173,287 Federal funds sold and securities purchased under resale agreements 102,140 80,207 Debt securities: Trading, at fair value 79,733 69,989 Available-for-sale, at fair value 263,459 269,912 Held-to-maturity, at cost (fair value $156,860 and $142,115) 153,933 144,788 Mortgage loans held for sale (includes $16,606 and $11,771 carried at fair value) (1) 23,342 15,126 Loans held for sale (includes $972 and $1,469 carried at fair value) (1) 977 2,041 Loans (includes $171 and $244 carried at fair value) (1) 962,265 953,110 Allowance for loan losses (9,551) (9,775) Net loans 952,714 943,335 Mortgage servicing rights: Measured at f 11,517 14,649 Amortize 1,430 1,443 Premises and equipment, net 9,309 8,920 Goodwill 26,39 26,418 Derivative assets 14,203 10,770 Equity securities (includes $41,936 and $29,556 carried at fair value) (1) 68,241 55,148 Other assets 78,917 79,850 otai assets (2) $ 1,927,555 1,895,883 Liabilities Noninterest-bearing deposits 344,496 349,534 Interest-bearing deposits 978,130 936,636 Total deposits 1,322,626 1,286,170 Short-term borrowings 104,512 105,787 Derivative liabilities 9,079 8,499 Accrued expenses and other liabilities 75,163 69,317 Long-term debt 228,191 229,044 Total liabilities (3) 1,739,571 1,698,817 Equity Wells Fargo stockholders' equity: Preferred stock 21,549 23,214 Common stock- $1-2/3 par value, authorized 9,000,000,000 shares; issued 5,481,811,474 shares 9,136 9,136 Additional paid-in capital 61,049 60,685 Retained earnings 166,697 158,163 Cumulative other comprehensive income (loss) (1,311) (6,336) Treasury stock - 1,347,385,537 shares and 900,557,866 shares (68,831) (47,194) Unearned ESOP share (1,143) (1,502) Total Wells Fargo stockholders equity 187,146 196,166 Noncontrolling interests 838 900 Total equity 187,984 97,066 Total liabilities and equity $ 1,927,555 1,895,883 (2) Parenthetical amounts represent assets and liabilities that we are required to carry at fair value or have elected the fair value option. Our consolidated assets at December 31, 2019 and 2018, include the following assets of certain variable interest entities (VIEs) that can only be used to settle the liabilities of those VIEs: Cash and due from banks, $16 million and $139 million; Interest-bearing deposits with banks, $284 million and $8 million; Debt securities, $540 million and $562 million; Net loans, $13.2 billion and $13.6 billion; Derivative assets, $1 million and $0 million; Equity securities, $118 million and $85 million; Other assets, $239 million and $227 million; and Total assets, $14.4 billion and $14.6 billion, respectively. Prior period balances have been conformed to current period presentation. (3) Our consolidated liabilities at December 31, 2019 and 2018, include the following VIE liabilities for which the VIE creditors do not have recourse to Wells Fargo: Short-term borrowings, $401 million and $493 million; Derivative liabilities, $3 million and $0 million; Accrued expenses and other liabilities, $235 million and $199 million; Long-term debt, $587 million and $816 million; and Total liabilities, $1.2 billion and $1.5 billion, respectively. Prior period balances have been conformed to current period presentation. The accompanying notes are an integral part of these statements.Wells Fargo & Company and Subsidiaries Consolidated Statement of Cash Flows Year ended December 31, (in millions) 2019 201 2017 Cash flows from operating activities: Net income before noncontrolling interests 22,876 22,460 Adjustments to reconcile net income to net cash provided by operating activities: 20,041 Provision for credit losses 2,687 1,744 2,528 Changes in fair value of MSRs, MLHFS and LHFS carried at fair value 3,702 453 886 Depreciation, amortization and accretion Other net gains 7,075 5,59 5,406 (5,500) 7,630 (1,518) Stock-based compensation 2,274 2,255 2,046 Originations and purchases of mortgage loans held for sale Proceeds from sales of and paydowns on mortgage loans held for sate (158,673) 112,718 152,832) Net change in: 119,097 181,269} 134,984 Debt and equity securities, held for trading 22,066 35,054 33 505 Loans held for sale Deferred income taxes 788 (960) 327 2,970 Derivative assets and liabilities (3,246) 999 2,665) 1,513 {5,025) Other assets Other accrued expenses and liabilities 3,034 7,805 (1,214) 2,429 865 4,837 Net cash provided by operating activities 6,730 6,073 18,619 Cash flows from investing activities Net change in: Federal funds sold and securities purchased under resate agreements Available-for-sale debt securities: (21,933) (1,184) (21,497) Proceeds from sales 7,320 Prepayments and maturities 9,386 42,067 Purchases 46,542 36,725 45,688 Held-to-maturity securities: (57,015) (60,067) 103,656) Paydowns and maturities 13,684 10,934 Purchases 10,673 Equity securities, not held for trading: (8,649) Proceeds from sales and capital returns 6,242 Purchases 6,143 5,45] 6,865) [6,433) Loans: (3,735) Loans originated by banking subsidiaries, net of principal collected Proceeds from sales (including participations) of loans held for investment (23,698) 18,619) 317 12,038 16,294 10,439 Purchases (including participations) of loan (2,033) 2,088 (3,702) Principal collected on nonbank entities' loans 7,448 Loans originated by nonbank entities 3,912 (5,274) 6,791 Proceeds from sales of foreclosed assets and short sales 2,666 [6,482 (6,814) 3.592 5,198 Other, net (]] 1,465 (779 (1,029) Net cash used by investing activities 29,631 (7,754) 13,152) Cash flows from financing activities: fet change in; Deposits 36,137 (48,034) 29,912 Short-term borrowings 1,275) ,53 Long-term debt: 14,020 Proceeds from issuance Repayment 53,381 47,595 43,575 60,996) (40,565) (80,802) Preferred stock Proceeds from issuance 677 Redeemed (1,550) (2,150 Cash dividends paid (1,391) 1,622 (1,629) Common stock Proceeds from issuance 380 632 1,211 Stock tendered for payment of withholding taxes (302) 24,533) 331 (393) Repurchased (20,633) 9,908 Cash dividends paid (8, 198) 7,692) (7,480) Net change in noncontrolling interests (513) (462) 30 Other, net (276) 248) (133) Net cash used by financing activities (9,136) 70,979 10,920} let change in cash, cash equivalents, and restricted cash (32,037) (42,660) (5,453) Cash, cash equivalents, and restricted cash at beginning of year 73,287 215,94 221,400 Cash, cash equivalents, and restricted cash at and of year 141,250 173,287 215,947 Supplemental cash flow disclosures: Cash paid for interest 18,83 14,366 9,103 Cash paid for income taxes 7,557 1,977 6,592 1) Prior periods have been revised to conform to the current period presentation. The accompanying notes are an integral part of these statements. See Note 1 (Summary of Significant Accounting Policies) for noncash activities.In addition to residential MS Rs included in the previous tabie, we have a small portfolio of commercial MSRs which are carried at LOCOM with a fair value of $1.9 billion and $2.3 billion at December 31, 2019 and 2018, respectively. Prepayment assumptions do not significantly impact values of commercial MSRs and commercial mortgage bonds as most commercial loans include contractual restrictions on prepayment. Servicing costs are not a driver of our MSR value as we are typically primary or master servicer; the higher costs of servicing delinquent and foreclosed loans is generally born by the special servicer. The primary economic driver impacting the fair value of our commercial MSRs is forward interest rates, which are derived from market observable yield curves used to price capital markets instruments. Market interest rates significantly affect interest earned on custodial deposit balances. The sensitivity of the current fair value to an immediate adverse 25% change in the assumption about interest earned on deposit balances at December 31, 2019 and 2018, results in a decrease in fair value of $205 million and $320 million, respectively. See Note 11 (Mortgage Banking Activities) for further information on our commercial MS R5. The sensitivities in the preceding paragraph and table are hypothetical and caution should be exercised when relying on this data. Changes in value based on variations in assumptions Table 10.7: Off-Balance Sheet Loans Sold or Securitized generally cannot be extrapolated because the relationship of the change in the assumption to the change in value may not be linear. Also, the effect of a variation in a particular assumption on the value of the other interests held is calculated independently without changing any other assumptions. In reality, changes in one factor may result in changes in others (for example, changes in prepayment speed estimates could result in changes in the credit losses), which might magnify or counteract the sensitivities. Off-Balance Sheet Loans Table 10.7 presents information about the principal balances of off-balance sheet loans that were sold or securitized, including residential mortgage loans sold to FNMA, FH LMC, GNMA and other investors, for which we have some to rm of continuing involvement lincluding servicer). Delinquent loans include loans 90 days or more past due and loans in bankruptcy, regardless of delinquency status. For loans sold or securitized where servicing is our only form of continuing involvement, we would only experience a loss if we were required to repurchase a delinquent loan or foreclosed asset due to a breach in representations and warranties associated with our loan sale or servicing contracts. Net charge-offs l3] Belinquent loans and ' ' ' Total loans foreclosed assets (1) Year ended December 31, December 31, December 31, (in millions) 2019 2018 2019 2018 2019 2018 Commercial: _ Real estate mortgage $ 112,507 105,173 776 1,008 I 179 739 Total commercial 112,507 105,173 776 1,008 _ 179 739 Consumer: Real estate 144 family first mortgage 1,008,446 1,097,128 6,664 8,947 229 466 Real estate 1,4 family junior lien mortgage 13 ~ 2 m- Total consumer 1,008,459 1,097,128 6,666 8,947 _ 229 466 Total offspalance sheet sold or securitized loans (2) 5 1,120,966 1,202,301 7,442 9,955 I 403 1,205 (1] Includes $492 million and $675 million of commercial foreclosed assets and $356 million and $582 million of consumer foreclosed assets at December 31, 2019 and 2018, respectiveiy. [2] At December 31, 2019 and 2018, the table includes total loans of $1.0 trillion and $1.1 trillion, delinquent loans of $5.2 billion and $6.4 billion, and foreclosed assets of$251 million and $442 million, respectively, for FNMA, FHLMC and GNMA. (3] Net charge-offs exclude loans sold to FNMA. FHLMC and GNMA as we do not service or manage the underlying real estate upon foreclosure and. as such, do not have access to net charge-off information