Form DEFA14A WELLS FARGO & COMPANY/MN
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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Wells Fargo Update:
Federal Reserve Consent Order
February 2, 2018
© 2018 Wells Fargo & Company. All rights reserved. Confidential.
1Wells Fargo Update
Wells Fargo entered into a Consent Order with the Board of Governors of the Federal
Reserve System on February 2, 2018, relating to our governance oversight, and
compliance and operational risk management program, which relates to prior issues
including our sales practices announcement on September 8, 2016
The Federal Reserve acknowledges that Wells Fargo has already taken steps to address
deficiencies in corporate governance and risk management, and has implemented
improvements in both
Within 60 days, the Board and the Company must submit plans to the Federal Reserve
that leverage existing plans and efforts already underway to:
- Further enhance the Board’s effectiveness in carrying out its oversight and governance of the
Company (Governance Plan)
- Further improve the firm wide compliance and operational risk management program (Risk
Management Program Plan)
Once we adopt and implement these two plans as approved by the Federal Reserve, we
will engage independent third parties to conduct an initial risk management review by
September 30, 2018
Until the Governance and Risk Management Program plans are adopted and
implemented, and the first third party review is completed to the satisfaction of the
Federal Reserve, our total asset size will be limited as follows:
- Effective 2Q18, Wells Fargo’s total consolidated assets must be held to the December 31, 2017
level
• We have flexibility to optimize our Balance Sheet while we continue to help our customers succeed
financially (See pages 5 and 6 for additional information)
Subsequently, after the asset cap has been lifted, and we have integrated the risk
management program improvements, we will engage in a second third-party review to
assess the efficacy and sustainability of the improvements
Federal Reserve Consent Order summary
2Wells Fargo Update
Relevant risk management enhancements already underway
Over the last 17 months, we continued our focus and accelerated progress on the
governance, compliance and operational risk issues referenced in the Federal Reserve’s
Consent Order, and we agree with the assessment that our work is not yet complete
- Much of the foundational work has been completed, as issues related to these functions were
previously identified by regulators, or were self-identified
Concurrently, we have made meaningful changes to our operating model that further
strengthen our governance and risk management, which include:
- Strengthened Board governance and oversight
- Centralized control functions
- Improved team member leadership and staff expertise including through external hires
- Increased investment spending and resources to address compliance and operating risk deficiencies
We are building on our progress to date and leveraging our experience in risk management
areas where we have excelled or made substantial improvements (e.g., credit/market risk,
model risk, capital stress testing, liquidity risk management including TLAC, resolution
planning), and we are confident that we are addressing the issues cited in the Consent
Order
As we execute on these plans and manage to the asset cap, we will continue to serve our
customers’ financial needs including saving, borrowing and investing, as we help them
succeed financially
3Wells Fargo Update
Board Leadership Structure Board Composition Governance Practices
Separated the roles of Chairman
and CEO
Amended By-Laws to require an
independent Board Chair
Elected new independent Chair,
Elizabeth “Betsy” Duke (former member
of the Federal Reserve Board of
Governors) effective January 1, 2018
Significant Board refreshment - Elected 6
new independent directors and 5 directors
retired in 2017; planned refreshment of an
additional 4 directors in 2018, with the
retirement of 3 of those directors occurring by
the 2018 Annual Meeting
Majority of independent directors (8) have
been added since 2015
Enhanced skills and experience
represented on Board, including financial
services, risk management, technology/cyber,
regulatory, human capital management,
finance, accounting, consumer and social
responsibility
2017 Board self-evaluation facilitated
by a third party (Mary Jo White,
former Chair of the SEC) following
2017 annual meeting and in advance of
typical year-end timing
Board Chair and Committee Chairs
focused on agenda planning and
managing information flow and
management reporting to the Board
Board continues to work with
management to enhance and focus Board
presentations and materials
Board actions taken to enhance structure and oversight
The Board has made significant changes to its leadership, composition, and governance practices that
resulted from a thoughtful and deliberate process informed by the Board’s comprehensive self-evaluation
process and the Company’s engagement with shareholders and other stakeholders.
Board Composition Evaluation
Robust annual Board and self-
evaluation process includes the
individual contributions of
directors
Succession planning and Board
refreshment
Recruitment of new
directors to complement
the existing skills and
experience of the Board in
areas identified through its
self-evaluation process while
maintaining an appropriate
balance of perspectives and
experience
Key Changes Made to Board Structure, Composition, and Oversight
Reconstitution of Key Committees
Risk Committee
Karen Peetz appointed as new Chair
Added 4 directors (Maria Morris, Karen Peetz, Juan
Pujadas, Suzanne Vautrinot)
Enhanced financial services, compliance, risk,
operational, cyber, and technology experience with
new composition
4 members have risk management expertise
meeting Federal Reserve enhanced prudential
standards for large U.S. bank holding companies
Consolidated oversight of second line of defense
risk management activities under the Risk
Committee
Established 2 subcommittees focused on (1)
compliance risk and (2) technology/cyber risk and
data governance and management
Governance and Nominating Committee
Donald James appointed as new Chair
Added 2 directors (Duke and James)
Enhanced financial services, corporate
governance, and regulatory experience with
new composition
Human Resources Committee
Added 2 directors (Peetz and Ron Sargent)
Enhanced oversight responsibilities to include
human capital management, culture, and ethics
Continues to oversee our incentive
compensation risk management program which
was expanded to include a broader population
of team members and incentive plans
4Wells Fargo Update
Actions taken to strengthen Risk Management organization
Following the centralization of risk management functions in 2017, we designed and are
implementing a fully integrated operating model for risk management that covers all
business groups and enterprise staff groups (including Corporate Risk)
- As a part of this transformation, we are currently executing comprehensive plans that address our
compliance and operational risk management programs, organizations, processes, technology and
controls
Hired external talent to strengthen our capabilities and address deficiencies:
- Chief Operational Risk Officer, Mark D’Arcy, joined February 2017; previously Global Head of
Operational Risk at State Street
- Chief Compliance Officer (CCO), Mike Roemer, joined January 2018; previously CCO at Barclays
- Head of Regulatory Relations (new position), Sarah Dahlgren, joining March 2018; currently a
Partner at McKinsey & Company in their risk practice, and previously a 25 year veteran of the
Federal Reserve Bank of N.Y.
- Hired more than 2,000 new external team members in Risk Management in 2016 and 2017
Established dedicated groups focused on key risk control areas and moved proven senior
talent into new roles leading those groups:
- Established a Conduct Management Office in January 2017, responsible for managing conduct risk
and driving consistency in the way Wells Fargo receives, researches, resolves, and oversees
allegations and customer complaints
- Created an Enterprise Data Management function in September 2017, responsible for defining the
infrastructure, business source systems and governance of all company data
- Formed a Comprehensive Customer Remediation Group in November 2017, responsible for
developing and implementing consistent enterprise standards for remediation across all consumer
products
5Wells Fargo Update
Effective 2Q18, Wells Fargo’s total consolidated assets will be held to the December 31,
2017 period-end level of $2.0 trillion
- Compliance will be measured on a 2-quarter daily average basis, which allows for management of
temporary fluctuations
Asset cap will remain in effect until we have finalized, adopted and implemented the
enhanced plans for governance and risk management to the satisfaction of the Federal
Reserve, and the first third-party review has been completed
Our Balance Sheet scale provides us with flexibility to manage within the asset cap to serve
our customers’ financial needs and generate a competitive Return on Equity (ROE) for
shareholders
- Certain portfolios that have been net interest income-enhancing and ROE beneficial, yet dilutive to
Return on Assets (ROA), have grown as a result of our strong leverage ratio position
- Until the asset cap is removed, we intend to temporarily limit some of these activities by actions
that:
• Can be taken in a relatively short period of time, which will enable us to continue to grow traditional loans and
deposits
• Would be expected to impact only a modest percentage of the total Balance Sheet
• Would be expected to impact only a portion of the portfolios currently under consideration
- Page 6 provides examples of portfolios under consideration for possible Balance Sheet optimization
activities, though the actual actions we take will be dependent upon underlying business trends
and/or strategies
Balance Sheet flexibility should minimize customer impact of the asset cap
With $2.0 trillion in assets, our scale provides us with the flexibility to continue to serve our
customers’ financial needs including saving, borrowing and investing, and to deliver a
competitive ROE for shareholders
6Wells Fargo Update
Financial Institutions’
Deposits
Trading Assets and Short-
term Investments
As of 12/31/17, ~$200 billion of non-
operational deposits
- On average these deposits provide
~45% liquidity value under the
liquidity coverage ratio (LCR) as they
do not meet requirements of the
operational deposit definition
Impact considerations:
- Modest NII headwind
- Manageable LCR impact due to
relatively lower liquidity value including
some categories with zero liquidity
value
- Total average deposit cost and deposit
betas are expected to benefit from any
reduction in balances from this
category
As of 12/31/17, $149 billion (1) of
deposits in our Financial Institutions
Group
- Balances have grown over $36 billion
since 2Q16
- Certain deposits provide little liquidity
value, are high beta/short-term, and
high cost
o 4Q17 average deposit cost of 0.91%
Impact considerations:
- Modest NII headwind
- Manageable LCR impact due to
relatively lower liquidity value including
some categories with zero liquidity
value
- Total average deposit cost and deposit
betas are expected to benefit from any
reduction in balances from this
category
As of 12/31/17, $92 billion of trading
assets
- As part of Resolution and Recovery
Planning we placed a temporary cap
on non-bank assets including trading
assets
As of 12/31/17, $91 billion of short-
term investments, excluding cash at
the Fed
- Predominantly securities borrowed
and reverse repurchase
Impact consideration:
- A portion of expected trading balances
and related revenue would be
foregone
Non-operational Deposits
(Commercial Only)
(1) A portion of Financial Institutions Group deposits are also included in the $200 billion of non-operational deposits noted above.
(2) Preliminary analysis that reflects the net income impacts of one set of assumptions for prospective Balance Sheet optimization activities to manage within the
asset cap. The analysis assumed we would primarily limit trading assets, short-term investments, and certain deposits that have less liquidity value by $50 billion
to $75 billion on average to accommodate assumed growth in lending, deposit taking and other asset and liability categories, as well as to provide an internal
buffer. The average assumed net interest margin (NIM) on the asset/liability categories reduced was in the range of 70-75 bps. Actual actions taken and resulting
financial impact will be dependent upon underlying business trends and/or strategies and will be determined over time.
Examples of Balance Sheet flexibility
Based on our preliminary analysis, Net Income after Tax impact of Balance Sheet
optimization to manage to the asset cap is estimated to be ~$(300 – 400) million in 2018 (2)
Temporary actions currently under consideration to manage to the asset cap
would likely reflect a mix of actions including a reduction in a portion of the
following portfolios, and would enable us to continue to serve our customers’ needs and
grow traditional loans and deposits
7Wells Fargo Update
What will the customer impact be?
- We will continue to serve our customers’ financial
needs including saving, borrowing and investing, as
we help them succeed financially
- We have flexibility to manage our Balance Sheet by
optimizing certain activities, which could include
temporarily pulling back from some activities
focused on providing liquidity to market participants
including other financial institutions
Do you have the capacity to address the
requirements, and how long will it take?
- This is priority #1 for the Company, and we will
allocate whatever resources are necessary to
address the issues citied
- We are working on augmenting the plans we
currently have in place for submission to the Federal
Reserve, and after Federal Reserve approval of the
plans we will engage independent third parties to
conduct a review to be completed no later than
September 30, 2018
When do you expect the Federal Reserve to
remove the constraint on your assets?
- There are a number of key deliverables in the
Consent Order.
- The asset cap will remain in effect until we have
adopted and implemented the plans for enhanced
governance and risk management, and the first
third-party review has been completed to the
satisfaction of the Federal Reserve
Are these new issues that have been
identified?
- These are not new issues. They are related to
compliance and operational risk matters that were
previously identified by regulators, or were self-
identified
Are you still committed to your expense
savings plans?
- We are focused on delivering expense savings, and
reinvesting in the business as previously disclosed
- We remain committed to our previously disclosed
2018 expense guidance, as well as our targeted $4
billion in expense savings by year-end 2019
What does this mean for your efficiency, ROE
and ROA targets?
- Updated annual targets will be disclosed at our May
2018 Investor Day, and will consider the impacts of
the 2017 Tax Act, as well as the asset cap
Will you be able to return more capital to
shareholders this year?
- With ~190 bps of capital above our internal
Common Equity Tier 1 target of 10%, as of
12/31/17, we remain committed to returning more
capital to shareholders
Key questions
Key questions and current outlook
8Wells Fargo Update
Key takeaways
We have been focused on the same issues cited by the Federal Reserve, and while we have
made meaningful progress we acknowledge additional work is necessary
We are building on our progress to date, leveraging our experience in risk management in
areas where we have excelled, and are confident that we are addressing the issues
We are committed to meeting the Consent Order requirements and are currently working
on our comprehensive Risk Management Program Plan, while the Board develops the
Governance Plan, for submission to the Federal Reserve within 60 days
We believe that our Balance Sheet scale provides us with the flexibility to manage within
the asset cap, serve our customers’ financial needs including saving, borrowing and
investing, and generate a competitive Return on Equity (ROE)
We take the Consent Order very seriously and we will successfully complete the work that we
have started, as we continue on the path towards building a better Wells Fargo
9Wells Fargo Update
Forward-looking statements and additional information
Forward-looking statements:
This document contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. In
addition, we may make forward-looking statements in our other documents filed or furnished with the SEC, and our management may
make forward-looking statements orally to analysts, investors, representatives of the media and others. 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. In particular, forward-looking statements
include, but are not limited to, statements we make about: (i) the balance sheet optimization strategies described in this document,
including their anticipated effects and our ability to implement those strategies, (ii) when we expect to fulfill our requirements under the
Consent Order, (iii) our expense savings plans, (iv) the future operating or financial performance of the Company; (v) our noninterest
expense and efficiency ratio; (vi) future credit quality and performance, including our expectations regarding future loan losses and
allowance levels; (vii) the appropriateness of the allowance for credit losses; (viii) our expectations regarding net interest income and net
interest margin; (ix) loan growth or the reduction or mitigation of risk in our loan portfolios; (x) future capital or liquidity levels or targets
and our estimated Common Equity Tier 1 ratio under Basel III capital standards; (xi) the performance of our mortgage business and any
related exposures; (xii) the expected outcome and impact of legal, regulatory and legislative developments, as well as our expectations
regarding compliance therewith; (xiii) future common stock dividends, common share repurchases and other uses of capital; (xiv) our
targeted range for return on assets and return on equity; (xv) the outcome of contingencies, such as legal proceedings; and (xvi) the
Company’s 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. Investors are urged to not unduly rely on
forward-looking statements as actual results could differ materially from expectations. Forward-looking statements speak only as of the
date made, and we do not undertake to update them to reflect changes or events that occur after that date. For more information about
factors that could cause actual results to differ materially from expectations, refer to the “Forward-Looking Statements” discussion in Wells
Fargo’s press release announcing our fourth quarter 2017 results and in our most recent Quarterly Report on Form 10-Q, as well as to
Wells Fargo’s other reports filed with the Securities and Exchange Commission, including the discussion under “Risk Factors” in our Annual
Report on Form 10-K for the year ended December 31, 2016.
Additional information and where to find it:
Wells Fargo & Company (the “Company”) will file a proxy statement related to items to be voted on at its 2018 annual meeting of
shareholders with the Securities and Exchange Commission (“SEC”). INVESTORS AND SECURITY HOLDERS ARE ADVISED TO READ
THE PROXY STATEMENT WHEN IT BECOMES AVAILABLE, BECAUSE IT WILL CONTAIN IMPORTANT INFORMATION. Investors
and security holders may obtain a free copy of the proxy statement (when available) and other documents filed by the Company with the
SEC at the SEC’s web site at www.sec.gov. Free copies of the proxy statement, once available, and the Company's other filings with the
SEC may also be obtained from the Company upon written request to the Office of the Corporate Secretary, Wells Fargo & Company, MAC
D1053-300, 301 S. College Street, Charlotte, North Carolina 28202.
Participants in the solicitation:
The Company and its directors, executive officers, and other members of management and employees may be soliciting proxies from Wells
Fargo shareholders in connection with items to be voted on at the Company’s 2018 annual meeting of shareholders. Information regarding
the persons who may, under the rules of the SEC, be deemed participants in the solicitation of proxies, including a description of their
direct and indirect interest, by security holdings or otherwise, will be set forth in the Company’s proxy statement filed with the SEC.