CEO: ‘Confident in the direction we are going’
The 2016 Wells Fargo Annual Report includes CEO Tim Sloan’s first annual letter to shareholders.
Editor’s note: In a letter published March 16 in the 2016 Wells Fargo Annual Report (PDF), CEO Tim Sloan reviews the company’s financial performance and details how Wells Fargo is working to rebuild trust with stakeholders.
To Our Owners,
This is my first annual report to shareholders, and I am pleased to have this opportunity to share my thoughts on Wells Fargo — our accomplishments, challenges, and decisive steps to rebuild trust — as part of our regular, ongoing conversation about our company.
In October 2016, I was honored to be chosen by our board of directors to succeed John Stumpf as CEO and to lead Wells Fargo into the future. John successfully navigated the company through the financial crisis of 2008–2009 and the largest merger in banking; now, I am fully dedicated to guiding our company forward at this critical moment in our 165-year history.
I want to start by stating clearly that the foundation of our company is strong. Despite our current challenges, I believe that our underlying business strengths and our focus on managing for the long term will continue to benefit us as we move forward. We have meaningful opportunities, as you will read later in this letter, and we will be prepared to deliver for all of our stakeholders. As always, we take our commitment to our team members, customers, shareholders, and communities very seriously, and we manage with those constituents in mind.
Our challenges in 2016 were among the toughest in our company’s history. Unacceptable sales practices in our retail bank resulted in accounts being opened for customers that they were unaware of and neither needed nor wanted. This exposed behaviors that needed to be addressed. These behaviors were contrary to our values, raised questions about our culture, and damaged our reputation and the trust of many of our stakeholders. I want to assure you that we are facing these problems head on, and I am confident that Wells Fargo will emerge a stronger company.
Our top priority is rebuilding trust through a comprehensive plan that includes making things right for our customers and team members, ensuring we fix problems at their root cause, and building a better bank for the future. We are committed to transparency as we connect with all stakeholders more frequently through increased communications.
We are conducting thorough reviews and investigations to fully understand where things broke down and where we failed. We are committed to learning from our mistakes because we recognize the inappropriate sales practices in our retail bank did not serve the interests of our customers, our team members, or our company. And despite efforts to set things right, we did not move quickly enough to address these issues.
All of this was unacceptable, and the lessons we learned must never be forgotten as we make changes necessary to regain our status as one of the world’s best financial institutions.
Making it right for customers and team members
We are fully committed to making things right for our stakeholders and rebuilding trust. This is a long-term effort — one requiring commitment, patience, and resolve.
At the outset, we employed a third-party consultant to review accounts and identify impacted customers. We reviewed more than 94 million checking, credit card, and line of credit accounts, dating from 2011 to 2016. Based on that review, we refunded more than $3.2 million in charges and fees on approximately 130,000 accounts that we could not rule out as being initiated without a customer’s authorization. We also reached out to approximately 40 million retail customers and 3 million small businesses through email, statement messaging, and postcards to ensure those affected by the unacceptable sales practices could reach us. We are researching how customers’ credit scores were impacted as a result of potentially unauthorized credit cards, with the goal of aiding customers whose credit scores might have been affected. And we decided to go beyond the requirements of our sales practices consent orders to expand our account reviews to include the years 2009 and 2010.
“We are fully committed to making things right for our stakeholders and rebuilding trust. This is a long-term effort — one requiring commitment, patience, and resolve.”
We also want to rebuild trust with our team members. A cornerstone of this effort is communicating more frequently and with greater transparency. Between September 2016 and January 2017, members of the Operating Committee held 50 in-person sessions with team members in more than 40 cities. These sessions reached thousands of team members in person, and tens of thousands participated through satellite broadcasts, streaming to desktops, and other communications channels.
As a part of this outreach, we actively sought and welcomed team member feedback, and we put that feedback into action to make our company better. One example is the role team members are playing as part of a third-party review of our EthicsLine process, which team members use to escalate concerns about their work or the company. Their recommendations are influencing our approach to the review and will shape the improvements we make to the process. In addition, we regularly survey team members on how they feel about Wells Fargo. In 2017, every Wells Fargo team member will be invited to provide feedback about our culture through a review conducted by an independent third party.
Our work to rebuild trust also includes an ongoing dialogue with community leaders, because we want to be viewed as a trusted and reliable partner in the work these nonprofit organizations do to strengthen communities. Since September, we have met regularly with nonprofit organizations, sharing specifics about our efforts to rebuild trust.
In addition, we are engaging with elected officials at the federal, state, and local levels, as well as industry regulators, to answer their questions and receive their feedback. We take their concerns and our accountability to their chief stakeholder — the American public — very seriously and are committed to regaining their trust.
Finally, we have increased the information we disclose to our investors, so you can more readily see the impact the sales practices matters have had on our business and the actions we have taken in response. For example, in October, we began providing monthly updates detailing trends in our retail bank’s customer activity. In May 2017, we will host an off-cycle Investor Day to provide more details, including the changes we are making across the company to better serve our customers and build a stronger Wells Fargo.
Though more work lies ahead, our focus is to uphold our long-held values that respect and honor our customers, team members, shareholders, and community partners.
“Though more work lies ahead, our focus is to uphold our long-held values that respect and honor our customers, team members, shareholders, and community partners.”
Fixing the problem
As we’ve worked to rebuild trust, we’ve enlisted the help of third parties. Why? We know we don’t have all the answers and are open to learning from others as we fix problems that we never want to happen again. This includes going beyond what has been required of us by our regulators as we are reviewing sales practices in all of our lines of business, the EthicsLine work I mentioned earlier, and the comprehensive review of our company’s culture.
In the Community Bank, we made a change at the top when Mary Mack assumed leadership of the team. She has worked on decisive fixes, including our October 1, 2016, decision to eliminate product sales goals for our branch team members, a move that will help ensure our retail bankers do not put their interests ahead of our customers. We’ve also introduced a mystery shopper program and have enhanced our customer communication by providing an automated email confirmation when a new checking or savings account is opened and a letter after submission of a credit card application.
In January 2017, we introduced a new compensation plan for our retail bankers that we developed with the assistance of a leading human resources and compensation consulting firm. This plan emphasizes team incentives over individual incentives, has a greater focus on oversight and controls, and is based on measures that we believe better reflect the value and quality of the service we provide our customers. Though this is just one aspect of the many changes we are making to our retail banking operations, we believe it will play a significant role in our effort to ensure our customers receive an exceptional level of service and advice from our team members.
“We are excited by the opportunity to leverage technology to create a banking experience that reflects the unique relationship we hope to form with each of our customers.”
Building a better bank
Rebuilding trust includes improving our company’s governance and making our company more customer-centric — focusing on how best to serve and protect customers today, tomorrow, and well into the future. Earlier this year, we formed the Office of Ethics, Oversight and Integrity within our Corporate Risk organization to ensure that all Wells Fargo team members are working according to our vision and values, team members and customers are protected, and we listen and act when team members escalate issues of concern regarding the integrity of our operations. This office combines the previous organizations of Global Ethics and Integrity, Sales Practices Oversight, Internal Investigations, and Complaints Oversight. Among other activities, this office will drive additional training for managers throughout the organization, because we want them to know how to effectively and appropriately respond to team members when issues are escalated.
Effective risk management protects and benefits all of our stakeholders. In 2016, we began an extensive effort to evaluate risk management across the company, resulting in several important changes, including moving many of our risk team members from the lines of business to the enterprise Corporate Risk organization to provide greater role clarity, increased consistency and coordination, and stronger oversight.
Additionally, we began the process of realigning and centralizing staff groups throughout Wells Fargo, including Finance, Marketing, Communications, Human Resources, and Compliance — moves to make us more efficient and coordinated and to enable greater consistency and effectiveness of our staff services. This frees up resources for key strategic priorities.
As part of our focus on innovation, we formed a new business group — Payments, Virtual Solutions and Innovation, led by Avid Modjtabai. The group brings together teams charged with creating the next generation of payments capabilities and digital and online offerings for our customers, enabling them to bank when, where, and how they want. We are excited by the opportunity to leverage technology to create a banking experience that reflects the unique relationship we hope to form with each of our customers.
As difficult as 2016 was in many respects, the company delivered solid financial performance for our shareholders. Through a balanced mix of net interest income and noninterest income, Wells Fargo generated $88.3 billion in revenue in 2016, up 3 percent from 2015, and net income of $21.9 billion, or $3.99 of diluted earnings per common share.
Our performance occurred despite the challenges of low interest rates, sluggish economic growth, and global volatility that included a dramatic decline in oil prices during the year. These results reflected the determination of our team members and the benefits of our diversified business model and strong risk discipline. In fact, in the fourth quarter, we earned more than $5 billion for the 17th consecutive quarter — one of only two U.S. companies to do so.
Core building blocks of long-term value creation — deposits, loans, and capital — continued to grow in 2016. At year-end, total deposits were $1.3 trillion, up 7 percent from the prior year, while the company’s loan portfolio, the largest of all U.S. banks, finished 2016 at $967.6 billion, up 6 percent from 2015.
The credit quality of our portfolio continued to be strong, driven by solid performance in the commercial and consumer real estate portfolios and continued improvement in residential real estate. Nonaccrual loans were down $998 million, or 9 percent, from 2015. Credit losses increased 22 percent over 2015 to $3.5 billion, driven largely by higher losses in our oil and gas portfolio. However, net charge-offs as a percentage of average loans were 0.37 percent in 2016, compared with 0.33 percent in 2015, remaining near historic lows.
From a capital standpoint, we ended 2016 with total equity of $200.5 billion, Common Equity Tier 1 capital of $146.4 billion, and a Common Equity Tier 1 capital ratio (fully phased-in) of 10.77 percent,1 well above our regulatory minimum of 9 percent.
Ongoing efforts to increase operational efficiency remain a priority, and we made good progress in 2016. Through centralizing operations, process improvements, and close management of discretionary spending, we generated savings to support reinvestment for growth and stability through innovation efforts, expanded risk management, and continued investment in technology and cybersecurity.
“Our team members are working together as never before to put customers at the center of everything we do. Together, we are listening, learning, and taking the actions necessary to move our company forward.”
Even as we faced many challenges in 2016, our team members continued to focus on serving and meeting the financial needs of our customers. Because of their commitment and the confidence our customers continue to place in us, one in three U.S. households relies on Wells Fargo to help them succeed financially.
Our customers depend on Wells Fargo’s integrated mobile, online, and branch-based banking services; retirement savings offerings; financial services and guidance for businesses large and small; and banking services that support the growth of U.S. companies doing business here and abroad.
They rely on us to achieve sustainable homeownership. This includes the low- and moderate-income households that took advantage of our yourFirst MortgageSM product, which we launched in 2016. With a down payment option as low as 3 percent for a fixed-rate loan, lower out-of-pocket costs, and incentives for completing a homebuyer education program, yourFirst Mortgage helped more than 18,000 customers achieve sustainable homeownership, generating more than $3.9 billion in mortgage financing in 2016.
With digital account management and payment tools, we help customers manage their financial lives, wherever and however they want. For example, we developed in-house the Wells Fargo Wallet for Android payment tool, which launched last year. Also in 2016, clients of Wells Fargo Advisors benefitted from a redesigned, secure website that made information about their financial assets available on one web page. This spring, we plan to offer even greater convenience when our customers will be able to use any one of our 13,000 ATMs card-free. An 8-digit passcode generated by a customer’s mobile app will allow them to enter an ATM PIN and complete a transaction without using an ATM card.
As the No. 1 small business lender in the U.S.,2 we know that access to capital is greatly valued by small business owners. This is why we introduced the Wells Fargo Works for Small Business® Business Credit Center, which provides tools and resources that empower small business owners to navigate the credit journey with confidence. The center, part of Wells Fargo’s focus on expanding small business access to capital, provides small business owners with financing options, tips on the application process, and credit management. Our Business Plan Tool, a free, online step-by-step tool that allows small business owners to create or update business plans, has counted more than 14,000 signups since mid-2015.
We are using technology we created in-house to meet our small business customers’ need for faster and more convenient lending options. We created the FastFlexSM Small Business Loan to provide small business customers an online loan that offers a fast decision. Because it is funded as soon as the next business day, it helps more small businesses access credit at a competitive rate.
Wells Fargo also is helping business customers build better credit profiles through our Credit Coaching Program. This program offers individualized support for small business owners who have been denied business credit products offered through Wells Fargo. The program helps business owners understand how credit decisions are made and what factors influenced the decision on their credit application. Since the program launched in March 2015, Wells Fargo credit specialists have conducted more than 17,000 credit coaching calls.
If our small business clients develop into Business Banking and Middle Market or Corporate Banking clients, we provide a seamless line of service. We offer customized banking services for many industry sectors — including health care, technology, media/telecom, and others — and we have unique partnerships with our Middle Market banking group to provide customized banking and services, such as specialized loan products and lines of credit. For these reasons, we are the No. 1 bank for midsized companies in the U.S.3
Our Treasury Management customers have begun to benefit from Application Programming Interface (API) channels that support a range of immediate payment services. For example, our commercial customers now can use Mastercard Send™ to send funds quickly and securely to consumers in the U.S. Our customers will have the ability to send digitally, and in real time, insurance claims, rebates, tax refunds, e-marketplace payouts, and social benefits to their customers.
Thanks to our Wells Fargo Investment Institute, our financial advisors and wealth advisors provide their clients with insights and advice from more than 100 articles and reports the institute publishes each month on topics such as investment strategy, manager research, alternative investments, and portfolio management.
With 70 million customers, Wells Fargo is committed to serving the needs of our diverse customer base. For example, we provide financing options and dedicated service to help enlisted military personnel and veterans finance the purchase of their homes. For our Spanish-speaking customers, we offer banking tools in Spanish which include bilingual online tools, Spanish Text Banking, Spanish account statements, Spanish-language call centers, and Spanish-speaking bankers in branches throughout the country. In addition, El Futuro en Tus Manos® (Hands on Banking®), a Wells Fargo-developed free online program that teaches the basics of responsible money management, has had approximately 1.14 million visitors since its launch in 2003.
In short, our commitment to our customers is as strong as it has ever been.
A long-standing principle of our company is that we are only as strong as the communities where we do business. Reflecting this belief, in 2016 we continued to be one of the top corporate cash donors among U.S. companies, donating $281 million to more than 14,900 nonprofits. We also launched an integrated, companywide corporate social responsibility strategy to make positive, critical differences in our communities. We set ambitious five-year goals to advance diversity and social inclusion, create economic opportunities in underserved communities, and accelerate our country’s transition to a lower-carbon economy and healthier planet. Here are some examples of our goals and accomplishments in these three areas:
Advancing diversity and social inclusion: We want everyone — our customers, team members, suppliers, and communities — to be respected and have access to opportunities to succeed.
As part of our commitment to diversity and inclusion, we’ve committed to donating $100 million by 2020 to critical social needs such as supporting the advancement of women and other diverse leaders and furthering social inclusion through education.
Since 2013, Wells Fargo has donated more than $25 million to nonprofits which help empower people with disabilities to succeed, including the National Disability Institute, National Federation of the Blind, and Disability Rights Education & Defense Fund. In 2016, we also committed $1 million to Scholarship America for a scholarship program to help people with disabilities obtain the education or training necessary to succeed in the career path of their choice.
We support local economies by developing and using diverse suppliers in the communities where we do business as well as across our global operations. We continue to make progress toward our goal of spending 15 percent of our total procurement budget with diverse suppliers by 2020, and we were honored to be named “Corporation of the Decade” by the U.S. Pan Asian American Chamber of Commerce Education Foundation for our positive impact on the growth of diverse businesses, including Asian American-owned businesses.
Creating economic opportunities: Our goal over the next five years is to deploy $500 million in grants toward programs focused on strengthening financial self-sufficiency and expanding access to opportunities in underserved communities.
“We are only as strong as the communities where we do business.”
Over the past six years, Wells Fargo has originated more home loans across all key categories — including loans to African Americans, Asians, Hispanics, Native Americans, low- and moderate-income borrowers, and residents of low- and moderate-income neighborhoods — than any other bank in America.4 In 2016, we invested $50 million in our NeighborhoodLIFT program to help make homeownership more affordable, achievable, and sustainable. Thanks to LIFT programs, which offer homebuyer education and matching down payment assistance grants for low- and moderate-income households, we have invested $327 million since 2012 to empower more than 12,900 homeowners in 48 communities. Over that period, we also donated more than 300 homes, totaling more than $50 million in value, to military veterans in all 50 states.
Additionally, in 2017 we plan to work with the National Urban League, the National Association of Real Estate Brokers, and others to address lagging homeownership rates within the African American community by committing to a lending goal of $60 billion in new mortgages, for as many as 250,000 new homeowners, including a goal of $15 million to support a variety of initiatives that promote financial education and counseling, over the next 10 years. Our corporate goal is to originate $150 billion in mortgages for minorities and $70 billion in low- and moderate-income mortgage originations over the next five years.
Among the ways we seek to give diverse-owned small businesses more opportunity is through our Wells Fargo Works for Small Business® Diverse Community Capital program, which has distributed more than $38 million in grants and lending capital to 30 Community Development Financial Institutions (CDFIs) since November 2015. Working with CDFIs, we provide capital and technical assistance to help small businesses grow. Our goal is to distribute $75 million in grants by 2018.
Driving environmental sustainability: To address growing environmental concerns, in 2016 we financed more than $17.6 billion in renewable energy, clean technology, “green” building construction, sustainable agriculture, and other environmentally sustainable businesses. In addition, our goal is to donate $65 million to nonprofits, universities, and other organizations driving clean technology, community resiliency, and environmental education from 2016 through 2020.
I remember when Wells Fargo built its first energy-efficient green building back in 2008. Today it’s standard practice for all of our new construction projects and renovations to use healthier and more resource-efficient models of construction, renovation, operation, and maintenance. We now have 521 branches and other locations — 21 percent of our total owned and leased square footage — that are Leadership in Energy and Environmental Design (LEED)-certified. Reinforcing our focus on operational efficiency, we plan to purchase renewable energy to power 100 percent of our operations by the end of 2017 and to transition to long-term agreements to fund new sources of green power by 2020.
Conservation has been a focus, too, as we have reduced company water use by more than 52 percent since 2008, saving more than 2.8 billion gallons of water and $28 million in utility costs.
Our team members
Our team members are integral to our commitment to restore trust and pride in Wells Fargo. They provide great service to our customers and create value in our company.
We continue to show our team members how much we value them, with competitive compensation and benefits that include expanded parental and family member leave, backup adult care, tuition benefits, matching retirement contributions, profit-sharing, health insurance, and other benefits. We are proud that 99 percent of U.S. team members are eligible to receive Wells Fargo benefits totaling, on average, $12,000 per team member each year. Including our team members’ dependents, our health care benefits cover more than 515,000 individuals. In 40 countries outside the U.S., we provide similar competitive benefit plans.
We use pay and benefits benchmarks, and we listen to our team members to find out what’s important to them and how we can meet their needs. As part of our annual compensation review process, in January 2017, we increased the minimum hourly pay we offer our team members to 86 percent above the national minimum wage.
A core aspect of our company’s culture is our focus on diversity and inclusion to ensure all people have equal opportunities to succeed at Wells Fargo. We are committed to expanding development opportunities for our team members through our diversity and inclusion strategy. This enables us to take advantage of the creativity and innovation that come from multiple perspectives and allows us to respond quickly and effectively to customer needs here at home and across the globe.
“Wells Fargo team members are an essential part of strengthening our communities.”
Our commitment to diversity is evident from our board of directors to the entire Wells Fargo team, which is 56 percent women and 42 percent people of color. But there is more work to do. One way we support increased diversity and inclusion is through our robust network of 10 Team Member Networks (TMNs) and our diversity and inclusion councils at the business, regional, and local levels of our organization. We also offer segment-specific leadership programs — and other recruiting, training, and development initiatives — that support our diversity and inclusion goals. We track our progress using a “diversity scorecard” that is shared with senior leaders quarterly.
Our goals include increasing the number of military veteran team members from 8,500 to 20,000 by 2020. In support of that goal, we have participated in more than 850 military job fairs and launched our Veteran Employment Transition Program, focused on identifying and hiring veterans who are moving into the private workforce for internships within Wells Fargo Securities. We plan to expand the Veteran Employment Transition Program to other lines of business in 2017.
External organizations have recognized our commitment to our team members. Wells Fargo ranked No. 13 on LATINA Style Inc.’s Top 50 Best Companies for Latinas, and we were listed in DiversityInc’s Top 50 Companies for Diversity, ranking No. 12 on the list in 2016. Also, New York Stock Exchange Governance Services named us the winner of its 2016 Best Board Diversity award, for the diversity of our board and for how diversity is carried forth as a cultural imperative throughout our company.
Wells Fargo team members are an essential part of strengthening our communities, and their work multiplies the effects of our corporate social responsibility programs. Each year, our Community Support Campaign yields millions of dollars that go back into local nonprofits and educational institutions. In 2016, our team members contributed $98.8 million during the campaign. United Way Worldwide has ranked our workplace-giving campaign the largest in the U.S. each of the past eight years. Our team members donate their time as well as their money, volunteering more than 1.73 million hours in 2016.
Another example of team members making a difference is the Focus on College! program that began in 2014 and has helped low-income parents open 300 college savings accounts to date. At six schools in high-poverty neighborhoods in St. Louis, Wells Fargo Advisors team members have helped families open the accounts, as well as learn the fundamentals of saving. Wells Fargo Advisors provides each family a savings match (up to a total of $250) for each dollar they put into their account on the day the account is opened. So far, more than $85,630 has been put aside toward college as a result.
Every day I am proud of the commitment and dedication our 269,000 team members show to serving our customers and our communities.
We recognize the commitment that you, as investors in our company, have made to Wells Fargo, and I want to assure you that we remain very focused on managing the company to maximize long-term shareholder value. Our goal is to generate consistent financial performance over time and through cycles while maintaining best-in-class shareholder returns. We believe we can achieve this result with the foundational elements described in this letter: a diversified, customer-centric business model; conservative risk discipline; and a strong balance sheet.
“As we move forward, we will remain focused on continued transparency.”
As CEO, I see this commitment as not just words on a page but a reflection of how we strive to operate the company and make decisions day-to-day. If we consistently make choices and allocate capital in ways that support long-term success, we will continue to build a durable and successful Wells Fargo for years to come.
In 2016, we returned $12.5 billion to shareholders through common stock dividends and net share repurchases. Our quarterly common stock dividend rose 1 percent to $0.38 per share, and our net payout ratio5 was 61 percent, within our annual target range. And, for the third straight year, we reduced our average number of diluted common shares outstanding, which were down 101.5 million shares from year-end 2015. Our 10-year total shareholder return of 7.33 percent6 ranked No. 2 among peer financial institutions.
As we move forward, we will remain focused on continued transparency. For example, we have provided meaningful, monthly information to help investors understand customer activity as we work through our sales practices issues. You have provided suggestions along the way, and we have added and refined content to be as responsive as possible. This is an important element of our ongoing conversation and reflects the trust you have placed in our company.
Our team members are working together as never before to put customers at the center of everything we do. Together, we are listening, learning, and taking the actions necessary to move our company forward. The task ahead is not easy, but we are working hard, and I know we will be successful.
The experience and knowledge of our board of directors have been instrumental in guiding us through the challenges we faced in 2016, and I appreciate their dedication to Wells Fargo. I want to recognize and thank Stephen Sanger, Chairman, and Betsy Duke, Vice Chair, for their outstanding leadership throughout the year. And I want to thank Elaine Chao, who resigned from the board in January 2017 after her confirmation as U.S. secretary of transportation, for her contributions and service since 2011 and wish her success in her new role.
I also want to thank you for your faith in Wells Fargo during 2016 and as we move ahead. We are committed to meaningful changes for our customers and our future. I am very confident in the direction we are going as we make our company better and stronger for everyone.
1 For more information on our regulatory capital and related ratios, please see the “Financial Review – Capital Management” section in this Report. 2 2002-2015 CRA data, loans under $1 million. 3 Barlow Research Middle Market Rolling 8 Quarter Data 1Q2014-4Q2015, showing Wells Fargo’s competitive market performance with companies $25MM-<$500MM in sales. 4 Home Mortgage Disclosure Act data filed with the Federal Financial Institutions Examination Council. 5 Net payout ratio is the ratio of (i) common stock dividends and share repurchases less issuances and stock compensation-related items, divided by (ii) net income applicable to common stock. 6 Bloomberg, includes share price appreciation and reinvested dividends.
Thanks! Would you like to subscribe?subscribe