Document


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10‑Q
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2016
 
Commission file number 001-2979
 
WELLS FARGO & COMPANY
(Exact name of registrant as specified in its charter)
Delaware
 
No. 41-0449260
(State of incorporation)
 
(I.R.S. Employer Identification No.)
 
420 Montgomery Street, San Francisco, California 94163
(Address of principal executive offices)  (Zip Code)
 
Registrant’s telephone number, including area code:  1-866-249-3302 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes þ
 
No o

Indicate by check mark whether the registrant has submitted electronically 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 o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non‑accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
 
Large accelerated filer    þ
 
Accelerated filer  o
 
 
 
 
 
 
 
Non‑accelerated filer    o (Do not check if a smaller reporting company)
 
Smaller reporting company  o
 
          
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o
 
No þ
 
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
 
 
 
Shares Outstanding
 
 
October 25, 2016
Common stock, $1-2/3 par value
 
5,022,303,027
          



FORM 10-Q
 
CROSS-REFERENCE INDEX
 
PART I
Financial Information
 
Item 1.
Financial Statements
Page
 
Consolidated Statement of Income
 
Consolidated Statement of Comprehensive Income
 
Consolidated Balance Sheet
 
Consolidated Statement of Changes in Equity
 
Consolidated Statement of Cash Flows
 
Notes to Financial Statements
  
 
1

—
Summary of Significant Accounting Policies  
 
2

—
Business Combinations
 
3

—
Federal Funds Sold, Securities Purchased under Resale Agreements and Other Short-Term Investments  
 
4

—
Investment Securities
 
5

—
Loans and Allowance for Credit Losses
 
6

—
Other Assets
 
7

—
Securitizations and Variable Interest Entities
 
8

—
Mortgage Banking Activities
 
9

—
Intangible Assets
 
10

—
Guarantees, Pledged Assets and Collateral
 
11

—
Legal Actions
 
12

—
Derivatives
 
13

—
Fair Values of Assets and Liabilities
 
14

—
Preferred Stock
 
15

—
Employee Benefits
 
16

—
Earnings Per Common Share
 
17

—
Other Comprehensive Income
 
18

—
Operating Segments
 
19

—
Regulatory and Agency Capital Requirements
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations (Financial Review)
 
 
Summary Financial Data  
 
Overview
 
Earnings Performance
 
Balance Sheet Analysis
 
Off-Balance Sheet Arrangements  
 
Risk Management
 
Capital Management
 
Regulatory Reform
 
Critical Accounting Policies  
 
Current Accounting Developments
 
Forward-Looking Statements  
 
Risk Factors 
 
Glossary of Acronyms
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
Item 4.
Controls and Procedures
 
 
 
PART II
Other Information
 
Item 1.
Legal Proceedings
Item 1A.
Risk Factors
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
Item 6.
Exhibits
 
 
 
 
 
Signature
 
 
Exhibit Index

1


PART I - FINANCIAL INFORMATION

FINANCIAL REVIEW
Summary Financial Data
 
 
 
 
 
 
 
 
 
 
  
 
  
 
  
  
 
 
 
 
 
 
% Change
 
 
  
 
  
 
  
 
Quarter ended
 
 
Sep 30, 2016 from
 
 
Nine months ended
 
 
  

($ in millions, except per share amounts)
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
 
 
 
 
 
 
 
 
 
 
  
 
  
 
  
Wells Fargo net income
$
5,644

 
5,558

 
5,796

 
2
 %
 
(3
)
 
$
16,664

 
17,319

 
(4
)%
Wells Fargo net income applicable to common stock
5,243

 
5,173

 
5,443

 
1

 
(4
)
 
15,501

 
16,267

 
(5
)
Diluted earnings per common share
1.03

 
1.01

 
1.05

 
2

 
(2
)
 
3.03

 
3.12

 
(3
)
Profitability ratios (annualized):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Wells Fargo net income to average assets (ROA)
1.17
%
 
1.20

 
1.32

 
(3
)
 
(11
)
 
1.19
%
 
1.34

 
(11
)
Wells Fargo net income applicable to common stock to average Wells Fargo common stockholders' equity (ROE)
11.60

 
11.70

 
12.62

 
(1
)
 
(8
)
 
11.68

 
12.83

 
(9
)
Return on average tangible common equity (ROTCE) (1)
13.96

 
14.15

 
15.19

 
(1
)
 
(8
)
 
14.08

 
15.46

 
(9
)
Efficiency ratio (2)
59.4

 
58.1

 
56.7

 
2

 
5

 
58.7

 
58.0

 
1

Total revenue
$
22,328

 
22,162

 
21,875

 
1

 
2

 
$
66,685

 
64,471

 
3

Pre-tax pre-provision profit (PTPP) (3)
9,060

 
9,296

 
9,476

 
(3
)
 
(4
)
 
27,523

 
27,096

 
2

Dividends declared per common share
0.380

 
0.380

 
0.375

 
—

 
1

 
1.135

 
1.100

 
3

Average common shares outstanding
5,043.4

 
5,066.9

 
5,125.8

 
—

 
(2
)
 
5,061.9

 
5,145.9

 
(2
)
Diluted average common shares outstanding
5,094.6

 
5,118.1

 
5,193.8

 
—

 
(2
)
 
5,118.2

 
5,220.3

 
(2
)
Average loans
$
957,484

 
950,751

 
895,095

 
1

 
7

 
$
945,197

 
876,384

 
8

Average assets
1,914,586

 
1,862,084

 
1,746,402

 
3

 
10

 
1,865,694

 
1,727,967

 
8

Average total deposits
1,261,527

 
1,236,658

 
1,198,874

 
2

 
5

 
1,239,287

 
1,186,412

 
4

Average consumer and small business banking deposits (4)
739,066

 
726,359

 
683,245

 
2

 
8

 
726,798

 
674,741

 
8

Net interest margin
2.82
%
 
2.86

 
2.96

 
(1
)
 
(5
)
 
2.86
%
 
2.96

 
(3
)
At Period End
 
 
 
 
 
 
 
 
 
 
  
 
  
 
  
Investment securities
$
390,832

 
353,426

 
345,074

 
11

 
13

 
$
390,832

 
345,074

 
13

Loans
961,326

 
957,157

 
903,233

 
—

 
6

 
961,326

 
903,233

 
6

Allowance for loan losses
11,583

 
11,664

 
11,659

 
(1
)
 
(1
)
 
11,583

 
11,659

 
(1
)
Goodwill
26,688

 
26,963

 
25,684

 
(1
)
 
4

 
26,688

 
25,684

 
4

Assets
1,942,124

 
1,889,235

 
1,751,265

 
3

 
11

 
1,942,124

 
1,751,265

 
11

Deposits
1,275,894

 
1,245,473

 
1,202,179

 
2

 
6

 
1,275,894

 
1,202,179

 
6

Common stockholders' equity
179,916

 
178,633

 
172,089

 
1

 
5

 
179,916

 
172,089

 
5

Wells Fargo stockholders' equity
203,028

 
201,745

 
193,051

 
1

 
5

 
203,028

 
193,051

 
5

Total equity
203,958

 
202,661

 
194,043

 
1

 
5

 
203,958

 
194,043

 
5

Tangible common equity (1)
149,829

 
148,110

 
143,352

 
1

 
5

 
149,829

 
143,352

 
5

Capital ratios (5)(6):
 
 
 
 
 
 
 
 
 
 
  
 
  
 
  
Total equity to assets
10.50
%
 
10.73

 
11.08

 
(2
)
 
(5
)
 
10.50
%
 
11.08

 
(5
)
Risk-based capital:
 
 
 
 
 
 
 
 


 
  
 
  
 


Common Equity Tier 1
10.93

 
10.82

 
10.87

 
1

 
1

 
10.93

 
10.87

 
1

Tier 1 capital
12.60

 
12.50

 
12.42

 
1

 
1

 
12.60

 
12.42

 
1

Total capital
15.40

 
15.14

 
14.86

 
2

 
4

 
15.40

 
14.86

 
4

Tier 1 leverage
9.11

 
9.25

 
9.51

 
(2
)
 
(4
)
 
9.11

 
9.51

 
(4
)
Common shares outstanding
5,023.9

 
5,048.5

 
5,108.5

 
—

 
(2
)
 
5,023.9

 
5,108.5

 
(2
)
Book value per common share (7)
$
35.81

 
35.38

 
33.69

 
1

 
6

 
$
35.81

 
33.69

 
6

Tangible book value per common share (1) (7)
29.82

 
29.34

 
28.06

 
2

 
6

 
29.82

 
28.06
 
6

Common stock price:
 
 
 
 
 
 
 
 
 
 
  
 
  
 
  
High
51.00

 
51.41

 
58.77

 
(1
)
 
(13
)
 
53.27

 
58.77

 
(9
)
Low
44.10

 
44.50

 
47.75

 
(1
)
 
(8
)
 
44.10

 
47.75

 
(8
)
Period end
44.28

 
47.33

 
51.35

 
(6
)
 
(14
)
 
44.28

 
51.35

 
(14
)
Team members (active, full-time equivalent)
268,800

 
267,900

 
265,200

 
—

 
1

 
268,800

 
265,200

 
1

(1)
Tangible common equity is a non-GAAP financial measure and represents total equity less preferred equity, noncontrolling interests, and goodwill and certain identifiable intangible assets (including goodwill and intangible assets associated with certain of our nonmarketable equity investments but excluding mortgage servicing rights), net of applicable deferred taxes. The methodology of determining tangible common equity may differ among companies. Management believes that return on average tangible common equity and tangible book value per common share, which utilize tangible common equity, are useful financial measures because they enable investors and others to assess the Company's use of equity. For additional information, including a corresponding reconciliation to GAAP financial measures, see the "Capital Management – Tangible Common Equity" section in this Report.
(2)
The efficiency ratio is noninterest expense divided by total revenue (net interest income and noninterest income).
(3)
Pre-tax pre-provision profit (PTPP) is total revenue less noninterest expense. Management believes that PTPP is a useful financial measure because it enables investors and others to assess the Company's ability to generate capital to cover credit losses through a credit cycle.
(4)
Consumer and small business banking deposits are total deposits excluding mortgage escrow and wholesale deposits.
(5)
The risk-based capital ratios presented at September 30 and June 30, 2016, and September 30, 2015 were calculated under the lower of Standardized or Advanced Approach determined pursuant to Basel III with Transition Requirements. Accordingly, the total capital ratio was calculated under the Advanced Approach and the other ratios were calculated under the Standardized Approach, for each of the periods, respectively.
(6)
See the "Capital Management" section and Note 19 (Regulatory and Agency Capital Requirements) to Financial Statements in this Report for additional information.
(7)
Book value per common share is common stockholders' equity divided by common shares outstanding. Tangible book value per common share is tangible common equity divided by common shares outstanding.

2
Overview (continued)

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 forward-looking statements due to several factors. Factors that could cause our actual 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” and “Regulation and Supervision” sections of our Annual Report on Form 10-K for the year ended December 31, 2015 (2015 Form 10-K).
 
When we refer to “Wells Fargo,” “the Company,” “we,” “our” or “us” in this Report, we mean Wells Fargo & Company and Subsidiaries (consolidated). When we refer to the “Parent,” we mean Wells Fargo & Company. See the Glossary of Acronyms for terms used throughout this Report.
 
Financial Review
 
Overview
Wells Fargo & Company is a diversified, community-based financial services company with $1.9 trillion in assets. Founded in 1852 and headquartered in San Francisco, we provide banking, insurance, investments, mortgage, and consumer and commercial finance through more than 8,600 locations, 13,000 ATMs, digital (online, mobile and social), and contact centers (phone, email and correspondence), and we have offices in 42 countries and territories to support customers who conduct business in the global economy. With approximately 269,000 active, full-time equivalent team members, we serve one in three households in the United States and ranked No. 27 on Fortune’s 2016 rankings of America’s largest corporations. We ranked third in assets and second in the market value of our common stock among all U.S. banks at September 30, 2016.
We use our Vision and Values to guide us toward growth and success. Our vision is to satisfy our customers’ financial needs, help them succeed financially, be recognized as the premier financial services company in our markets and be one of America’s great companies. We aspire to create deep and enduring relationships with our customers by providing them with an exceptional experience and by discovering their needs and delivering the most relevant products, services, advice, and guidance.
We have five primary values, which are based on our vision and provide the foundation for everything we do. First, we value and support our people as a competitive advantage and strive to attract, develop, retain and motivate the most talented people we can find. Second, we strive for the highest ethical standards with our team members, our customers, our communities and our shareholders. Third, with respect to our customers, we strive to base our decisions and actions on what is right for them in everything we do. Fourth, for team members we strive to build and sustain a diverse and inclusive culture – one where they feel valued and respected for who they are as well as for the skills and experiences they bring to our company. Fifth, we also look to each of our team members to be leaders in establishing, sharing and communicating our vision. In addition to our five primary values, one of our key day-to-day priorities is to make risk management a competitive advantage by working hard to ensure that appropriate controls are in place to reduce risks to our customers, maintain and increase our competitive market position, and protect Wells Fargo’s long-term safety, soundness and reputation.

Sales Practices Matters
On September 8, 2016, we announced settlements with the Consumer Financial Protection Bureau (CFPB), the Office of the Comptroller of the Currency (OCC) and the Office of the Los Angeles City Attorney regarding allegations that some of our
 
retail customers received products and services they did not request. The amount of the settlements, which was fully accrued for as of June 30, 2016, totaled $185 million, plus $5 million in customer remediation. Our commitment to addressing the concerns raised by these settlements has included:
•
The Independent Directors of the Board have retained the law firm of Shearman & Sterling LLP to assist in its investigation into the Company's retail banking sales practices and related matters.
•
An extensive review was performed by an independent consulting firm going back to 2011, which was completed prior to these settlements. This review was conducted to identify financial harm stemming from potentially unauthorized accounts. The review identified approximately 2.1 million potentially unauthorized consumer and small business accounts, including 623,000 consumer and small business unsecured credit card accounts. As a result of this review, $2.6 million has been refunded to customers for any fees associated with the potentially unauthorized accounts. Since the announcement of the settlements, the review has been voluntarily expanded to include 2009 and 2010.
•
Changes in senior management:
◦
John Stumpf retired and has been replaced by Tim Sloan as CEO and Stephen Sanger, an independent member of the Board, as Chairman. Consistent with his recommendation, Mr. Stumpf forfeited unvested equity awards valued at approximately $41 million.
◦
Carrie Tolstedt left the Company and has been replaced by Mary Mack as head of Community Banking. Ms. Tolstedt forfeited unvested equity awards valued at approximately $19 million, will not receive severance or retirement enhancements in connection with her separation from the Company, and has agreed not to exercise vested options during the investigation by the Independent Directors of the Board.
◦
Neither executive will receive a bonus for 2016.
•
Eliminated product sales goals for retail banking team members. Implemented interim incentive-based compensation plans‎ in retail banking for fourth quarter 2016. Management continues to review incentive-based compensation practices in retail banking.
•
Implemented procedures to send retail banking customers a confirmation email approximately an hour after opening a checking or savings account and an acknowledgment letter after submitting a credit card application.
•
Attempting to contact all retail and small business deposit customers across the country, including those who have already received refunded fees, to invite them to review their accounts with their banker. Also contacting credit card customers identified as possibly having unauthorized accounts to confirm whether they need or want their credit card.


3

•
Investments in enhanced team member training and monitoring and controls have been made, including reinforcement of our Code of Ethics and Business Conduct and our EthicsLine.
•
Evaluation of potential credit score and related impacts to customers to develop a plan for regulatory approval.
•
Expanding branch-based customer experience surveys and instituted mystery shopper program.

As we move forward we have a specific action plan in place that is focused on outreach to everyone who has been affected by retail banking sales practices including our community, our customers, our regulators, our team members and our investors. For additional information regarding sales practices matters, including related legal matters, see the "Earnings Performance – Operating Segment Results – Cross-sell" and “Risk Factors” sections and Note 11 (Legal Actions) to Financial Statements in this Report.
 
Financial Performance
Wells Fargo net income was $5.6 billion in third quarter 2016 with diluted earnings per common share (EPS) of $1.03, compared with $5.8 billion and $1.05, respectively, a year ago. We have now generated quarterly earnings of more than $5 billion for 16 consecutive quarters, which reflected the ability of our diversified business model and risk discipline to generate consistent financial performance during a period that included persistent low interest rates, market volatility and economic uncertainty. We remain focused on meeting the financial needs of our customers and on investing in our businesses so we may continue to meet the evolving needs of our customers in the future.
Compared with a year ago:
•
revenue was $22.3 billion, up 2%, with growth in net interest income despite equity investment gains being at a five quarter low and $780 million lower than a year ago;
•
noninterest expense increased driven by higher personnel expenses and higher operating lease expense due to the GE Capital business acquisitions;
•
our investment securities reached a record $390.8 billion, an increase of $45.8 billion, or 13%;
•
our total loans reached a high of $961.3 billion, an increase of $58.1 billion, or 6%;
•
our deposit franchise generated strong customer and balance growth, with total deposits reaching a record $1.28 trillion, up $73.7 billion, or 6%, and we grew the number of primary consumer checking customers by 4.7% (August 2016 compared with August 2015); and
•
our solid capital position enabled us to return $3.2 billion to shareholders through common stock dividends and net share repurchases, the fifth consecutive quarter of returning more than $3 billion.

Balance Sheet and Liquidity
Our balance sheet maintained its strength in third quarter 2016 as we increased our liquidity position, generated loan, investment securities and deposit growth, experienced solid credit quality and maintained strong capital levels. We have been able to grow our loans on a year-over-year basis for 21 consecutive quarters (for the past 18 quarters year-over-year loan growth has been 3% or greater). Our loan portfolio increased $44.8 billion from December 31, 2015, predominantly due to growth in commercial and industrial, real estate mortgage, real estate construction and lease financing loans within the commercial loan portfolio segment, which included $26.5 billion of commercial and
 
industrial loans and capital leases acquired from GE Capital in the first nine months of 2016.
With the expectation of interest rates remaining lower for a longer period, we grew our investment securities portfolio by $43.3 billion, or 12%, from December 31, 2015, with approximately $57 billion of gross purchases during third quarter 2016, compared with last year's average of $26 billion per quarter. The amount of investment securities purchased was higher than in prior quarters due to the fact that we did not add duration in the loan portfolio with interest rate swaps, as we had in prior quarters.
Our funding sources grew in third quarter 2016 with long-term debt up $55.3 billion from December 31, 2015, on $19.7 billion of issuances in third quarter 2016, including $9.2 billion that we anticipate will be Total Loss Absorbing Capacity (TLAC) eligible. Deposit growth continued in the first nine months of 2016 with period-end deposits up $52.6 billion, or 4%, from December 31, 2015. Our average deposit cost in third quarter 2016 was 11 basis points, up 3 basis points from a year ago, which reflected an increase in deposit pricing for certain wholesale banking customers. We successfully grew our primary consumer checking customers (i.e., customers who actively use their checking account with transactions such as debit card purchases, online bill payments, and direct deposit) by 4.7% (August 2016 compared with August 2015).

Credit Quality
Solid overall credit results continued in third quarter 2016 as losses remained low and we continued to originate high quality loans, reflecting our long-term risk focus. Net charge-offs were $805 million, or 0.33% (annualized) of average loans, in third quarter 2016, compared with $703 million a year ago (0.31%). The increase in net charge-offs in third quarter 2016, compared with a year ago, was predominantly due to continued challenges in the oil and gas portfolio. However, our total oil and gas loan exposure, which includes unfunded commitments and loans outstanding, was down 10% from a year ago.
Our commercial portfolio net charge-offs were $215 million, or 17 basis points of average commercial loans, in third quarter 2016, compared with net charge-offs of $94 million, or 8 basis points, a year ago. Net consumer credit losses declined to 51 basis points of average consumer loans in third quarter 2016 from 53 basis points in third quarter 2015. Our commercial real estate portfolios were in a net recovery position for the 15th consecutive quarter, reflecting our conservative risk discipline and improved market conditions. Losses on our consumer real estate portfolios declined $82 million from a year ago, down 54%. The lower consumer loss levels reflected the benefit of the continued improvement in the housing market and our continued focus on originating high quality loans. Approximately 72% of the consumer first mortgage portfolio was originated after 2008, when more stringent underwriting standards were implemented.
The allowance for credit losses as of September 30, 2016, increased $132 million compared with a year ago. The allowance coverage for total loans was 1.32% at September 30, 2016, compared with 1.39% a year ago. The allowance covered 4.0 times annualized third quarter net charge-offs, compared with 4.5 times a year ago. Future allowance levels will be based on a variety of factors, including loan growth, portfolio performance and general economic conditions. Our provision for loan losses was $805 million in third quarter 2016, up from $703 million a year ago, reflecting losses in the oil and gas portfolio and the loan growth mentioned above.
Nonperforming assets decreased $1.1 billion, or 8%, from June 30, 2016 with improvement across our consumer and


4
Overview (continued)

commercial portfolios and lower foreclosed assets. Nonperforming assets were only 1.25% of total loans, the lowest level since the merger with Wachovia in 2008. Nonaccrual loans decreased $977 million from the prior quarter primarily due to a $732 million decrease in consumer nonaccruals. In addition, foreclosed assets were down $97 million from the prior quarter.
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 primarily relate to our consumer real estate, commercial real estate and auto 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
Our financial performance in third quarter 2016 resulted in strong capital generation, which increased total equity to a record $204.0 billion at September 30, 2016, up $1.3 billion from the prior quarter. We returned $3.2 billion to shareholders in third quarter 2016 through common stock dividends and net share repurchases and our net payout ratio (which 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) was 61%, compared with 62% in the prior quarter, and within our targeted range of 55-75%. We continued to reduce our common share count through the repurchase of 38.3 million common shares in the quarter. We also entered into a $750 million forward repurchase contract with an unrelated third party in October 2016 that is expected to settle in first quarter 2017 for approximately 17 million shares. We expect to reduce our common shares outstanding through share repurchases throughout the remainder of 2016.
We believe an important measure of our capital strength is the Common Equity Tier 1 ratio under Basel III, fully phased-in, which was 10.71% at September 30, 2016. Likewise, our other regulatory capital ratios remained strong. See the “Capital Management” section in this Report for more information regarding our capital, including the calculation of our regulatory capital amounts.



5

Earnings Performance
Wells Fargo net income for third quarter 2016 was $5.6 billion ($1.03 diluted earnings per common share), compared with $5.8 billion ($1.05 diluted per share) for third quarter 2015. Net income for the first nine months of 2016 was $16.7 billion ($3.03), compared with $17.3 billion ($3.12) for the same period a year ago. Our third quarter and first nine months of 2016 earnings reflected continued execution of our business strategy as we continued to satisfy our customers' financial needs. We generated revenue growth across many of our businesses and grew loans and deposits. Our financial performance in the first nine months of 2016, compared with the same period a year ago, benefited from a $1.6 billion increase in net interest income, which was offset by a $1.4 billion increase in our provision for credit losses and a $1.8 billion increase in noninterest expense. The key drivers of our financial performance in the third quarter and first nine months of 2016 were balanced net interest income and noninterest income, diversified sources of fee income, and a diversified and growing loan portfolio.
Revenue, the sum of net interest income and noninterest income, was $22.3 billion in third quarter 2016, compared with $21.9 billion in third quarter 2015. Revenue for the first nine months of 2016 was $66.7 billion, up 3% from the first nine months of 2015. The increase in revenue for the third quarter and first nine months of 2016, compared with the same periods in 2015, was largely due to an increase in net interest income, reflecting increases in interest income from loans and trading assets, partially offset by higher long-term debt and deposit interest expense. In the third quarter and first nine months of 2016, net interest income represented 54% and 53% of revenue, respectively, compared with 52% for both periods in 2015.
Noninterest income was $10.38 billion and $31.33 billion in the third quarter and first nine months of 2016, representing 46% and 47% of revenue, respectively, compared with $10.42 billion (48%) and $30.76 billion (48%) in the third quarter and first nine months of 2015. Noninterest income in third quarter 2016 decreased $42 million, compared with the same period in 2015, predominantly due to lower net gains on equity investments and insurance, partially offset by an increase in net gains from trading activities and lease income. Noninterest income for the first nine months of 2016, compared with the same period in 2015, reflected an increase in lease income related to the GE Capital business acquisitions, gains from the sale of our crop insurance and health benefit services businesses, and hedge ineffectiveness income, primarily on our long-term debt hedges, partially offset by lower trust and investment fees, and net gains on equity investments.
Noninterest expense was $13.3 billion and $39.2 billion in the third quarter and first nine months of 2016, respectively, compared with $12.4 billion and $37.4 billion for the same periods in 2015. The increase in noninterest expense for the third quarter and first nine months of 2016, compared with the same periods in 2015, was predominantly due to higher personnel expenses, operating lease expense, FDIC and other deposit assessments, and outside professional services and contract services, as well as increased operating losses, reflecting higher litigation accruals, partially offset by lower foreclosed assets expense, insurance and outside data processing. Noninterest expense as a percentage of revenue (efficiency ratio) was 59.4% in third quarter 2016 (58.7% in the first nine months of 2016), compared with 56.7% in third quarter 2015 (58.0% in the first nine months of 2015).
During first quarter 2016, we closed substantially all of the
 
acquisition of certain commercial lending businesses and assets from GE Capital. A portion of the assets were acquired in January 2016 with additional assets acquired in March 2016. In third quarter 2016, we closed the acquisition of the Asia, Australia, and New Zealand segments of GE Capital’s Commercial Distribution Finance business. In October 2016, the final phase of our GE Capital business acquisitions was completed when we closed the acquisition of the Europe, Middle East, and Africa segments of the GE Capital Commercial Distribution Finance business.
 
Net Interest Income
Net interest income is the interest earned on debt securities, loans (including yield-related loan fees) and other interest-earning assets minus the interest paid on deposits, short-term borrowings and long-term debt. The net interest margin is the average yield on earning assets minus the average interest rate paid for deposits and our other sources of funding. Net interest income and the net interest margin are presented on a taxable-equivalent basis in Table 1 to consistently reflect income from taxable and tax-exempt loans and securities based on a 35% federal statutory tax rate.
While the Company believes that it has the ability to increase net interest income over time, net interest income and the net interest margin in any one period can be significantly affected by a variety of factors including the mix and overall size of our earning assets portfolio and the cost of funding those assets. In addition, some variable sources of interest income, such as resolutions from purchased credit-impaired (PCI) loans, loan fees and collection of interest on nonaccrual loans, can vary from period to period. Net interest income and net interest margin growth has been challenged during the prolonged low interest rate environment as higher yielding loans and securities have run off and been replaced with lower yielding assets.
Net interest income on a taxable-equivalent basis was $12.3 billion and $36.3 billion in the third quarter and first nine months of 2016, respectively, compared with $11.7 billion and $34.5 billion for the same periods a year ago. The net interest margin was 2.82% and 2.86% for the third quarter and first nine months of 2016, down from 2.96% for both the third quarter and first nine months of 2015. The increase in net interest income in the third quarter and first nine months of 2016 from the same periods a year ago resulted from an increase in interest income, partially offset by an increase in funding interest expense. The increase in interest income was driven by growth in commercial and consumer loans, including the GE Capital business acquisitions that closed in 2016, growth in investment securities, increased trading income and higher short-term interest rates. Funding interest expense increased in the third quarter and first nine months of 2016, compared with the same periods a year ago, primarily due to growth and repricing of long-term debt. Deposit interest expense was also higher, predominantly due to an increase in wholesale pricing resulting from higher short-term interest rates.
The decline in net interest margin in the third quarter and first nine months of 2016, compared with the same periods a year ago, was primarily due to deposit growth and higher long-term debt balances, including debt issued to fund the GE Capital business acquisitions. As a result of growth in funding balances, net interest margin was diluted by an increase in cash, federal funds sold, and other short-term investments, which was partially offset by growth in loans, trading, and the benefit of higher short-term interest rates.


6
Earnings Performance (continued)




Average earning assets increased $158.4 billion and $135.5 billion in the third quarter and first nine months of 2016, respectively, compared with the same periods a year ago, as average loans increased $62.4 billion in the third quarter and $68.8 billion in the first nine months of 2016, average investment securities increased $24.2 billion in the third quarter and $21.5 billion in the first nine months of 2016, and average trading assets increased $21.6 billion in the third quarter and $17.6 billion in the first nine months of 2016, compared with the same periods a year ago. In addition, average federal funds sold and other short-term investments increased $49.2 billion and $28.4 billion in the third quarter and first nine months of 2016, respectively, compared with the same periods a year ago.
 
Deposits are an important low-cost source of funding and affect both net interest income and the net interest margin. Deposits include noninterest-bearing deposits, interest-bearing checking, market rate and other savings, savings certificates, other time deposits, and deposits in foreign offices. Average deposits of $1.26 trillion increased in third quarter 2016 ($1.24 trillion in the first nine months of 2016), compared with $1.20 trillion in third quarter 2015 ($1.19 trillion in the first nine months of 2015), and represented 132% of average loans in third quarter 2016 (131% in the first nine months of 2016), compared with 134% and 135% for the same periods a year ago. Average deposits decreased to 73% of average earning assets in both the third quarter and first nine months of 2016, compared with 76% for the same periods a year ago as the growth in total loans outpaced deposit growth.


7

Table 1: Average Balances, Yields and Rates Paid (Taxable-Equivalent Basis) (1)(2)
  
Quarter ended September 30,
 
 
 
 
 
 
2016

 
 
 
 
 
2015

(in millions)
Average
balance

 
Yields/
rates

 
Interest
income/
expense

 
Average
balance

 
Yields/
rates

 
Interest
income/
expense

Earning assets
 
 
 
 
 
 
 
 
 
 
 
Federal funds sold, securities purchased under resale agreements and other short-term investments
$
299,351

 
0.50
%
 
$
373

 
250,104

 
0.26
%
 
$
167

Trading assets
88,838

 
2.72

 
605

 
67,223

 
2.93

 
492

Investment securities (3): 
 
 
 
 
 
 
 
 
 
 
 
Available-for-sale securities:
 
 
 
 
 
 
 
 
 
 
 
Securities of U.S. Treasury and federal agencies
25,817

 
1.52

 
99

 
35,709

 
1.59

 
143

Securities of U.S. states and political subdivisions
55,170

 
4.28

 
590

 
48,238

 
4.22

 
510

Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
Federal agencies
105,780

 
2.39

 
631

 
98,459

 
2.70

 
665

Residential and commercial
18,080

 
5.54

 
250

 
21,876

 
5.84

 
319

Total mortgage-backed securities
123,860

 
2.85

 
881

 
120,335

 
3.27

 
984

Other debt and equity securities
54,176

 
3.37

 
459

 
50,371

 
3.40

 
430

Total available-for-sale securities
259,023

 
3.13

 
2,029

 
254,653

 
3.24

 
2,067

Held-to-maturity securities:
 
 
 
 
 
 
 
 
 
 
 
Securities of U.S. Treasury and federal agencies
44,678

 
2.19

 
246

 
44,649

 
2.18

 
245

Securities of U.S. states and political subdivisions
2,507

 
5.24

 
33

 
2,151

 
5.17

 
28

Federal agency and other mortgage-backed securities
47,971

 
1.97

 
236

 
27,079

 
2.38

 
161

Other debt securities
3,909

 
1.98

 
19

 
5,371

 
1.75

 
24

Total held-to-maturity securities
99,065

 
2.15

 
534

 
79,250

 
2.30

 
458

Total investment securities
358,088

 
2.86

 
2,563

 
333,903

 
3.02

 
2,525

Mortgages held for sale (4)
24,060

 
3.44

 
207

 
24,159

 
3.69

 
223

Loans held for sale (4)
199

 
3.04

 
2

 
568

 
2.57

 
4

Loans:
 
 
 
 
 
 
 
 
 
 
 
Commercial:
 
 
 
 
 
 
 
 
 
 
 
Commercial and industrial – U.S.
271,226

 
3.48

 
2,369

 
241,409

 
3.30

 
2,005

Commercial and industrial – Non U.S.
51,261

 
2.40

 
309

 
45,923

 
1.83

 
212

Real estate mortgage
128,809

 
3.48

 
1,127

 
120,983

 
3.31

 
1,009

Real estate construction
23,212

 
3.50

 
205

 
21,626

 
3.39

 
184

Lease financing
18,896

 
4.70

 
223

 
12,282

 
4.18

 
129

Total commercial
493,404

 
3.42

 
4,233

 
442,223

 
3.18

 
3,539

Consumer:
 
 
 
 
 
 
 
 
 
 
 
Real estate 1-4 family first mortgage
278,509

 
3.97

 
2,764

 
269,437

 
4.10

 
2,762

Real estate 1-4 family junior lien mortgage
48,927

 
4.37

 
537

 
55,298

 
4.22

 
588

Credit card
34,578

 
11.60

 
1,008

 
31,649

 
11.73

 
936

Automobile
62,461

 
5.60

 
880

 
58,534

 
5.80

 
855

Other revolving credit and installment
39,605

 
5.92

 
590

 
37,954

 
5.84

 
559

Total consumer
464,080

 
4.97

 
5,779

 
452,872

 
5.01

 
5,700

Total loans (4)
957,484

 
4.17

 
10,012

 
895,095

 
4.11

 
9,239

Other
6,488

 
2.30

 
36

 
5,028

 
5.11

 
64

Total earning assets
$
1,734,508

 
3.17
%
 
$
13,798

 
1,576,080

 
3.21
%
 
$
12,714

Funding sources
 
 
 
 
 
 
 
 
 
 
 
Deposits:
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing checking
$
44,056

 
0.15
%
 
$
17

 
37,783

 
0.05
%
 
$
5

Market rate and other savings
667,185

 
0.07

 
110

 
628,119

 
0.06

 
90

Savings certificates
25,185

 
0.30

 
19

 
30,897

 
0.58

 
44

Other time deposits
54,921

 
0.93

 
128

 
48,676

 
0.46

 
57

Deposits in foreign offices
107,072

 
0.30

 
82

 
111,521

 
0.13

 
36

Total interest-bearing deposits
898,419

 
0.16

 
356

 
856,996

 
0.11

 
232

Short-term borrowings
116,228

 
0.29

 
86

 
90,357

 
0.06

 
13

Long-term debt
252,400

 
1.59

 
1,006

 
180,569

 
1.45

 
655

Other liabilities
16,771

 
2.11

 
88

 
16,435

 
2.13

 
89

Total interest-bearing liabilities
1,283,818

 
0.48

 
1,536

 
1,144,357

 
0.34

 
989

Portion of noninterest-bearing funding sources
450,690

 
—

 
—

 
431,723

 
—

 
—

Total funding sources
$
1,734,508

 
0.35

 
1,536

 
1,576,080

 
0.25

 
989

Net interest margin and net interest income on a taxable-equivalent basis (5)
 
 
2.82
%
 
$
12,262

 
 
 
2.96
%
 
$
11,725

Noninterest-earning assets
 
 
 
 
 
 
 
 
 
 
 
Cash and due from banks
$
18,682

 
  
 
  
 
16,979

 
  
 
  
Goodwill
26,979

 
  
 
  
 
25,703

 
  
 
  
Other
134,417

 
 
 
 
 
127,640

 
 
 
 
Total noninterest-earning assets
$
180,078

 
 
 
 
 
170,322

 
 
 
 
Noninterest-bearing funding sources
 
 
 
 
 
 
  
 
 
 
 
Deposits
$
363,108

 
 
 
 
 
341,878

 
 
 
 
Other liabilities
63,777

 
 
 
 
 
67,964

 
 
 
 
Total equity
203,883

 
 
 
 
 
192,203

 
 
 
 
Noninterest-bearing funding sources used to fund earning assets
(450,690
)
 
 
 
 
 
(431,723
)
 
 
 
 
Net noninterest-bearing funding sources
$
180,078

 
 
 
 
 
170,322

 
 
 
 
Total assets
$
1,914,586

 
 
 
 
 
1,746,402

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1)
Our average prime rate was 3.50% and 3.25% both for the quarters ended September 30, 2016 and 2015, and for the first nine months of 2016 and 2015, respectively. The average three-month London Interbank Offered Rate (LIBOR) was 0.79% and 0.31% for the quarters ended September 30, 2016 and 2015, respectively, and 0.69% and 0.28% for the first nine months of 2016 and 2015, respectively.
(2)
Yields/rates and amounts include the effects of hedge and risk management activities associated with the respective asset and liability categories.
(3)
Yields and rates are based on interest income/expense amounts for the period, annualized based on the accrual basis for the respective accounts. The average balance amounts represent amortized cost for the periods presented.
(4)
Nonaccrual loans and related income are included in their respective loan categories.
(5)
Includes taxable-equivalent adjustments of $310 million and $268 million for the quarters ended September 30, 2016 and 2015, respectively, and $909 million and $780 million for the first nine months of 2016 and 2015, respectively, predominantly related to tax-exempt income on certain loans and securities. The federal statutory tax rate utilized was 35% for the periods presented.

8



 
Nine months ended September 30,
 
 
  
 
  
 
2016

 
  
 
  
 
2015

(in millions)
Average
balance

 
Yields/
rates

 
Interest
income/
expense

 
Average
balance

 
Yields/
rates

 
Interest
income/
expense

Earning assets
 
 
 
 
 
 
 
 
 
 
 
Federal funds sold, securities purchased under resale agreements and other short-term investments
$
292,635

 
0.49
%
 
$
1,076

 
264,218

 
0.27
%
 
$
543

Trading assets
83,580

 
2.86

 
1,792

 
65,954

 
2.91

 
1,437

Investment securities (3):
 
 
 
 
 
 
 
 
 
 
 
Available-for-sale securities: 
 
 
 
 
 
 
 
 
 
 
 
Securities of U.S. Treasury and federal agencies
30,588

 
1.56

 
358

 
31,242

 
1.57

 
368

Securities of U.S. states and political subdivisions
52,637

 
4.25

 
1,678

 
46,765

 
4.18

 
1,468

Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
Federal agencies
98,099

 
2.57

 
1,889

 
99,523

 
2.71

 
2,021

Residential and commercial
19,488

 
5.39

 
787

 
22,823

 
5.80

 
992

Total mortgage-backed securities
117,587

 
3.03

 
2,676

 
122,346

 
3.28

 
3,013

Other debt and equity securities
53,680

 
3.36

 
1,349

 
48,758

 
3.44

 
1,257

Total available-for-sale securities
254,492

 
3.18

 
6,061

 
249,111

 
3.27

 
6,106

Held-to-maturity securities:
 
 
 
 
 
 
 
 
 
 
 
Securities of U.S. Treasury and federal agencies
44,671

 
2.19

 
733

 
44,010

 
2.19

 
722

Securities of U.S. states and political subdivisions
2,274

 
5.34

 
91

 
2,064

 
5.16

 
80

Federal agency and other mortgage-backed securities
37,087

 
2.08

 
577

 
19,871

 
2.14

 
319

Other debt securities
4,193

 
1.94

 
61

 
6,139

 
1.72

 
79

Total held-to-maturity securities
88,225

 
2.21

 
1,462

 
72,084

 
2.22

 
1,200

Total investment securities
342,717

 
2.93

 
7,523

 
321,195

 
3.03

 
7,306

Mortgages held for sale (4)
20,702

 
3.53

 
549

 
22,416

 
3.62

 
609

Loans held for sale (4)
240

 
3.71

 
7

 
644

 
2.93

 
14

Loans:
  
 
 
 
  
 
  
 
 
 
  
Commercial:
  
 
 
 
  
 
  
 
 
 
  
Commercial and industrial – U.S.
266,622

 
3.44

 
6,874

 
233,598

 
3.31

 
5,788

Commercial and industrial – Non U.S.
50,658

 
2.29

 
867

 
45,373

 
1.88

 
638

Real estate mortgage
125,902

 
3.43

 
3,236

 
115,224

 
3.45

 
2,972

Real estate construction
22,978

 
3.53

 
608

 
20,637

 
3.68

 
567

Lease financing
17,629

 
4.86

 
643

 
12,322

 
4.77

 
441

Total commercial
483,789

 
3.38

 
12,228

 
427,154

 
3.26

 
10,406

Consumer:
 
 
 
 
 
 
 
 
 
 
 
Real estate 1-4 family first mortgage
276,369

 
4.01

 
8,311

 
267,107

 
4.12

 
8,243

Real estate 1-4 family junior lien mortgage
50,585

 
4.38

 
1,659

 
57,068

 
4.24

 
1,812

Credit card
33,774

 
11.58

 
2,927

 
30,806

 
11.74

 
2,704

Automobile
61,246

 
5.64

 
2,588

 
57,180

 
5.87

 
2,512

Other revolving credit and installment
39,434

 
5.94

 
1,755

 
37,069

 
5.91

 
1,638

Total consumer
461,408

 
4.99

 
17,240

 
449,230

 
5.03

 
16,909

Total loans (4)
945,197

 
4.16

 
29,468

 
876,384

 
4.16

 
27,315

Other
6,104

 
2.23

 
101

 
4,874

 
5.21

 
191

Total earning assets
$
1,691,175

 
3.20
%
 
$
40,516

 
1,555,685

 
3.21
%
 
$
37,415

Funding sources
 
 
 
 
 
 
 
 
 
 
 
Deposits:
  
 
 
 
  
 
  
 
 
 
  
Interest-bearing checking
$
40,858

 
0.13
%
 
$
41

 
38,491

 
0.05
%
 
$
15

Market rate and other savings
659,257

 
0.07

 
327

 
620,510

 
0.06

 
274

Savings certificates
26,432

 
0.37

 
73

 
32,639

 
0.66

 
160

Other time deposits
58,087

 
0.84

 
364

 
52,459

 
0.43

 
168

Deposits in foreign offices
100,783

 
0.25

 
190

 
107,153

 
0.13

 
105

Total interest-bearing deposits
885,417

 
0.15

 
995

 
851,252

 
0.11

 
722

Short-term borrowings
111,993

 
0.28

 
231

 
82,258

 
0.09

 
52

Long-term debt
235,209

 
1.57

 
2,769

 
183,130

 
1.37

 
1,879

Other liabilities
16,534

 
2.10

 
260

 
16,576

 
2.16

 
269

Total interest-bearing liabilities
1,249,153

 
0.45

 
4,255

 
1,133,216

 
0.34

 
2,922

Portion of noninterest-bearing funding sources
442,022

 
 
 
—

 
422,469

 
—

 
—

Total funding sources
$
1,691,175

 
0.34

 
4,255

 
1,555,685

 
0.25

 
2,922

Net interest margin and net interest income on a taxable-equivalent basis (5)
  
 
2.86
%
 
$
36,261

 
  
 
2.96
%
 
$
34,493

Noninterest-earning assets
  
 
  
 
  
 
  
 
  
 
  
Cash and due from banks
$
18,499

 
 
 
 
 
17,167

 
 
 
 
Goodwill
26,696

 
 
 
 
 
25,703

 
 
 
 
Other
129,324

 
 
 
 
 
129,412

 
 
 
 
Total noninterest-earning assets
$
174,519

 
 
 
 
 
172,282

 
 
 
 
Noninterest-bearing funding sources
  
 
 
 
 
 
  
 
 
 
 
Deposits
$
353,870

 
 
 
 
 
335,160

 
 
 
 
Other liabilities
62,169

 
 
 
 
 
69,167

 
 
 
 
Total equity
200,502

 
 
 
 
 
190,424

 
 
 
 
Noninterest-bearing funding sources used to fund earning assets
(442,022
)
 
 
 
 
 
(422,469
)
 
 
 
 
Net noninterest-bearing funding sources
$
174,519

 
 
 
 
 
172,282

 
 
 
 
Total assets
$
1,865,694

 
 
 
 
 
1,727,967

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 




9

Noninterest Income
Table 2: Noninterest Income
 
Quarter ended Sep 30,
 
 
%

 
Nine months ended Sep 30,
 
 
%

(in millions)
2016

 
2015

 
Change

 
2016

 
2015

 
Change

Service charges on deposit accounts
$
1,370

 
1,335

 
3
 %
 
$
4,015

 
3,839

 
5
 %
Trust and investment fees:
 
 
 
 
 
 
 
 
 
 
 
Brokerage advisory, commissions and other fees
2,344

 
2,368

 
(1
)
 
6,874

 
7,147

 
(4
)
Trust and investment management
849

 
843

 
1

 
2,499

 
2,556

 
(2
)
Investment banking
420

 
359

 
17

 
1,172

 
1,254

 
(7
)
Total trust and investment fees
3,613

 
3,570

 
1

 
10,545

 
10,957

 
(4
)
Card fees
997

 
953

 
5

 
2,935

 
2,754

 
7

Other fees:
 
 
 
 
 
 
 
 
 
 

Charges and fees on loans
306

 
307

 
—

 
936

 
920

 
2

Cash network fees
138

 
136

 
1

 
407

 
393

 
4

Commercial real estate brokerage commissions
119

 
124

 
(4
)
 
322

 
394

 
(18
)
Letters of credit fees
81

 
89

 
(9
)
 
242

 
267

 
(9
)
Wire transfer and other remittance fees
103

 
95

 
8

 
296

 
275

 
8

All other fees (1)(2)(3)
179

 
348

 
(49
)
 
562

 
1,035

 
(46
)
Total other fees
926

 
1,099

 
(16
)
 
2,765


3,284

 
(16
)
Mortgage banking:
 
 
 
 
 
 
 
 
 
 

Servicing income, net
359

 
674

 
(47
)
 
1,569

 
1,711

 
(8
)
Net gains on mortgage loan origination/sales activities
1,308

 
915

 
43

 
3,110

 
3,130

 
(1
)
Total mortgage banking
1,667

 
1,589

 
5

 
4,679


4,841

 
(3
)
Insurance
293

 
376

 
(22
)
 
1,006

 
1,267

 
(21
)
Net gains (losses) from trading activities
415

 
(26
)
 
NM

 
943

 
515

 
83

Net gains on debt securities
106

 
147

 
(28
)
 
797

 
606

 
32

Net gains from equity investments
140

 
920

 
(85
)
 
573

 
1,807

 
(68
)
Lease income
534

 
189

 
183

 
1,404