Wells Fargo Real Estate Investment Corp. - FORM 10-Q

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EX-32.B - EXHIBIT 32.B - Wells Fargo Real Estate Investment Corp.	wfe-2016930xex32b.htm
EX-32.A - EXHIBIT 32.A - Wells Fargo Real Estate Investment Corp.	wfe-2016930xex32a.htm
EX-31.B - EXHIBIT 31.B - Wells Fargo Real Estate Investment Corp.	wfe-2016930xex31b.htm
EX-31.A - EXHIBIT 31.A - Wells Fargo Real Estate Investment Corp.	wfe-2016930xex31a.htm
EX-12 - EXHIBIT 12 - Wells Fargo Real Estate Investment Corp.	wfe-2016930xex12.htm

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2016

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 1-36768

Wells Fargo Real Estate Investment Corporation

(Exact name of registrant as specified in its charter)



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

90 South 7th Street

Minneapolis, Minnesota 55402

(Address of principal executive offices)

(Zip Code)

(855) 825-1437

(Registrant’s telephone number, including area code)

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

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.

Large accelerated filer ¨ Accelerated filer ¨ Non-accelerated filer þ Smaller reporting company ¨

(Do not check if a smaller reporting company.)

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

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY

PROCEEDINGS DURING THE PRECEDING FIVE YEARS:

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes ¨ No ¨

APPLICABLE ONLY TO CORPORATE ISSUERS:

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

As of October 31, 2016, 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			22
	Balance Sheet			23
	Statement of Changes in Equity			24
	Statement of Cash Flows			25
	Notes to Financial Statements
	1	—	Summary of Significant Accounting Policies	26
	2	—	Loans and Allowance for Credit Losses	27
	3	—	Fair Values of Assets and Liabilities	40
	4	—	Common and Preferred Stock	41
	5	—	Transactions with Related Parties	42

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations (Financial Review)
	Summary Financial Data			2
	Overview			3
	Earnings Performance			5
	Balance Sheet Analysis			8
	Risk Management			9
	Critical Accounting Policy			19
	Current Accounting Developments			19
	Forward-Looking Statements			20
	Risk Factors			20

Item 3.	Quantitative and Qualitative Disclosures About Market Risk			18

Item 4.	Controls and Procedures			21

PART II	Other Information

Item 1.	Legal Proceedings			43

Item 1A.	Risk Factors			43

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds			43

Item 6.	Exhibits			43

Signature				43

Exhibit Index				44

PART I - FINANCIAL INFORMATION

On August 26, 2016, Wells Fargo Real Estate Investment Corporation (the Company) issued and sold 21.2 million shares of the Company’s common stock to affiliates of the Company for an aggregate purchase price of $20.0 billion. Subsequent to the issuance, the Company used the proceeds, as well as proceeds from loan pay-downs and payoffs, to acquire $19.1 billion of real estate 1-4 family first mortgage loans and $1.9 billion of commercial secured by real estate loans (CSRE).

FINANCIAL REVIEW



Summary Financial Data
						% Change
	Quarter ended					Sep 30, 2016 from				Nine months ended
($ in thousands, except per share data)	Sep 30, 2016			Jun 30, 2016	Sep 30, 2015	Jun 30, 2016		Sep 30, 2015		Sep 30, 2016			Sep 30, 2015	% Change
For the period
Net income	$	191,263		148,728	179,910	29	%	6		$	485,020		487,522	(1	)%
Net income applicable to common stock	186,866			144,331	175,513	29		6		471,829			474,331	(1	)
Diluted earnings per common share	8.82			11.19	13.61	(21	)	(35	)	30.09			36.77	(18	)
Profitability ratios
Return on average assets	3.07		%	4.48	5.46	(31	)	(44	)	3.80		%	5.05	(25	)
Return on average stockholders’ equity	3.74			4.81	5.76	(22	)	(35	)	4.29			5.26	(18	)
Average stockholders’ equity to average assets	82.10			93.16	94.84	(12	)	(13	)	88.53			96.08	(8	)
Common dividend payout ratio (1)	71.54			96.96	82.66	(26	)	(13	)	93.09			89.61	4
Dividend coverage ratio (2)	3,659			3,594	3,653	2		—		3,659			3,653	—
Total revenue	$	231,348		170,168	172,868	36		34		$	568,235		508,042	12
Average loans	20,648,080			13,013,458	13,047,478	59		58		15,538,275			12,730,005	22
Average assets	24,765,989			13,357,024	13,062,408	85		90		17,065,674			12,906,830	32
Net interest margin	3.62		%	5.02	5.23	(28	)	(31	)	4.34		%	5.24	(17	)
Net loan charge-offs	$	3,203		5,726	8,881	(44	)	(64	)	$	15,362		26,321	(42	)
As a percentage of average total loans (annualized)	0.06		%	0.18	0.27	(67	)	(78	)	0.13		%	0.28	(54	)
At period end
Loans, net of unearned income	$	33,501,153		14,028,200	13,151,348	139		155		$	33,501,153		13,151,348	155
Allowance for loan losses	130,715			117,422	130,839	11		—		130,715			130,839	—
As a percentage of total loans	0.39		%	0.84	0.99	(54	)	(61	)	0.39		%	0.99	(61	)
Assets	$	33,763,620		14,049,883	13,159,059	140		157		$	33,763,620		13,159,059	157
Total stockholders’ equity	32,389,786			12,417,870	12,405,848	161		161		32,389,786			12,405,848	161
Total nonaccrual loans and foreclosed assets	231,660			245,224	286,797	(6	)	(19	)	231,660			286,797	(19	)
As a percentage of total loans	0.69		%	1.75	2.18	(61	)	(68	)	0.69		%	2.18	(68	)
Loans 90 days or more past due and still accruing (3)	$	6,102		7,769	9,258	(21	)	(34	)	$	6,102		9,258	(34	)


(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, 2015 (2015 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 predominantly domestic mortgage assets and other authorized investments that generate net income for distribution to our shareholders. We are classified as a real estate investment trust (REIT) for federal income tax purposes and are an indirect subsidiary of Wells Fargo and the Bank.

As of September 30, 2016, we had $33.8 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, 2015, 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. 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.

Common Stock Issuance

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

We used proceeds from the common stock issuance, as well as proceeds from loan pay-downs and payoffs, to acquire $19.1 billion of real estate 1-4 family first mortgage loans and $1.9 billion of CSRE loans in third quarter 2016 (Third Quarter 2016 Loan Acquisitions). The weighted average FICO score and LTV ratio for real estate 1-4 family first mortgage loans included in the acquisition was 783 and 62%, respectively, compared with 762 and 57% as of September 30, 2016, for our existing portfolio. The percentage of acquired CSRE loan risk ratings, based on recorded investment, designated as Pass under the Bank's borrower and collateral quality ratings was 100%, compared with 99.6% as of September 30, 2016, for our existing CSRE portfolio.

Financial Performance

We earned net income of $191.3 million in third quarter 2016, or$8.82 diluted earnings per common share, compared with $179.9 million in third quarter 2015, or $13.61 diluted earnings per common share. The increase in net income in third quarter 2016 was predominantly attributable to increased interest income resulting from a larger average interest-earning asset base due to the Third Quarter 2016 Loan Acquisitions, partially offset by a higher provision for credit losses. For the first nine months of 2016, net income was $485.0 million or $30.09 diluted earnings per common share, compared with $487.5 million or $36.77 diluted earnings per common share for the same period a year ago. The decrease in net income in the first nine months of 2016 was predominantly attributable to a higher provision for credit losses, partially offset by increased interest income resulting from a larger average interest-earning asset base due to the Third Quarter 2016 Loan Acquisitions.

Loans

Total loans were $33.5 billion at September 30, 2016, compared with $13.3 billion at December 31, 2015. Net loans represented 99% of assets at both September 30, 2016, and December 31, 2015.

Credit quality, as measured by net charge-off rates, nonaccruals and delinquencies, continued to improve during third quarter 2016 reflecting the benefit of continued

improvement in the housing environment and the acquisition of high quality loans in the Third Quarter 2016 Loan Acquisitions. Net charge-offs were $3.2 million in third quarter 2016 (0.06% annualized as a percent of average loans), compared with $8.9 million in third quarter 2015 (0.27% annualized as a percent of average loans). Nonaccrual loans were $228.3 million at September 30, 2016, compared with $268.0 million at December 31, 2015. Loans 90 days or more past due and still accruing were $6.1 million at September 30, 2016, compared with $13.1 million at December 31, 2015.

Third quarter 2016 provision for credit losses was $18.7 million, compared with a reversal of provision for credit losses of $23.0 million a year ago. We had an allowance build of $15.5 million in third quarter 2016 compared to a release from the allowance of $31.9 million in third quarter 2015. The higher level of provision in third quarter compared to a year ago reflected loan growth as well as moderation in the rate of delinquency improvement. Future allowance levels will be based on a variety of factors, including loan portfolio composition, size and performance, and the general economic environment, including housing market conditions.

During the first week of October 2016, Hurricane Matthew caused destruction along the coasts of Florida, Georgia, South Carolina and North Carolina and resulted in, among other things, property damage for our customers and the closing of many businesses. We are currently assessing the impact to our customers and our business as a result of Hurricane Matthew. The financial impact to us is expected to relate to our consumer and commercial real estate loan portfolios and will depend on a number of factors, including the types of loans most affected by the hurricane, the extent of damage to our collateral, the extent of available insurance coverage, the availability of government assistance for our borrowers, and whether our borrowers’ ability to repay their loans has been diminished.

Capital Distributions

Dividends declared to holders of our Series A preferred stock totaled $4.3 million and $13.1 million in the third quarter and first nine months, respectively, of both 2016 and 2015. Dividends declared to holders of our Series B preferred stock totaled $15 thousand and $43 thousand in the third quarter and first nine months, respectively, of both 2016 and 2015.

Dividends declared to the holders of our common stock totaled $215.0 million and $495.0 million for the third quarter and first nine months of 2016, respectively, compared with $145.0 million and $425.0 million for the same periods in 2015.

Earnings Performance

Net Income

We earned net income of $191.3 million and $179.9 million in third quarter 2016 and 2015, respectively. The increase in net income in third quarter 2016 was predominantly attributable to increased interest income resulting from a larger average interest-earning asset base due to the Third Quarter 2016 Loan Acquisitions, partially offset by a higher provision for credit losses. For the first nine months of 2016, net income was $485.0 million, compared with $487.5 million for the same period a year ago. The decrease in net income in the first nine months of 2016 was predominantly attributable to a higher provision for credit losses, partially offset by increased interest income resulting from a larger average interest-earning asset base due to the Third Quarter 2016 Loan Acquisitions.

Net Interest Income

Net interest income is the interest earned on loans and cash and cash equivalents less the interest paid on our Bank line of credit. Net interest income was $223.4 million in third quarter 2016, compared with $171.2 million a year ago and $552.3 million for the first nine months of 2016, compared with $505.8 million a year ago. The increase in the third quarter and first nine months of 2016 was attributable to a larger interest-earning asset base due to the Third Quarter 2016 Loan Acquisitions, offset by a decrease in yield.

Net interest margin is the average yield on interest-earning assets minus the average interest paid for funding. Interest-earning assets predominantly consist of loans. Net interest margin was 3.62% and 4.34% in the third quarter and first nine months of 2016, respectively, compared with 5.23% and 5.24% for the same periods a year ago. The decrease in net interest margin for the third quarter and first nine months of 2016 was attributable to the investment of proceeds from the common stock issuance in third quarter 2016 and proceeds from loan pay-downs and payoffs into lower yielding loans, as well as dilution from higher average interest-bearing deposits. Interest income in the third quarter 2016 and first nine months of 2016 included net accretion of adjustments on loans of $4.7 million and $42.5 million, respectively, compared with $20.9 million and $62.9 million a year ago. The decrease in net accretion of adjustments on loans in both periods is attributable to less remaining net unamortized discount on the loan portfolio in 2016. Loan pay-downs and payoffs annualized represented 25.1% and 24.3% of average loan balances during the third quarter and first nine months of 2016, respectively, compared with 23.7% and 24.0% during the same periods a year ago.

We expect continued downward pressure on our average yield on total interest-earning assets as we invest available funds in the current low interest rate environment. The Company believes interest income will increase due to the larger interest-earning asset base as a result of the Third Quarter 2016 Loan Acquisitions; however, 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 $2.2 billion line of credit with the Bank. Interest expense related to borrowings on the line of credit was $1.3 million and $2.0 million in the third quarter and first nine months of 2016, compared with $377 thousand and $644 thousand for the same periods a year ago. Average borrowings for third quarter 2016 and 2015 were $952.8 million and $393.3 million, respectively, at a weighted average interest rate of 0.53% and 0.38%, respectively. Average borrowings for the first nine months of 2016 and 2015, were $523.9 million and $226.3 million, respectively, at a weighted average interest rate of 0.52% and 0.38%, respectively. The increase in weighted average interest rate in the third quarter and first nine months of 2016 was attributable to an increase in the average federal funds rate.

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: Interest Income



	Quarter ended September 30,
					2016						2015
(in thousands)	Average balance		Interest income/expense		Yields/rates		Average balance		Interest income/expense		Yields/rates
Earning assets
Commercial loans	$	2,746,255	17,283		2.50	%	$	2,807,226	17,330		2.45	%
Real estate 1-4 family mortgage loans	17,901,825		203,343		4.54		10,240,252		154,237		6.00
Interest-bearing deposits in banks and other interest-earning assets	4,017,299		4,064		0.40		—		—		—
Total interest-earning assets	$	24,665,379	224,690		3.64		$	13,047,478	171,567		5.24
Funding sources
Line of credit with Bank	$	952,778	1,272		0.53		$	393,326	377		0.38
Total interest-bearing liabilities	$	952,778	1,272		0.53		$	393,326	377		0.38
Net interest margin and net interest income			$	223,418	3.62	%			$	171,190	5.23	%
	Nine months ended September 30,
					2016						2015
(in thousands)	Average balance		Interest income/expense		Yields/rates		Average balance		Interest income/expense		Yields/rates
Earning assets
Commercial loans	$	2,699,636	50,893		2.52	%	$	2,977,755	53,546		2.40	%
Real estate 1-4 family mortgage loans	12,838,639		499,168		5.19		9,752,250		452,562		6.20
Interest-bearing deposits in banks and other interest-earning assets	1,432,722		4,303		0.40		160,280		304		0.25
Total interest-earning assets	$	16,970,997	554,364		4.36		$	12,890,285	506,412		5.25
Funding sources
Line of credit with Bank	$	523,884	2,029		0.52		$	226,344	644		0.38
Total interest-bearing liabilities	$	523,884	2,029		0.52		$	226,344	644		0.38
Net interest margin and net interest income			$	552,335	4.34	%			$	505,768	5.24	%

Provision for Credit Losses

Third quarter 2016 provision for credit losses was $18.7 million, compared with a reversal of provision for credit losses of $23.0 million a year ago. We had an allowance build of $15.5 million in third quarter 2016 compared to a release from the allowance of $31.9 million in third quarter 2015. For the first nine months of 2016, the provision for credit losses was $30.2 million, compared with a reversal of provision for credit losses of $23.9 million a year ago. The higher level of provision in the third quarter and first nine months of 2016 compared to a year ago reflected loan growth as well as moderation in the rate of delinquency improvement. 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 third quarter 2016 was $7.9 million, compared with $1.7 million a year ago and $15.9 million and $2.3 million in the first nine months of 2016 and 2015, respectively. In the third quarter and first nine months of 2016, noninterest income predominantly consisted of loan pledge fees.

We may pledge our loans in an aggregate amount not exceeding 80% of our total assets at any time as collateral on behalf of the Bank for the Bank’s access to secured borrowing facilities through the Federal Home Loan Banks or the discount window of Federal Reserve Banks. In exchange for the pledge of our loan assets, the Bank will pay us a fee that is consistent with

market terms. We earned $8.7 million and $16.5 million in pledge fees during the third quarter and first nine months of 2016, respectively, compared with $1.5 million and $1.9 million for the same periods a year ago. The increase in both periods was attributable to a higher average pledged loan balance as well as a higher pledge fee rate in the third quarter and first nine months of 2016. See Note 5 (Transactions With Related Parties) to Financial Statements in this Report for more details.

Noninterest Expense

Noninterest expense in third quarter 2016 was $21.3 million, compared with $16.0 million a year ago and $53.0 million and $44.4 million in the first nine months of 2016 and 2015, respectively. 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 third quarter 2016 were $13.3 million, compared with $9.1 million in third quarter 2015 and $30.9 million and $26.6 million in the first nine months of 2016 and 2015, respectively. The increase in

both periods was attributable to the Third Quarter 2016 Loan Acquisitions.

Management fees represent reimbursements made to the Bank for general overhead expenses, including allocations of technology support and a combination of finance and accounting, risk management and other general overhead expenses incurred on our behalf. Management fees are calculated based on Wells Fargo’s total allocable costs multiplied by a formula. The formula is based on our proportion of Wells Fargo’s consolidated: (1) full-time equivalent employees, (2) total average assets and (3) total revenue. Management fees were $4.4 million and $11.8 million in the third quarter and first nine months of 2016, respectively, compared with $2.9 million and $8.3 million, respectively, in the third quarter and first nine months of 2015. The increase in management fees in 2016 related to an increase in Wells Fargo’s general overhead expenses, including technology and risk management expenses, as well as higher total average assets due to the common stock issuance in third quarter 2016.

Foreclosed assets expense was $3.2 million in third quarter 2016 compared with $3.8 million in third quarter 2015 and $9.6 million and $8.7 million in the first nine months of 2016 and 2015, respectively. The increase in the first nine months of 2016 was due to higher costs of maintaining our foreclosed assets, including tax and insurance expenses. Substantially all of our foreclosed assets consist of residential 1-4 family real estate assets.

Balance Sheet Analysis

Total Assets

Our assets predominantly consist of commercial and consumer loans, although we have the authority to hold assets other than loans. Total assets were $33.8 billion at September 30, 2016, and $13.2 billion at December 31, 2015. The increase is attributable to the Third Quarter 2016 Loan Acquisitions through the use of proceeds from the common stock issuance.

Loans

Loans, net of unearned income were $33.5 billion at September 30, 2016, and $13.3 billion at December 31, 2015. In the third quarter and first nine months of 2016, we acquired $19.1 billion and $21.4 billion of consumer loans, respectively, and $1.9 billion of commercial loans for both periods, from the Bank at their estimated fair value using proceeds from the common stock issuance and loan pay-downs and payoffs. In the third quarter and first nine months of 2015, we acquired $794.5 million and $2.5 billion, respectively, of consumer loans from the Bank at their estimated fair value. At September 30, 2016 and December 31, 2015, consumer loans represented 87% and 78% of loans, respectively, and commercial loans represented the balance of our loan portfolio.

Allowance for Loan Losses

The allowance for loan losses increased $9.8 million to $130.7 million at September 30, 2016, from $120.9 million at December 31, 2015, due to commercial and consumer loan growth through acquisition, partially offset by continued improvement in the housing environment.

At September 30, 2016, the allowance for loan losses included $104.7 million for consumer loans and $26.0 million for commercial loans; however, the entire allowance is available to absorb credit losses inherent in the total loan portfolio. The total allowance reflects management’s estimate of credit losses inherent in the loan portfolio at the balance sheet date. See the “Risk Management — Credit Risk Management — Allowance for Credit Losses” section in this Report for a description of how management estimates the allowance for loan losses and the allowance for unfunded credit commitments.

Accounts Receivable—Affiliates, Net

Accounts payable and receivable from affiliates result from intercompany transactions in the normal course of business related to loan pay-downs 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 $2.2 billion line of credit to finance loan acquisitions. At September 30, 2016 and December 31, 2015, we had $1.4 billion and $828.1 million 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, 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 2015 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 2015 Form 10-K. The discussion that follows provides an update regarding these risks.

Credit Risk Management Loans represent the largest component of our assets and their related credit risk is among the most significant risks we manage. We define credit risk as the risk of loss associated with a borrower or counterparty default (failure to meet obligations in accordance with agreed upon terms).

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

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



	Loans outstanding			Weighted average maturity in years
(in thousands)	Sep 30, 2016		Dec 31, 2015	Sep 30, 2016	Dec 31, 2015
Commercial:
Commercial and industrial	$	9,606	46,712	0.7	0.8
Secured by real estate	4,248,472		2,871,021	3.5	3.1
Total commercial	4,258,078		2,917,733	3.5	3.0
Consumer:
Real estate 1-4 family first mortgage	28,080,674		8,950,429	25.4	23.0
Real estate 1-4 family junior lien mortgage	1,162,401		1,388,018	15.9	16.2
Total consumer	29,243,075		10,338,447	25.0	22.1
Total loans	$	33,501,153	13,256,180	22.3	17.9

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



	September 30, 2016
(in thousands)	Commercial		Real estate 1-4 family first mortgage	Real estate 1-4 family junior lien mortgage	Total	% of total loans
California	$	1,835,978	9,849,042	13,675	11,698,695	35	%
New York	16,533		2,402,423	68,779	2,487,735	7
Washington	273,569		1,669,957	1,520	1,945,046	6
Virginia	74,913		1,484,136	117,957	1,677,006	5
Florida	417,089		1,074,093	153,335	1,644,517	5
All other states	1,639,996		11,601,023	807,135	14,048,154	42
Total loans	$	4,258,078	28,080,674	1,162,401	33,501,153	100	%

COMMERCIAL AND INDUSTRIAL LOANS (C&I) C&I loans were less than 1% of total loans at September 30, 2016. We believe the C&I loan portfolio is appropriately underwritten. Our credit risk management process for this portfolio focuses on a customer's ability to repay the loan through their cash flows. Substantially all of the loans in our C&I portfolio are unsecured

at September 30, 2016, with the remainder secured by short-term assets, such as accounts receivable and inventory, as well as long-lived assets, such as equipment and other business assets. Generally, the collateral securing this portfolio represents a secondary source of repayment.

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



	September 30, 2016
(in thousands)	Total CSRE loans		% of total CSRE loans
By state:
California	$	1,835,978	43	%
Florida	413,926		10
Washington	273,569		6
Utah	215,765		5
Oregon	186,405		4
All other states	1,322,829		32
Total loans	$	4,248,472	100	%
By property type:
Office buildings	$	1,102,389	26	%
Shopping centers	796,014		19
Warehouses	636,652		15
5+ multifamily residences	569,234		13
Retail establishments (restaurants, stores)	482,118		11
Mini-storage	173,523		4
Motels/hotels	122,883		3
Manufacturing plants	86,503		2
Research and development	68,186		2
Commercial/industrial (non-residential)	57,079		1
Other	153,891		4
Total loans	$	4,248,472	100	%

REAL ESTATE 1-4 FAMILY MORTGAGE LOANS The concentrations of real estate 1-4 family mortgage loans by state and the related combined loan-to-value (CLTV) ratio are presented in Table 5. CLTV means the ratio of the total loan balance of first and junior mortgages (including unused line amounts for credit line products) to property collateral value. Our underwriting and periodic review of loans secured by residential real estate collateral includes appraisals or estimates from automated valuation models (AVMs) to support property values. We also 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. 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 2015 Form 10-K.

We continue to modify real estate 1-4 family mortgage loans to assist homeowners and other borrowers experiencing financial difficulties. For more information on our participation in the U.S. Treasury's Making Home Affordable (MHA) programs, see the "Risk Management - Credit Risk Management - Real Estate 1-4 Family Mortgage Loans" section in our 2015 Form 10-K.

The credit performance associated with our real estate 1-4 family mortgage portfolio continued to improve in third quarter 2016, as measured through net charge-offs and nonaccrual loans. Improvement in the credit performance was driven by an improving housing environment.

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



	September 30, 2016
(in thousands)	Real estate 1-4 family mortgage		Current CLTV ratio (1)
California	$	9,862,717	54	%
New York	2,471,202		65
Washington	1,671,477		64
Virginia	1,602,093		66
Pennsylvania	1,269,775		65
All other states	12,365,811		64
Total loans	$	29,243,075	61	%


(1)	Collateral values are generally determined using AVMs and are updated quarterly. AVMs are computer-based tools used to estimate market values of homes based on processing large volumes of market data including market comparables and price trends for local market areas.

REAL ESTATE 1-4 FAMILY FIRST MORTGAGE LOANS Net charge-offs (annualized) as a percentage of average loans improved to 0.06% and 0.11% in the third quarter and first nine months of 2016, respectively, compared with 0.25% and 0.22%, for the same periods a year ago. Nonaccrual loans were

$175.1 million at September 30, 2016, compared with $201.5 million at December 31, 2015.

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 (1)			Loss (recovery) rate (annualized) quarter ended (1)
(in thousands)	Sep 30, 2016		Dec 31, 2015	Sep 30, 2016		Dec 31, 2015	Sep 30, 2016	Jun 30, 2016	Mar 31, 2016		Dec 31, 2015		Sep 30, 2015
California	$	9,849,236	616,333	0.04	%	1.09	—	—	(0.04	)	—		—
New York	2,402,056		718,933	0.54		2.04	0.02	0.03	0.02		0.08		0.07
Texas	1,200,708		553,577	0.36		0.68	0.01	0.03	0.02		(0.01	)	0.03
Washington	1,670,125		504,538	0.10		0.12	—	—	(0.05	)	(0.03	)	—
Virginia	1,483,239		638,886	0.60		2.30	0.10	0.05	0.12		0.08		0.04
Other	11,462,038		5,901,048	1.08		2.58	0.13	0.24	0.22		0.19		0.36
Total	28,067,402		8,933,315	0.56	%	2.16	0.06	0.16	0.15		0.14		0.25
PCI	13,272		17,114
Total first mortgages	$	28,080,674	8,950,429


(1)	September 30, 2016 reflects $19.1 billion of high quality consumer loans acquired in the Third Quarter 2016 Loan Acquisitions.

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 (annualized) as a

percentage of average loans improved to 0.27% and 0.64% in the third quarter and nine months ended September 30, 2016, respectively, compared with 0.92% and 1.07%, respectively, for the same periods a year ago. Nonaccrual loans were $50.8 million at September 30, 2016, compared with $64.7 million at December 31, 2015.

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

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



	Outstanding balance			% of loans 30 days or more past due			Loss (recovery) rate (annualized) quarter ended
(in thousands)	Sep 30, 2016		Dec 31, 2015	Sep 30, 2016		Dec 31, 2015	Sep 30, 2016		Jun 30, 2016	Mar 31, 2016	Dec 31, 2015	Sep 30, 2015
New Jersey	$	242,357	281,657	4.97	%	5.38	0.66		1.27	0.84	0.81	1.73
Pennsylvania	179,460		212,776	4.34		5.57	0.66		0.86	0.64	0.21	1.32
Florida	153,499		185,249	2.90		3.16	(0.55	)	0.52	1.00	0.78	0.41
Virginia	117,672		141,687	3.30		4.29	0.33		0.91	1.55	1.02	0.83
Georgia	86,040		106,239	2.04		3.27	(0.08	)	0.26	0.38	2.75	0.54
Other	381,896		457,178	4.32		4.71	0.25		0.26	1.08	1.06	0.57
Total	1,160,924		1,384,786	4.00	%	4.62	0.27		0.66	0.95	0.97	0.92
PCI	1,477		3,232
Total junior lien mortgages	$	1,162,401	1,388,018

NONPERFORMING ASSETS (NONACCRUAL LOANS AND FORECLOSED ASSETS) Table 8 summarizes nonperforming assets (NPAs) for each of the last five quarters. We generally place loans on nonaccrual status when:


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


•	they are 90 days (120 days with respect to real estate 1-4 family first and junior lien mortgages) past due for interest

or principal, unless both well-secured and in the process of collection;


•	part of the principal balance has been charged off;


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


•	consumer loans are discharged in bankruptcy, regardless of their delinquency status.

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



(in thousands)	Sep 30, 2016			Jun 30, 2016	Mar 31, 2016	Dec 31, 2015	Sep 30, 2015
Nonaccrual loans:
Commercial:
Commercial and industrial	$	—		—	—	—	—
Secured by real estate	2,378			2,783	3,733	1,706	9,164
Total commercial	2,378			2,783	3,733	1,706	9,164
Consumer:
Real estate 1-4 family first mortgage	175,086			182,814	196,967	201,531	206,821
Real estate 1-4 family junior lien mortgage	50,812			55,874	62,316	64,718	69,656
Total consumer	225,898			238,688	259,283	266,249	276,477
Total nonaccrual loans (1)	228,276			241,471	263,016	267,955	285,641
Foreclosed assets	3,384			3,753	3,854	1,996	1,156
Total nonperforming assets	$	231,660		245,224	266,870	269,951	286,797
As a percentage of total loans (2)	0.69		%	1.75	2.14	2.04	2.18


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


(2)	Decrease at September 30, 2016, reflects $21.0 billion of high quality loans acquired in the Third Quarter 2016 Loan Acquisitions.

Total NPAs were $231.7 million (0.69% of total loans) at September 30, 2016, and included $228.3 million of nonaccrual loans. Total NPAs were $270.0 million (2.04% of total loans) at December 31, 2015, and included $268.0 million of nonaccrual loans. The decrease in third quarter 2016 was due in part to improving economic conditions and the Bank's proactive credit risk management activities.

Typically, changes to nonaccrual loans period-over-period represent inflows for loans that are placed on nonaccrual status

in accordance with our policy, offset by reductions for loans that are paid down, charged off while on nonaccrual status, or sold, transferred to foreclosed properties, or are no longer classified as nonaccrual as a result of continued performance and an improvement in the borrower’s financial condition and loan repayment capabilities. Table 9 provides an analysis of the changes in nonaccrual loans.

Table 9: Analysis of Changes in Nonaccrual Loans



	Quarter ended
(in thousands)	Sep 30, 2016			Jun 30, 2016		Mar 31, 2016		Dec 31, 2015		Sep 30, 2015
Commercial:
Balance, beginning of period	$	2,783		3,733		1,706		9,164		10,404
Inflows	2,128			48		2,253		954		141
Outflows	(2,533		)	(998	)	(226	)	(8,412	)	(1,381	)
Balance, end of period	2,378			2,783		3,733		1,706		9,164
Consumer:
Balance, beginning of period	238,688			259,283		266,249		276,477		297,649
Inflows	31,770			34,964		38,049		38,736		33,731
Outflows:
Returned to accruing	(18,158		)	(24,507	)	(16,798	)	(21,503	)	(24,834	)
Foreclosures	(3,762		)	(5,212	)	(3,177	)	(3,403	)	(1,418	)
Charge-offs	(5,670		)	(9,696	)	(8,179	)	(8,340	)	(11,245	)
Payment, sales and other	(16,970		)	(16,144	)	(16,861	)	(15,718	)	(17,406	)
Total outflows	(44,560		)	(55,559	)	(45,015	)	(48,964	)	(54,903	)
Balance, end of period	225,898			238,688		259,283		266,249		276,477
Total nonaccrual loans	$	228,276		241,471		263,016		267,955		285,641

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 $75.7 million and $74.5 million at September 30, 2016 and December 31, 2015, respectively. See Note 2 (Loans and Allowance for Credit Losses) to Financial Statements in this Report for more information. Those loans discharged in bankruptcy and reported as TDRs have been written down to net realizable collateral value.

In those situations where principal is forgiven, the entire amount of such principal forgiveness is immediately charged off to the extent not done so prior to the modification. We sometimes delay the timing on the repayment of a portion of principal (principal forbearance) and 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 2015 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)	Sep 30, 2016		Jun 30, 2016	Mar 31, 2016	Dec 31, 2015	Sep 30, 2015
Commercial:
Commercial and industrial	$	—	—	—	—	—
Real estate mortgage	3,285		3,443	4,395	2,534	3,870
Total commercial TDRs	3,285		3,443	4,395	2,534	3,870
Consumer:
Real estate 1-4 family first mortgage	350,324		358,337	366,492	371,605	377,080
Real estate 1-4 family junior lien mortgage	102,423		107,280	109,306	112,597	114,491
Trial modifications	12,876		12,217	14,693	15,663	14,257
Total consumer TDRs	465,623		477,834	490,491	499,865	505,828
Total TDRs	$	468,908	481,277	494,886	502,399	509,698
TDRs on nonaccrual status	$	144,723	150,789	159,021	159,998	162,115
TDRs on accrual status	324,185		330,488	335,865	342,401	347,583
Total TDRs	$	468,908	481,277	494,886	502,399	509,698

Table 11: Analysis of Changes in TDRs



	Quarter ended
(in thousands)	Sep 30, 2016			Jun 30, 2016		Mar 31, 2016		Dec 31, 2015		Sep 30, 2015
Commercial:
Balance, beginning of period	$	3,443		4,395		2,534		3,870		4,073
Inflows (1)	2,106			—		1,885		—		—
Outflows (2)	(2,264		)	(952	)	(24	)	(1,336	)	(203	)
Balance, end of period	3,285			3,443		4,395		2,534		3,870
Consumer:
Balance, beginning of period	477,834			490,491		499,865		505,828		512,264
Inflows (1)	8,429			10,060		10,876		9,989		12,631
Outflows:
Charge-offs	(2,301		)	(1,959	)	(2,685	)	(3,003	)	(2,910	)
Foreclosures	(658		)	(2,339	)	(1,599	)	(1,284	)	(811	)
Payments, sales and other (2)	(18,340		)	(15,943	)	(14,995	)	(13,072	)	(14,115	)
Net change in trial modifications (3)	659			(2,476	)	(971	)	1,407		(1,231	)
Balance, end of period	465,623			477,834		490,491		499,865		505,828
Total TDRs	$	468,908		481,277		494,886		502,399		509,698


(1)	Inflows include loans that both modify and 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 September 30, June 30, and March 31, 2016, and December 31, and September 30, 2015, 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. Our experience is that most of the mortgages that enter a trial payment period program are successful in completing the program requirements.

Loans 90 days or more past due and still accruing at September 30, 2016 were down $7.0 million from December 31, 2015, due to payoffs, modifications and other loss mitigation activities, and credit stabilization.

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)	Sep 30, 2016		Jun 30, 2016	Mar 31, 2016	Dec 31, 2015	Sep 30, 2015
Commercial:
Commercial and industrial	$	—	—	—	—	—
Secured by real estate	—		—	—	2,252	—
Total commercial	—		—	—	2,252	—
Consumer:
Real estate 1-4 family first mortgage	3,633		5,476	5,001	8,365	6,139
Real estate 1-4 family junior lien mortgage	2,469		2,293	2,056	2,462	3,119
Total consumer	6,102		7,769	7,057	10,827	9,258
Total	$	6,102	7,769	7,057	13,079	9,258

(1)

PCI loans of $2.3 million, $2.4 million, $3.1 million, $4.4 million and $4.6 million at September 30, June 30, and March 31, 2016, and December 31, and September 30, 2015, 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 for third quarter 2016 and the previous four quarters. Net charge-offs in third quarter 2016 were $3.2 million (0.06% of average

total loans outstanding) compared with $8.9 million (0.27% of average total loans outstanding) in third quarter 2015. Substantially all net losses were in consumer real estate.

Table 13: Net Charge-offs



						Quarter ended
	Sep 30, 2016					Jun 30, 2016					Mar 31, 2016					Dec 31, 2015					Sep 30, 2015
($ in thousands)	Net loan charge- offs			% of avg. loans (1) (2)		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	$	(48	)	(0.01	)%	$	(1	)	—	%	$	(18	)	—	%	$	(467	)	(0.07	)%	$	(178	)	(0.03	)%
Consumer:
Real estate 1-4 family first mortgage	2,426			0.06		3,630			0.16		3,281			0.15		3,030			0.14		5,556			0.25
Real estate 1-4 family junior lien mortgage	825			0.27		2,097			0.66		3,170			0.94		3,486			0.97		3,503			0.92
Total consumer	3,251			0.07		5,727			0.22		6,451			0.26		6,516			0.25		9,059			0.35
Total	$	3,203		0.06	%	$	5,726		0.18	%	$	6,433		0.20	%	$	6,049		0.18	%	$	8,881		0.27	%


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


(2)	Decrease at September 30, 2016 reflects $21.0 billion of high quality loans acquired in the Third Quarter 2016 Loan Acquisitions.

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. 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.

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 September 30, 2016.

reversal of provision for credit losses of $23.0 million for the same period a year ago. We had an allowance build of $15.5 million in third quarter 2016, compared to a release from the allowance of $31.9 million in third quarter 2015. For the first nine months of 2016, the provision for credit losses was $30.2 million compared with a reversal of provision for credit losses of $23.9 million a year ago. The higher level of provision in the third quarter and first nine months of 2016 compared with a year ago reflected loan growth as well as moderation in the rate of delinquency improvement.

We believe the allowance for credit losses at September 30, 2016 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 portfolio composition, size and performance, and the general economic environment, including housing market 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 2015 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
	Sep 30, 2016				Jun 30, 2016				Mar 31, 2016				Dec 31, 2015				Sep 30, 2015
(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
Commercial:
Commercial and industrial	$	443	—	%	$	642	—	%	$	639	—	%	$	669	—	%	$	813	—	%
Secured by real estate	26,807		13		14,366		18		17,138		21		17,007		22		17,880		20
Total commercial	27,250		13		15,008		18		17,777		21		17,676		22		18,693		20
Consumer:
Real estate 1-4 family first mortgage	65,003		84		56,648		73		56,160		68		56,689		68		60,582		68
Real estate 1-4 family junior lien mortgage	39,713		3		46,374		9		45,516		11		47,173		10		52,194		12
Total consumer	104,716		87		103,022		82		101,676		79		103,862		78		112,776		80
Total	$	131,966	100	%	$	118,030	100	%	$	119,453	100	%	$	121,538	100	%	$	131,469	100	%




	Quarter ended
(in thousands)	Sep 30, 2016			Jun 30, 2016	Mar 31, 2016	Dec 31, 2015	Sep 30, 2015
Components:
Allowance for loan losses	$	130,715		117,422	118,773	120,866	130,839
Allowance for unfunded credit commitments	1,251			608	680	672	630
Allowance for credit losses	$	131,966		118,030	119,453	121,538	131,469
Allowance for loan losses as a percentage of total loans (1)	0.39		%	0.84	0.95	0.91	0.99
Allowance for loan losses as a percentage of annualized net charge-offs	1,025.78			509.83	459.07	503.58	371.37
Allowance for credit losses as a percentage of total loans (1)	0.39			0.84	0.96	0.92	1.00
Allowance for credit losses as a percentage of total nonaccrual loans	57.81			48.88	45.42	45.36	46.03


(1)	Decrease at September 30, 2016 reflects $21.0 billion of high quality loans acquired in the Third Quarter 2016 Loan Acquisitions.

Asset/Liability Management

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

INTEREST RATE RISK Interest rate risk is the sensitivity of earnings to changes in interest rates. At September 30, 2016, 15% 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 pay-down 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 September 30, 2016, approximately 85% 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 September 30, 2016, 15% of our assets had variable interest rates, and could be expected to reprice with changes in interest rates. At September 30, 2016, our liabilities were 4% 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 pay-downs of loans are typically sufficient to fund existing lending commitments and loan acquisitions. Depending upon the timing of the loan acquisitions, we may draw on our $2.2 billion revolving line of credit we have with the Bank as a short-term liquidity source. At

September 30, 2016, there was $1.4 billion outstanding on our Bank line of credit. The rate of interest on the line of credit is equal to the average federal funds rate plus 12.5 basis points.

Our primary liquidity needs are to pay operating expenses, fund our lending commitments, acquire loans to replace existing loans that mature or repay, and pay dividends. The retained deficit included within our balance sheet results from cumulative distributions that have exceeded GAAP net income, predominantly due to the impact on REIT taxable income of purchase accounting adjustments attributable to the Company during the years 2009 through 2013, from the 2008 acquisition of Wachovia Corporation by Wells Fargo. The excess dividend distributions were funded by using cash provided by investing (generally principal payments received on our loans) and financing activities (generally draws on our Bank line of credit). As the remaining purchase accounting adjustments are not expected to cause a significant variance between GAAP net income and REIT taxable income in future years, operating expenses and dividends are expected to be funded through cash generated by operations or paid-in capital. Funding commitments and the acquisition of loans are intended to be funded with the proceeds obtained from repayment of principal balances by individual borrowers and our line of credit with the Bank.

On September 8, 2016, Wells Fargo reached agreements with the Consumer Financial Protection Bureau, the Office of the Comptroller of the Currency, and the Office of the Los Angeles City Attorney, regarding allegations that some of its retail customers received products and services they did not request. Negative publicity or public opinion resulting from the settlements and related matters 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 pay-downs 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.

Using proceeds from the common stock issuance in third quarter 2016 as well as proceeds from loan pay-downs and payoffs, we acquired $19.1 billion of consumer loans and $1.9 billion of CSRE loans from the Bank. To the extent that we determine that additional funding is necessary or advisable, we could issue additional common or preferred stock, subject to Board of Directors approval, raise funds through debt financings, or a combination of these methods. Retention of cash flows does not represent a significant source of funding because any cash flow retention must be consistent with the provisions of the Investment Company Act and the Code, which requires the distribution by a REIT of at least 90% of its REIT taxable income, excluding capital gains, and must take into account taxes that would be imposed on undistributed income.

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 2015 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 2015 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) 2016-15 – Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments	The Update addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice for reporting in the Statement of Cash Flows.	The Update is effective for us in first quarter 2018 with retrospective application. We are evaluating the impact the Update will have on our financial statements.
ASU 2016-13 – Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments	The Update changes the accounting for credit losses on loans by requiring a current expected credit loss (CECL) approach to determine the allowance for credit losses. CECL requires loss estimates for the remaining estimated life of the financial asset using historical experience, current conditions, and reasonable and supportable forecasts. Also, the Update eliminates the existing guidance for purchased credit-impaired (PCI) loans, but requires an allowance for purchased financial assets with more than insignificant deterioration since origination.	The guidance is effective for us in first quarter 2020 with a cumulative-effect adjustment to retained earnings as of the beginning of the year of adoption. Early adoption is permitted beginning in first quarter 2019. While we are evaluating the impact the Update will have on our financial statements, we expect the Update will result in an increase in the allowance for credit losses given the change to estimated losses for the estimated life of the financial asset. The amount of the increase will be impacted by the portfolio composition and quality at the adoption date as well as economic conditions and forecasts at that time.
ASU 2016-01 - Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities	The Update amends the accounting, presentation, and disclosure of certain financial instruments, including financial instruments measured at amortized cost.	The Update is effective for us in first quarter 2018 and should be applied with a cumulative-effect adjustment to the balance sheet as of the beginning of the adoption period. Early adoption is prohibited for the amendments applicable to us. We are evaluating the impact of the Update on our financial statements.
ASU 2014-09 - Revenue from Contracts With Customers (Topic 606) and subsequent related Updates	The Update modifies the guidance companies use to recognize revenue from contracts with customers for transfers of goods or services and transfers of nonfinancial assets, unless those contracts are within the scope of other standards. The guidance also requires new qualitative and quantitative disclosures, including information about contract balances and performance obligations.	In August 2015, the FASB issued ASU 2015-14 (Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date), which defers the effective date of ASU 2014-09 to first quarter 2018. Early adoption is permitted in first quarter 2017. Predominantly all of our revenue is from net interest income on financial assets and liabilities, which is explicitly excluded from the scope of the update. We continue to evaluate the impact of the Update to our noninterest income and on our presentation and disclosures. We expect to adopt the update in first quarter 2018 with a cumulative-effect adjustment to opening retained earnings.

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 pay-downs; 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 relating to Hurricane Matthew, including as to our consumer and commercial loan portfolios, the extent of damage or loss to our collateral for loans in our portfolios or the unavailability of adequate insurance coverage or government assistance for our borrowers;


•	the effect of the current low 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;


•	losses relating to natural disasters, including, with respect to our loan portfolio, damage or loss to the collateral

underlying loans in our portfolio or the unavailability of adequate insurance coverage or government assistance for borrowers;


•	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;


•	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, and the final definition of qualified mortgage issued by the Consumer Financial Protection Bureau;


•	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 2015 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 2015 Form

10-K.

Controls and Procedures



Disclosure Controls and Procedures

The Company's management evaluated the effectiveness, as of September 30, 2016, of our disclosure controls and procedures. The Company's chief executive officer and chief financial officer participated in the evaluation. Based on this evaluation, the chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective as of September 30, 2016.



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, 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 third quarter 2016 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 September 30,					Nine months ended September 30,
(in thousands, except per share amounts)	2016			2015		2016		2015
Interest income	$	224,690		171,567		554,364		506,412
Interest expense	1,272			377		2,029		644
Net interest income	223,418			171,190		552,335		505,768
Provision (reversal of provision) for credit losses	18,743			(23,023	)	30,174		(23,914	)
Net interest income after provision for credit losses	204,675			194,213		522,161		529,682
Noninterest income
Pledge fees	8,715			1,538		16,457		1,856
Other	(785		)	140		(557	)	418
Total noninterest income	7,930			1,678		15,900		2,274
Noninterest expense
Loan servicing costs	13,309			9,080		30,855		26,622
Management fees	4,441			2,871		11,843		8,328
Foreclosed assets	3,174			3,772		9,627		8,676
Other	418			258		716		808
Total noninterest expense	21,342			15,981		53,041		44,434
Net income	191,263			179,910		485,020		487,522
Comprehensive income	191,263			179,910		485,020		487,522
Dividends on preferred stock	4,397			4,397		13,191		13,191
Net income applicable to common stock	$	186,866		175,513		471,829		474,331
Per common share information
Earnings per common share	$	8.82		13.61		30.09		36.77
Diluted earnings per common share	8.82			13.61		30.09		36.77
Dividends declared per common share	6.31			11.25		28.01		32.95
Average common shares outstanding	21,179			12,900		15,680		12,900
Diluted average common shares outstanding	21,179			12,900		15,680		12,900

The accompanying notes are an integral part of these statements.



Wells Fargo Real Estate Investment Corporation
Balance Sheet
(in thousands, except shares)	Sep 30, 2016			Dec 31, 2015
Assets	(Unaudited)
Cash and cash equivalents	$	—		—
Loans, net of unearned income	33,501,153			13,256,180
Allowance for loan losses	(130,715		)	(120,866	)
Net loans	33,370,438			13,135,314
Accounts receivable - affiliates, net	302,171			70,982
Other assets	91,011			38,572
Total assets	$	33,763,620		13,244,868
Liabilities
Line of credit with Bank	$	1,369,954		828,149
Other liabilities	3,880			3,812
Total liabilities	1,373,834			831,961
Stockholders’ Equity
Preferred stock	110			110
Common stock – $0.01 par value, authorized 100,000,000 shares; issued and outstanding 34,058,028 and 12,900,000 shares	341			129
Additional paid-in capital	32,550,660			12,550,822
Retained earnings (deficit)	(161,325		)	(138,154	)
Total stockholders’ equity	32,389,786			12,412,907
Total liabilities and stockholders’ equity	$	33,763,620		13,244,868

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, 2014	$	110	129	12,550,822	(194,544	)	12,356,517
Net income	—		—	—	487,522		487,522
Cash dividends
Series A preferred stock at $1.20 per share	—		—	—	(13,148	)	(13,148	)
Series B preferred stock at $63.75 per share	—		—	—	(43	)	(43	)
Common stock at $32.95 per share	—		—	—	(425,000	)	(425,000	)
Balance, September 30, 2015	$	110	129	12,550,822	(145,213	)	12,405,848
Balance, December 31, 2015	$	110	129	12,550,822	(138,154	)	12,412,907
Net income	—		—	—	485,020		485,020
Common stock issued	—		212	19,999,838	—		20,000,050
Cash dividends
Series A preferred stock at $1.20 per share	—		—	—	(13,148	)	(13,148	)
Series B preferred stock at $63.75 per share	—		—	—	(43	)	(43	)
Common stock at $28.01 per share	—		—	—	(495,000	)	(495,000	)
Balance, September 30, 2016	$	110	341	32,550,660	(161,325	)	32,389,786

The accompanying notes are an integral part of these statements.



Wells Fargo Real Estate Investment Corporation
Statement of Cash Flows (Unaudited)
	Nine months ended September 30,
(in thousands)	2016			2015
Cash flows from operating activities:
Net income	$	485,020		487,522
Adjustments to reconcile net income to net cash provided by operating activities:
Net accretion of adjustments on loans	(42,538		)	(62,904	)
Provision (reversal of provision) for credit losses	30,174			(23,914	)
Other operating activities, net	(67,753		)	(10,495	)
Net cash provided by operating activities	404,903			390,209
Cash flows from investing activities:
Increase (decrease) in cash realized from
Loans:
Acquisitions	(23,339,146		)	(2,495,142	)
Proceeds from payments and sales	2,900,579			2,291,261
Net cash used by investing activities	(20,438,567		)	(203,881	)
Cash flows from financing activities:
Increase (decrease) in cash realized from
Draws on line of credit with Bank	3,146,666			1,348,643
Repayments of line of credit with Bank	(2,604,861		)	(1,095,758	)
Common stock issued	20,000,050			—
Cash dividends paid	(508,191		)	(439,213	)
Net cash provided (used) by financing activities	20,033,664			(186,328	)
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	$	11,920		8,472

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, 2015 (2015 Form 10-K). There were no material changes to these policies in the first nine months of 2016. 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 worse 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 2015 Form 10-K.

Accounting Standards Adopted in 2016

In first quarter 2016, we adopted the following new accounting guidance:


•	Accounting Standards Update (ASU or Update) 2015-01,

Income Statement - Extraordinary and Unusual Items (Subtopic 225-20): Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items.

ASU 2015-01 removes the concept of extraordinary items from

GAAP and eliminates the requirement for extraordinary items to

be separately presented in the statement of income. We adopted the Update in first quarter 2016 with prospective application. The Update did not impact our financial statements.

Accounting Standards with Retrospective Application The following accounting pronouncement has been issued by the FASB but is not yet effective:


•	ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments

ASU 2016-15 addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice for reporting in the Statement of Cash Flows. The Update is effective for us in first quarter 2018 with retrospective application. We are evaluating the impact the Update will have on our financial statements.

Subsequent Events

We have evaluated the effects of events that have occurred subsequent to September 30, 2016. There were no material subsequent events requiring adjustment to the financial statements or disclosure in the Notes to Financial Statements. During the first week of October 2016, Hurricane Matthew caused destruction along the coasts of Florida, Georgia, South Carolina and North Carolina and resulted in, among other things, property damage for our customers and the closing of many businesses. We are currently assessing the impact to our customers and our business as a result of Hurricane Matthew. The financial impact to us is expected to relate to our consumer and commercial real estate loan portfolios and will depend on a number of factors, including the types of loans most affected by the hurricane, the extent of damage to our collateral, the extent of available insurance coverage, the availability of government assistance for our borrowers, and whether our borrowers’ ability to repay their loans has been diminished.

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. The majority of our loans are concentrated in California, New York, Washington, Virginia and Florida. These markets include approximately 58% of our total loan balance at September 30, 2016.

The following table presents total loans outstanding by portfolio segment and class of financing receivable. Outstanding balances include a total net addition of $76.1 million at September 30, 2016 and a net reduction of $301.3 million at December 31, 2015, for unamortized premiums and discounts.



(in thousands)	Sep 30, 2016		Dec 31, 2015
Commercial:
Commercial and industrial	$	9,606	46,712
Secured by real estate	4,248,472		2,871,021
Total commercial	4,258,078		2,917,733
Consumer:
Real estate 1-4 family first mortgage	28,080,674		8,950,429
Real estate 1-4 family junior lien mortgage	1,162,401		1,388,018
Total consumer	29,243,075		10,338,447
Total loans	$	33,501,153	13,256,180

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



	2016							2015
(in thousands)	Commercial			Consumer		Total		Commercial		Consumer		Total
Quarter ended September 30,
Loan acquisitions	$	1,907,228		19,117,991		21,025,219		—		794,475		794,475
Loan sales	—			(198,549	)	(198,549	)	—		(3,457	)	(3,457	)
Nine months ended September 30,
Loan acquisitions	$	1,907,228		21,431,918		23,339,146		—		2,495,142		2,495,142
Loan sales	(128		)	(203,634	)	(203,762	)	(550	)	(9,441	)	(9,991	)

Commitments to Lend

The contract or notional amount of commercial loan commitments to extend credit was $551.7 million at September 30, 2016 and $399.5 million at December 31, 2015.

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 September 30,					Nine months ended September 30,
(in thousands)	2016			2015		2016		2015
Balance, beginning of period	$	118,030		164,494		121,538		185,174
Provision (reversal of provision) for credit losses	18,743			(23,023	)	30,174		(23,914	)
Interest income on certain impaired loans (1)	(1,604		)	(1,121	)	(4,384	)	(3,470	)
Loan charge-offs:
Commercial:
Commercial and industrial	—			—		—		—
Secured by real estate	—			(113	)	(10	)	(476	)
Total commercial	—			(113	)	(10	)	(476	)
Consumer:
Real estate 1-4 family first mortgage	(4,246		)	(6,757	)	(13,602	)	(17,110	)
Real estate 1-4 family junior lien mortgage	(4,468		)	(6,684	)	(16,424	)	(22,329	)
Total consumer	(8,714		)	(13,441	)	(30,026	)	(39,439	)
Total loan charge-offs	(8,714		)	(13,554	)	(30,036	)	(39,915	)
Loan recoveries:
Commercial:
Commercial and industrial	—			—		—		—
Secured by real estate	48			291		77		300
Total commercial	48			291		77		300
Consumer:
Real estate 1-4 family first mortgage	1,820			1,201		4,265		3,789
Real estate 1-4 family junior lien mortgage	3,643			3,181		10,332		9,505
Total consumer	5,463			4,382		14,597		13,294
Total loan recoveries	5,511			4,673		14,674		13,594
Net loan charge-offs	(3,203		)	(8,881	)	(15,362	)	(26,321	)
Balance, end of period	$	131,966		131,469		131,966		131,469
Components:
Allowance for loan losses	$	130,715		130,839		130,715		130,839
Allowance for unfunded credit commitments	1,251			630		1,251		630
Allowance for credit losses	$	131,966		131,469		131,966		131,469
Net loan charge-offs (annualized) as a percentage of average total loans	0.06		%	0.27		0.13		0.28
Allowance for loan losses as a percentage of total loans	0.39			0.99		0.39		0.99
Allowance for credit losses as a percentage of total loans	0.39			1.00		0.39		1.00


(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.

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



	2016							2015
(in thousands)	Commercial			Consumer		Total		Commercial		Consumer		Total
Quarter ended September 30,
Balance, beginning of period	$	15,008		103,022		118,030		18,806		145,688		164,494
Provision (reversal of provision) for credit losses	12,194			6,549		18,743		(291	)	(22,732	)	(23,023	)
Interest income on certain impaired loans	—			(1,604	)	(1,604	)	—		(1,121	)	(1,121	)

Loan charge-offs	—			(8,714	)	(8,714	)	(113	)	(13,441	)	(13,554	)
Loan recoveries	48			5,463		5,511		291		4,382		4,673
Net loan charge-offs	48			(3,251	)	(3,203	)	178		(9,059	)	(8,881	)
Balance, end of period	$	27,250		104,716		131,966		18,693		112,776		131,469

Nine months ended September 30,
Balance, beginning of period	$	17,676		103,862		121,538		19,476		165,698		185,174
Provision (reversal of provision) for credit losses	9,507			20,667		30,174		(607	)	(23,307	)	(23,914	)
Interest income on certain impaired loans	—			(4,384	)	(4,384	)	—		(3,470	)	(3,470	)

Loan charge-offs	(10		)	(30,026	)	(30,036	)	(476	)	(39,439	)	(39,915	)
Loan recoveries	77			14,597		14,674		300		13,294		13,594
Net loan charge-offs	67			(15,429	)	(15,362	)	(176	)	(26,145	)	(26,321	)
Balance, end of period	$	27,250		104,716		131,966		18,693		112,776		131,469

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
September 30, 2016
Collectively evaluated (1)	$	26,024	30,222	56,246	4,253,638	28,762,703	33,016,341
Individually evaluated (2)	1,226		74,494	75,720	3,285	465,623	468,908
Purchased credit-impaired (PCI) (3)	—		—	—	1,155	14,749	15,904
Total	$	27,250	104,716	131,966	4,258,078	29,243,075	33,501,153
December 31, 2015
Collectively evaluated (1)	$	16,893	30,187	47,080	2,913,168	9,818,236	12,731,404
Individually evaluated (2)	783		73,675	74,458	3,378	499,865	503,243
PCI (3)	—		—	—	1,187	20,346	21,533
Total	$	17,676	103,862	121,538	2,917,733	10,338,447	13,256,180


(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 June 30, 2016.

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)	Commercial and industrial		Secured by real estate	Total
September 30, 2016
By risk category:
Pass	$	9,606	4,239,726	4,249,332
Criticized	—		8,746	8,746
Total commercial loans	$	9,606	4,248,472	4,258,078
December 31, 2015
By risk category:
Pass	$	46,712	2,848,613	2,895,325
Criticized	—		22,408	22,408
Total commercial loans	$	46,712	2,871,021	2,917,733

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



(in thousands)	Commercial and industrial		Secured by real estate	Total
September 30, 2016
By delinquency status:
Current-29 days past due (DPD) and still accruing	$	9,606	4,238,527	4,248,133
30-89 DPD and still accruing	—		6,592	6,592
90+ DPD and still accruing	—		975	975
Nonaccrual loans	—		2,378	2,378
Total commercial loans	$	9,606	4,248,472	4,258,078
December 31, 2015
By delinquency status:
Current-29 DPD and still accruing	$	46,712	2,866,076	2,912,788
30-89 DPD and still accruing	—		12	12
90+ DPD and still accruing	—		3,227	3,227
Nonaccrual loans	—		1,706	1,706
Total commercial loans	$	46,712	2,871,021	2,917,733

CONSUMER CREDIT QUALITY INDICATORS We have various classes of consumer loans that present unique risks. Loan delinquency, FICO credit scores and LTV/CLTV for loan types are common credit quality indicators that we monitor and utilize in our evaluation of the appropriateness of the allowance for credit losses for the consumer portfolio segment.

The majority of our loss estimation techniques used for the allowance for credit losses rely on delinquency matrix models or

delinquency roll rate models. Therefore, delinquency is an important indicator of credit quality and the establishment of our allowance for credit losses.

The following table provides the outstanding balances of our consumer portfolio by delinquency status.



(in thousands)	Real estate 1-4 family first mortgage			Real estate 1-4 family junior lien mortgage		Total
September 30, 2016
By delinquency status:
Current-29 DPD	$	27,943,198		1,118,357		29,061,555
30-59 DPD	39,008			14,057		53,065
60-89 DPD	14,242			7,885		22,127
90-119 DPD	8,792			4,959		13,751
120-179 DPD	11,063			4,229		15,292
180+ DPD	72,764			16,157		88,921
Remaining PCI accounting adjustments	(8,393		)	(3,243	)	(11,636	)
Total consumer loans	$	28,080,674		1,162,401		29,243,075
December 31, 2015
By delinquency status:
Current-29 DPD	$	8,776,254		1,328,855		10,105,109
30-59 DPD	42,987			19,275		62,262
60-89 DPD	24,004			9,049		33,053
90-119 DPD	14,201			5,100		19,301
120-179 DPD	14,976			6,804		21,780
180+ DPD	88,064			21,952		110,016
Remaining PCI accounting adjustments	(10,057		)	(3,017	)	(13,074	)
Total consumer loans	$	8,950,429		1,388,018		10,338,447

The following table provides a breakdown of our consumer portfolio by FICO. FICO is not available for certain loan types and may not be obtained if we deem it unnecessary due to strong collateral and other borrower attributes.



(in thousands)	Real estate 1-4 family first mortgage			Real estate 1-4 family junior lien mortgage		Total
September 30, 2016
By FICO:
< 600	$	244,791		122,872		367,663
600-639	187,591			82,890		270,481
640-679	482,580			138,833		621,413
680-719	1,257,445			207,950		1,465,395
720-759	4,050,105			233,002		4,283,107
760-799	13,931,253			242,464		14,173,717
800+	7,796,472			123,402		7,919,874
No FICO available	138,830			14,231		153,061
Remaining PCI accounting adjustments	(8,393		)	(3,243	)	(11,636	)
Total consumer loans	$	28,080,674		1,162,401		29,243,075
December 31, 2015
By FICO:
< 600	$	262,799		141,809		404,608
600-639	214,494			108,603		323,097
640-679	431,433			181,071		612,504
680-719	860,106			239,838		1,099,944
720-759	1,433,933			270,970		1,704,903
760-799	3,696,156			282,387		3,978,543
800+	1,952,028			146,248		2,098,276
No FICO available	109,537			20,109		129,646
Remaining PCI accounting adjustments	(10,057		)	(3,017	)	(13,074	)
Total consumer loans	$	8,950,429		1,388,018		10,338,447

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

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



(in thousands)	Real estate 1-4 family first mortgage by LTV			Real estate 1-4 family junior lien mortgage by CLTV		Total
September 30, 2016
By LTV/CLTV:
0-60%	$	12,713,736		350,702		13,064,438
60.01-80%	13,265,944			305,088		13,571,032
80.01-100%	1,823,872			291,137		2,115,009
100.01-120% (1)	170,994			145,176		316,170
> 120% (1)	93,322			71,782		165,104
No LTV/CLTV available	21,199			1,759		22,958
Remaining PCI accounting adjustments	(8,393		)	(3,243	)	(11,636	)
Total consumer loans	$	28,080,674		1,162,401		29,243,075
December 31, 2015
By LTV/CLTV:
0-60%	$	4,408,951		381,782		4,790,733
60.01-80%	3,628,951			355,758		3,984,709
80.01-100%	718,484			352,406		1,070,890
100.01-120% (1)	125,295			196,760		322,055
> 120% (1)	55,217			101,808		157,025
No LTV/CLTV available	23,588			2,521		26,109
Remaining PCI accounting adjustments	(10,057		)	(3,017	)	(13,074	)
Total consumer loans	$	8,950,429		1,388,018		10,338,447


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

NONACCRUAL LOANS The following table provides loans on nonaccrual status. PCI loans are excluded from this table due to the existence of the accretable yield.



(in thousands)	Sep 30, 2016		Dec 31, 2015
Commercial:
Commercial and industrial	$	—	—
Secured by real estate	2,378		1,706
Total commercial	2,378		1,706
Consumer:
Real estate 1-4 family first mortgage	175,086		201,531
Real estate 1-4 family junior lien mortgage	50,812		64,718
Total consumer	225,898		266,249
Total nonaccrual loans (excluding PCI)	$	228,276	267,955

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. PCI loans of $2.3 million at September 30, 2016, and $4.4 million at December 31, 2015, 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.

The following table shows non-PCI loans 90 days or more past due and still accruing.



(in thousands)	Sep 30, 2016		Dec 31, 2015
Commercial:
Commercial and industrial	$	—	—
Secured by real estate	—		2,252
Total commercial	—		2,252
Consumer:
Real estate 1-4 family first mortgage	3,633		8,365
Real estate 1-4 family junior lien mortgage	2,469		2,462
Total consumer	6,102		10,827
Total past due (excluding PCI)	$	6,102	13,079

Impaired Loans The table below summarizes key information for impaired loans. Our impaired loans predominantly include loans on nonaccrual status in the commercial portfolio segment and loans modified in a TDR, whether on accrual or nonaccrual status. These impaired loans generally have estimated losses which are included in the allowance for credit losses. We have impaired loans with no allowance for credit losses when loss content has been

previously recognized through charge-offs and we do not anticipate additional charge-offs or losses, or certain loans are currently performing in accordance with their terms and for which no loss has been estimated. Impaired loans exclude PCI loans. The table below includes trial modifications that totaled $12.9 million at September 30, 2016 and $15.7 million at December 31, 2015.



			Recorded investment
(in thousands)	Unpaid principal balance		Impaired loans	Impaired loans with related allowance for credit losses	Related allowance for credit losses
September 30, 2016
Commercial:
Commercial and industrial	$	—	—	—	—
Secured by real estate	3,711		3,285	3,285	1,226
Total commercial	3,711		3,285	3,285	1,226
Consumer:
Real estate 1-4 family first mortgage	431,398		359,829	251,512	50,365
Real estate 1-4 family junior lien mortgage	117,324		105,794	86,819	24,129
Total consumer	548,722		465,623	338,331	74,494
Total impaired loans (excluding PCI)	$	552,433	468,908	341,616	75,720
December 31, 2015
Commercial:
Commercial and industrial	$	—	—	—	—
Secured by real estate	4,097		3,378	3,378	783
Total commercial	4,097		3,378	3,378	783
Consumer:
Real estate 1-4 family first mortgage	461,186		382,596	256,669	44,077
Real estate 1-4 family junior lien mortgage	130,787		117,269	96,511	29,598
Total consumer	591,973		499,865	353,180	73,675
Total impaired loans (excluding PCI)	$	596,070	503,243	356,558	74,458

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



	Quarter ended September 30,						Nine months ended September 30,
	2016				2015		2016		2015
(in thousands)	Average recorded investment		Recognized interest income		Average recorded investment	Recognized interest income	Average recorded investment	Recognized interest income	Average recorded investment	Recognized interest income
Commercial:
Commercial and industrial	$	—	—		—	—	—	—	—	—
Secured by real estate	3,358		11		11,351	821	3,828	60	8,170	898
Total commercial	3,358		11		11,351	821	3,828	60	8,170	898
Consumer:
Real estate 1-4 family first mortgage	363,593		5,867		388,609	5,681	372,254	17,120	392,712	17,183
Real estate 1-4 family junior lien mortgage	107,935		2,240		119,882	2,370	111,742	6,935	121,797	7,146
Total consumer	471,528		8,107		508,491	8,051	483,996	24,055	514,509	24,329
Total impaired loans	$	474,886	8,118		519,842	8,872	487,824	24,115	522,679	25,227
Interest income:
Cash basis of accounting			$	2,511		3,381		7,443		8,580
Other (1)			5,607			5,491		16,672		16,647
Total interest income			$	8,118		8,872		24,115		25,227


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

Troubled Debt Restructuring (TDRs) When, for economic or legal reasons related to a borrower’s financial difficulties, we grant a concession for other than an insignificant period of time to a borrower that we would not otherwise consider, the related loan is classified as a TDR, the balance of which totaled $468.9 million and $502.4 million at September 30, 2016 and December 31, 2015, respectively. We do not consider any loans modified through a loan resolution such as foreclosure or short sale to be a TDR.

We may require some consumer borrowers experiencing financial difficulty to make trial payments generally for a period of three to four months, according to the terms of a planned permanent modification, to determine if they can perform according to those terms. These arrangements represent trial modifications, which we classify and account for as TDRs. While loans are in trial payment programs, their original terms are not considered modified and they continue to advance through delinquency status and accrue interest according to their original terms. Most of the planned modifications for these arrangements involve interest rate reductions; however, the exact concession type and resulting financial effect are usually not finalized and do not take effect until the loan is permanently modified. The trial period terms are developed in accordance with our proprietary programs or the U.S. Treasury’s Making Homes Affordable programs for real estate 1-4 family first lien (i.e. Home Affordable Modification Program - HAMP) and junior lien (i.e. Second Lien Modification Program - 2MP) mortgage loans.

At September 30, 2016, the loans in trial modification period were $6.2 million under HAMP, $774 thousand under 2MP and $5.9 million under proprietary programs, compared with $7.4 million, $663 thousand and $7.6 million at December 31, 2015, respectively. Trial modifications with a recorded investment of $4.9 million at September 30, 2016, and $5.8 million at December 31, 2015, were accruing loans and $8.0 million and $9.9 million, respectively, were nonaccruing loans. Our experience is that most of the mortgages that enter a trial payment period program are successful in completing the program requirements and are then permanently modified at the end of the trial period. As previously discussed, our allowance process considers the impact of those modifications that are probable to occur including the associated credit cost and related re-default risk.

For those loans that may be modified more than once, the following table reflects each modification that occurred during the period. Loans that both modify and pay off within the period, as well as changes in recorded investment during the period for loans modified in prior periods, are not included in the table.



	Primary modification type (1)							Financial effects of modifications
(in thousands)	Principal (2)		Interest rate reduction	Other concessions (3)		Total		Charge- offs (4)	Weighted average interest rate reduction		Recorded investment related to interest rate reduction (5)
Quarter ended September 30, 2016
Commercial:
Commercial and industrial	$	—	—	—		—		—	—	%	$	—
Secured by real estate	—		—	2,106		2,106		—	—		—
Total commercial	—		—	2,106		2,106		—	—		—
Consumer:
Real estate 1-4 family first mortgage	2,079		3,107	3,267		8,453		258	3.48		5,110
Real estate 1-4 family junior lien mortgage	111		738	866		1,715		437	3.88		848
Trial modifications (6)	—		—	1,181		1,181		—	—		—
Total consumer	2,190		3,845	5,314		11,349		695	3.54		5,958
Total	$	2,190	3,845	7,420		13,455		695	3.54	%	$	5,958
Quarter ended September 30, 2015
Commercial:
Commercial and industrial	$	—	—	—		—		—	—	%	$	—
Secured by real estate	—		—	—		—		—	—		—
Total commercial	—		—	—		—		—	—		—
Consumer:
Real estate 1-4 family first mortgage	3,588		5,887	4,657		14,132		485	3.68		8,825
Real estate 1-4 family junior lien mortgage	704		1,441	974		3,119		552	4.58		2,089
Trial modifications (6)	—		—	(350	)	(350	)	—	—		—
Total consumer	4,292		7,328	5,281		16,901		1,037	3.85		10,914
Total	$	4,292	7,328	5,281		16,901		1,037	3.85	%	$	10,914



	Primary modification type (1)							Financial effects of modifications
(in thousands)	Principal (2)		Interest rate reduction	Other concessions (3)		Total		Charge- offs (4)	Weighted average interest rate reduction		Recorded investment related to interest rate reduction (5)
Nine months ended September 30, 2016
Commercial:
Commercial and industrial	$	—	—	—		—		—	—	%	$	—
Secured by real estate	—		—	3,954		3,954		—	—		—
Total commercial	—		—	3,954		3,954		—	—		—
Consumer:
Real estate 1-4 family first mortgage	5,914		8,086	13,137		27,137		1,297	3.48		12,798
Real estate 1-4 family junior lien mortgage	794		3,425	3,211		7,430		1,478	3.82		4,012
Trial modifications (6)	—		—	(1,133	)	(1,133	)	—	—		—
Total consumer	6,708		11,511	15,215		33,434		2,775	3.56		16,810
Total	$	6,708	11,511	19,169		37,388		2,775	3.56	%	$	16,810
Nine months ended September 30, 2015
Commercial:
Commercial and industrial	$	—	—	—		—		—	—	%	$	—
Secured by real estate	—		—	3,884		3,884		—	—		—
Total commercial	—		—	3,884		3,884		—	—		—
Consumer:
Real estate 1-4 family first mortgage	7,796		16,405	14,418		38,619		1,655	3.46		22,467
Real estate 1-4 family junior lien mortgage	1,401		3,716	3,816		8,933		1,484	4.98		4,747
Trial modifications (6)	—		—	1,634		1,634		—	—		—
Total consumer	9,197		20,121	19,868		49,186		3,139	3.73		27,214
Total	$	9,197	20,121	23,752		53,070		3,139	3.73	%	$	27,214

(1)

Amounts represent the recorded investment in loans after recognizing the effects of the TDR, if any. TDRs may have multiple types of concessions, but are presented only once in the first modification type based on the order presented in the table above. The reported amounts include loans remodified of $2.7 million and $5.2 million for the quarters ended September 30, 2016 and 2015, and $6.9 million and $13.2 million for the nine months ended September 30, 2016 and 2015, respectively.


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


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

(4)

Charge-offs include write-downs of the investment in the loan in the period it is contractually modified. The amount of charge-off will differ from the modification terms if the loan has been charged down prior to the modification based on our policies. In addition, there may be cases where we have a charge-off/down with no legal principal modification. Modifications resulted in legally forgiving principal (actual, contingent or deferred) of $290 thousand and $1.1 million for the quarters ended September 30, 2016 and 2015, and $1.0 million and $2.3 million for the nine months ended September 30, 2016 and 2015, respectively.


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

(6)

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

The table below summarizes permanent modification TDRs that have defaulted in the current period within 12 months of their permanent modification date. We report these defaulted

TDRs based on a payment default definition of 90 days past due for the commercial portfolio segment and 60 days past due for the consumer portfolio segment.



	Recorded investment of defaults
	Quarter ended September 30,			Nine months ended September 30,
(in thousands)	2016		2015	2016	2015
Commercial:
Commercial and industrial	$	—	—	—	—
Secured by real estate	—		—	807	—
Total commercial	—		—	807	—
Consumer:
Real estate 1-4 family first mortgage	835		1,797	1,759	4,264
Real estate 1-4 family junior lien mortgage	573		383	885	814
Total consumer	1,408		2,180	2,644	5,078
Total	$	1,408	2,180	3,451	5,078

Note 3: Fair Values of Assets and Liabilities

We use fair value measurements to record fair value adjustments to certain assets and to determine fair value disclosures. We did not elect the fair value option for any financial instruments as permitted in FASB ASC 825, Financial Instruments, which allows companies to elect to carry certain financial instruments at fair value with corresponding changes in fair value reported in the results of operations. As of September 30, 2016 and December 31, 2015, assets measured at fair value on a nonrecurring basis were less than 1% of total assets. See Note 1 (Summary of Significant Accounting Policies) in our 2015 Form 10-K for additional information about our fair value measurement policies and methods.

Disclosures about Fair Value of Financial Instruments The table below is a summary of fair value estimates by level for financial instruments. The carrying amounts in the following table are recorded in the balance sheet under the indicated captions.

We have not included assets and liabilities that are not financial instruments in our disclosure, such as other assets and other liabilities. The total of the fair value calculations presented does not represent, and should not be construed to represent, the underlying value of the Company.




	Carrying amount		Estimated fair value
(in thousands)	Carrying amount		Level 1	Level 2	Level 3	Total
September 30, 2016
Financial assets
Cash and cash equivalents (1)	$	—	—	—	—	—
Loans, net (2)	33,370,438		—	—	34,842,564	34,842,564

Financial liabilities
Line of credit with Bank (1)	1,369,954		—	—	1,369,954	1,369,954
December 31, 2015
Financial assets
Cash and cash equivalents (1)	$	—	—	—	—	—
Loans, net (2)	13,135,314		—	—	13,892,807	13,892,807

Financial liabilities
Line of credit with Bank (1)	828,149		—	—	828,149	828,149


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


(2)	Carrying amount reflects net discount and allowance for loan losses.

Note 4: Common and Preferred Stock

The following table provides details of our authorized common and preferred stock.



	Liquidation preference per share		Shares authorized	Shares issued and outstanding	Par value per share		Carrying value
September 30, 2016
Preferred stock:
Series A
6.375%, Cumulative, Perpetual Series A Preferred Stock	$	25	11,000,000	11,000,000	$	0.01	110,000
Series B
$85 Annual Dividend Per Share, Cumulative, Perpetual Series B Preferred Stock	1,000		1,000	667	0.01		7
Common stock			100,000,000	34,058,028	0.01		340,580
Total			111,001,000	45,058,695			$	450,587
December 31, 2015
Preferred stock:
Series A
6.375%, Cumulative, Perpetual Series A Preferred Stock	$	25	11,000,000	11,000,000	$	0.01	110,000
Series B
$85 Annual Dividend Per Share, Cumulative, Perpetual Series B Preferred Stock	1,000		1,000	667	0.01		7
Common stock			100,000,000	12,900,000	0.01		129,000
Total			111,001,000	23,900,667			$	239,007

In the event that the Company is liquidated or dissolved, the holders of the Series A and Series B preferred stock will be entitled to a liquidation preference for each security plus any authorized, declared and unpaid dividends that will be paid prior to any payments to common stockholders. With respect to the payment of dividends and liquidation preference, the Series A preferred stock ranks on parity with Series B preferred stock and senior to the Company’s common stock. The Company may issue additional shares of common stock to affiliates of Wells Fargo without further action by the Series A or Series B stockholders. Additional information related to Series A and B preferred stock is included in Note 5 (Common and Preferred Stock) to Financial Statements in our 2015 Form 10-K.

On August 26, 2016, the Company issued and sold 21.2 million shares of the Company’s common stock, par value $0.01 per share, for an aggregate purchase price of $20.0 billion. The shares were sold to affiliates of the Company. The Company used the proceeds from the issuance to acquire REIT Qualified Assets (as described in the our Annual Report on Form 10-K for the year ended December 31, 2015) from affiliates. Following the issuance, indirect wholly-owned subsidiaries of Wells Fargo Bank, N.A. continue to own 100% of the Company’s common stock.

Note 5: Transactions With Related Parties

The Company engages in various transactions and agreements with affiliated parties in the ordinary course of business. Due to the common ownership of the Company and the affiliated parties by Wells Fargo, these transactions and agreements may reflect circumstances and considerations that could differ from

those conducted with unaffiliated parties. The principal items related to transactions with affiliated parties included in the accompanying statement of income and balance sheet are described in the table and narrative below.



	Quarter ended September 30,			Nine months ended September 30,
(in thousands)	2016		2015	2016	2015
Income statement data
Interest income:
Net accretion of adjustments on loans	$	4,694	20,926	42,538	62,904
Interest on deposits	4,064		—	4,303	304
Total interest income	8,758		20,926	46,841	63,208
Pledge fees	8,715		1,538	16,457	1,856
Interest expense	1,272		377	2,029	644
Loan servicing costs	13,308		9,074	30,848	26,598
Management fees	4,441		2,871	11,843	8,328



(in thousands)	Sep 30, 2016			Dec 31, 2015
Balance sheet related data
Loan acquisitions (year-to-date)	$	23,339,146		3,303,296
Proceeds from common stock issuance	20,000,050			—
Loan sales (year-to-date)	(203,762		)	(11,751	)
Pledged loans (carrying value) (1)	21,484,462			5,760,284
Foreclosed asset sales (year-to-date)	(8,493		)	(11,137	)
Line of credit with Bank	1,369,954			828,149
Accounts receivable - affiliates, net	302,171			70,982


(1)	The fair value of pledged loans was approximately $22.4 billion and $6.1 billion at September 30, 2016 and December 31, 2015, respectively.

Loans We acquire and sell loans to and from the Bank. The acquisitions and sales are transacted at fair value resulting in acquisition discounts and premiums or gains and losses on sales. The net acquisition discount accretion is reported within interest income. Gains or losses on sales of loans are included within noninterest income. We may pledge our loans in an aggregate amount not exceeding 80% of our total assets at any time as collateral on behalf of the Bank for the Bank’s access to secured borrowing facilities through the Federal Home Loan Banks or the discount window of Federal Reserve Banks. In exchange for the pledge of our loan assets, the Bank will pay us a fee that is consistent with market terms. At September 30, 2016 and September 30, 2015, the fee was equal to an annual rate of 28 basis points (0.28%) and 11 basis points (0.11%), respectively, as applied to the unpaid principal balance of pledged loans on a monthly basis. Such fee may be renegotiated by us and the Bank from time to time.

Loan Servicing Costs The loans in our portfolio are predominantly serviced by the Bank pursuant to the terms of participation and servicing and assignment agreements. In some 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.

Management Fees We pay the Bank a management fee to reimburse 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 are calculated based on Wells Fargo’s total allocable costs multiplied by a formula. The formula is based on our proportion of Wells Fargo’s consolidated: (1) full-time equivalent employees, (2) total average assets and (3) total revenue.

Deposits Interest income earned on deposits is included in interest income. Our cash management process includes applying operating cash flows to reduce any outstanding balance on our line of credit with the Bank. Operating cash flows are settled through our affiliate accounts receivable/payable process. Upon settlement cash received is either applied to reduce our line of credit outstanding or retained as a deposit with the Bank.

Foreclosed Assets We sell foreclosed assets back to the Bank from time to time at estimated fair value.

Line of Credit We have a revolving line of credit with the Bank, pursuant to which we can borrow up to $2.2 billion at a rate of interest equal to the average federal funds rate plus 12.5 basis points (0.125%).

Accounts Receivable - Affiliates, Net Accounts receivable from or payable to the Bank or its affiliates result from intercompany transactions which include net loan pay-downs, interest receipts, and other transactions, including those transactions noted herein, which have not yet settled.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

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

Item 1A. Risk Factors

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

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

Information required by this Item 2 pursuant to Item 703 of Regulation S-K regarding issuer repurchases of equity securities is not applicable since we do not have a program providing for the repurchase of our securities.

Item 6. Exhibits

A list of exhibits to this Form 10-Q is set forth on the Exhibit Index immediately preceding such exhibits and is incorporated herein by reference.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.



Wells Fargo Real Estate Investment Corporation

By:		/s/ RICHARD D. LEVY
		Richard D. Levy Executive Vice President and Controller (Principal Accounting Officer)

Date: November 7, 2016

EXHIBIT INDEX



Exhibit No.	Description	Location

(3)(a)	Amended and Restated Certificate of Incorporation.	Incorporated by reference to Exhibit (3)(a) to WFREIC’s Annual Report on Form 10-K for the year ended December 31, 2014.

(3)(b)	Bylaws.	Incorporated by reference to Exhibit 3.3 to WFREIC’s Registration Statement on Form S-11 No. 333-198948 filed November 18, 2014.

(12)	Computations of Ratios of Earnings to Fixed Charges and Preferred Stock Dividends.	Filed herewith.

(31)(a)	Certification of principal executive officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.	Filed herewith.

(31)(b)	Certification of principal financial officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.	Filed herewith.

(32)(a)	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.	Filed herewith.

(32)(b)	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.	Filed herewith.

(101.Ins)	XBRL Instance Document	Filed herewith.

(101.Sch)	XBRL Taxonomy Extension Schema Document	Filed herewith.

(101.Cal)	XBRL Taxonomy Extension Calculation Linkbase Document	Filed herewith.

(101.Lab)	XBRL Taxonomy Extension Label Linkbase Document	Filed herewith.

(101.Pre)	XBRL Taxonomy Extension Presentation Linkbase Document	Filed herewith.

(101.Def)	XBRL Taxonomy Extension Definitions Linkbase Document	Filed herewith.

Attached files

Wells Fargo Real Estate Investment Corp. Reports

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