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, 2018
 
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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit 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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
 
 
Large accelerated filer    þ
 
Accelerated filer  o
 
 
 
 
 
 
 
Non-accelerated filer    o
 
Smaller reporting company  o
 
 
 
 
Emerging growth company  o
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 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 24, 2018
Common stock, $1-2/3 par value
 
4,707,244,168
          



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

—
Cash, Loan and Dividend Restrictions
 
4

—
Trading Activities
 
5

—
Available-for-Sale and Held-to-Maturity Debt Securities
 
6

—
Loans and Allowance for Credit Losses
 
7

—
Equity Securities
 
8

—
Other Assets
 
9

—
Securitizations and Variable Interest Entities
 
10

—
Mortgage Banking Activities
 
11

—
Intangible Assets
 
12

—
Guarantees, Pledged Assets and Collateral, and Other Commitments
 
13

—
Legal Actions
 
14

—
Derivatives
 
15

—
Fair Values of Assets and Liabilities
 
16

—
Preferred Stock
 
17

—
Revenue from Contracts with Customers
 
18

—
Employee Benefits
 
19

—
Earnings Per Common Share
 
20

—
Other Comprehensive Income
 
21

—
Operating Segments
 
22

—
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 Matters
 
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

1


PART I - FINANCIAL INFORMATION

FINANCIAL REVIEW
Summary Financial Data
 
 
 
 
 
 
 
 
 
 
  
 
  
 
  
  
 
 
 
 
 
 
% Change
 
 
  
 
  
 
  
 
Quarter ended
 
 
Sep 30, 2018 from
 
 
Nine months ended
 
 
  

($ in millions, except per share amounts)
Sep 30,
2018

 
Jun 30,
2018

 
Sep 30,
2017

 
Jun 30,
2018

 
Sep 30,
2017

 
Sep 30,
2018


Sep 30,
2017

 
%
Change

For the Period
 
 
 
 
 
 
 
 
 
 
  
 
  
 
  
Wells Fargo net income
$
6,007

 
5,186

 
4,542

 
16
 %
 
32

 
$
16,329

 
16,032

 
2
 %
Wells Fargo net income applicable to common stock
5,453

 
4,792

 
4,131

 
14

 
32

 
14,978

 
14,814

 
1

Diluted earnings per common share
1.13

 
0.98

 
0.83

 
15

 
36

 
3.07

 
2.94

 
4

Profitability ratios (annualized):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Wells Fargo net income to average assets (ROA)
1.27
%
 
1.10

 
0.93

 
15

 
37

 
1.15
%
 
1.11

 
4

Wells Fargo net income applicable to common stock to average Wells Fargo common stockholders' equity (ROE)
12.04

 
10.60

 
8.96

 
14

 
34

 
11.08

 
10.97

 
1

Return on average tangible common equity (ROTCE) (1)
14.33

 
12.62

 
10.66

 
14

 
34

 
13.19

 
13.11

 
1

Efficiency ratio (2)
62.7

 
64.9

 
65.7

 
(3
)
 
(5
)
 
65.4

 
62.8

 
4

Total revenue
$
21,941

 
21,553

 
21,849

 
2

 
—

 
$
65,428

 
66,339

 
(1
)
Pre-tax pre-provision profit (PTPP) (3)
8,178

 
7,571

 
7,498

 
8

 
9

 
22,641

 
24,655

 
(8
)
Dividends declared per common share
0.43

 
0.39

 
0.39

 
10

 
10

 
1.210

 
1.150

 
5

Average common shares outstanding
4,784.0

 
4,865.8

 
4,948.6

 
(2
)
 
(3
)
 
4,844.8

 
4,982.1

 
(3
)
Diluted average common shares outstanding
4,823.2

 
4,899.8

 
4,996.8

 
(2
)
 
(3
)
 
4,885.0

 
5,035.4

 
(3
)
Average loans
$
939,462

 
944,079

 
952,343

 
—

 
(1
)
 
$
944,813

 
957,581

 
(1
)
Average assets
1,876,283

 
1,884,884

 
1,938,461

 
—

 
(3
)
 
1,892,209

 
1,932,201

 
(2
)
Average total deposits
1,266,378

 
1,271,339

 
1,306,356

 
—

 
(3
)
 
1,278,185

 
1,302,273

 
(2
)
Average consumer and small business banking deposits (4)
743,503

 
754,047

 
755,094

 
(1
)
 
(2
)
 
751,030

 
758,443

 
(1
)
Net interest margin
2.94
%
 
2.93

 
2.86

 
—

 
3

 
2.90
%
 
2.88

 
1

At Period End
 
 
 
 
 
 
 
 
 
 
  
 
  
 
  
Debt securities (5)
$
472,283

 
475,495

 
474,710

 
(1
)
 
(1
)
 
$
472,283

 
474,710

 
(1
)
Loans
942,300

 
944,265

 
951,873

 
—

 
(1
)
 
942,300

 
951,873

 
(1
)
Allowance for loan losses
10,021

 
10,193

 
11,078

 
(2
)
 
(10
)
 
10,021

 
11,078

 
(10
)
Goodwill
26,425

 
26,429

 
26,581

 
—

 
(1
)
 
26,425

 
26,581

 
(1
)
Equity securities (5)
61,755

 
57,505

 
54,981

 
7

 
12

 
61,755

 
54,981

 
12

Assets
1,872,981

 
1,879,700

 
1,934,880

 
—

 
(3
)
 
1,872,981

 
1,934,880

 
(3
)
Deposits
1,266,594

 
1,268,864

 
1,306,706

 
—

 
(3
)
 
1,266,594

 
1,306,706

 
(3
)
Common stockholders' equity
176,934

 
181,386

 
181,920

 
(2
)
 
(3
)
 
176,934

 
181,920

 
(3
)
Wells Fargo stockholders' equity
198,741

 
205,188

 
205,722

 
(3
)
 
(3
)
 
198,741

 
205,722

 
(3
)
Total equity
199,679

 
206,069

 
206,617

 
(3
)
 
(3
)
 
199,679

 
206,617

 
(3
)
Tangible common equity (1)
148,391

 
152,580

 
152,694

 
(3
)
 
(3
)
 
148,391

 
152,694

 
(3
)
Capital ratios (6):
 
 
 
 
 
 
 
 
 
 
  
 
  
 
  
Total equity to assets
10.66
%
 
10.96

 
10.68

 
(3
)
 
—

 
10.66
%
 
10.68

 
—

Risk-based capital:
 
 
 
 
 
 
 
 


 
  
 
  
 


Common Equity Tier 1
11.91

 
11.98

 
12.10

 
(1
)
 
(2
)
 
11.91

 
12.10

 
(2
)
Tier 1 capital
13.63

 
13.83

 
13.95

 
(1
)
 
(2
)
 
13.63

 
13.95

 
(2
)
Total capital
16.79

 
16.98

 
17.21

 
(1
)
 
(2
)
 
16.79

 
17.21

 
(2
)
Tier 1 leverage
9.22

 
9.51

 
9.27

 
(3
)
 
(1
)
 
9.22

 
9.27

 
(1
)
Common shares outstanding
4,711.6

 
4,849.1

 
4,927.9

 
(3
)
 
(4
)
 
4,711.6

 
4,927.9

 
(4
)
Book value per common share (7)
$
37.55

 
37.41

 
36.92

 
—

 
2

 
$
37.55

 
36.92

 
2

Tangible book value per common share (1)(7)
31.49

 
31.47

 
30.99

 
—

 
2

 
31.49

 
30.99
 
2

Team members (active, full-time equivalent)
261,700

 
264,500

 
268,000

 
(1
)
 
(2
)
 
261,700

 
268,000

 
(2
)
(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 securities, 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)
Financial information for the prior periods of 2017 has been revised to reflect the impact of the adoption in first quarter 2018 of Accounting Standards Update (ASU) 2016-01 – Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, which amends the presentation and accounting for certain financial instruments, including equity securities. See Note 1 (Summary of Significant Accounting Policies) to Financial Statements in this Report for more information.
(6)
The risk-based capital ratios were calculated under the lower of Standardized or Advanced Approach determined pursuant to Basel III. Beginning January 1, 2018, the requirements for calculating common equity tier 1 and tier 1 capital, along with risk-weighted assets, became fully phased-in; however, the requirements for calculating tier 2 and total capital are still in accordance with Transition Requirements. See the “Capital Management” section and Note 22 (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 in the “Risk Factors” and “Regulation and Supervision” sections of our Annual Report on Form 10-K for the year ended December 31, 2017 (2017 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 definitions of terms used throughout this Report.
 
Financial Review1 

Overview
Wells Fargo & Company is a diversified, community-based financial services company with $1.87 trillion in assets. Founded in 1852 and headquartered in San Francisco, we provide banking, investment, and mortgage products and services, as well as consumer and commercial finance, through 7,950 locations, 13,000 ATMs, digital (online, mobile and social), and contact centers (phone, email and correspondence), and we have offices in 37 countries and territories to support customers who conduct business in the global economy. With approximately 262,000 active, full-time equivalent team members, we serve one in three households in the United States and ranked No. 26 on Fortune’s 2018 rankings of America’s largest corporations. We ranked fourth in assets and third in the market value of our common stock among all U.S. banks at September 30, 2018.
We use our Vision, Values and Goals to guide us toward growth and success. Our vision is to satisfy our customers’ financial needs and help them succeed financially. We aspire to create deep and enduring relationships with our customers by providing them with an exceptional experience and by understanding their needs and delivering the most relevant products, services, advice, and guidance.
We have five primary values, which are based on our vision and guide the actions we take. First, we place customers at the center of everything we do. We want to exceed customer expectations and build relationships that last a lifetime. Second, we value and support our people as a competitive advantage and strive to attract, develop, motivate, and retain the best team members. Third, we strive for the highest ethical standards of integrity, transparency, and principled performance. Fourth, we value and promote diversity and inclusion in all aspects of business and at all levels. Fifth, we look to each of our team members to be a leader in establishing, sharing, and communicating our vision for our customers, communities, team members, and shareholders. 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.

                                

1 
Financial information for the prior periods of 2017 has been revised to reflect our adoption in first quarter 2018 of Accounting Standards Update (ASU) 2016-01 Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. See Note 1 (Summary of Significant Accounting Policies) to Financial Statements in this Report for more information.
 
In keeping with our primary values and risk management priorities, we have six long-term goals for the Company, which entail becoming the financial services leader in the following areas:
•
Customer service and advice – provide exceptional service and guidance to our customers to help them succeed financially.
•
Team member engagement – be a company where people feel included, valued, and supported; everyone is respected; and we work as a team.
•
Innovation – create lasting value for our customers and increased efficiency for our operations through innovative thinking, industry-leading technology, and a willingness to test and learn.
•
Risk management – set the global standard in managing all forms of risk.
•
Corporate citizenship – make a positive contribution to communities through philanthropy, advancing diversity and inclusion, creating economic opportunity, and promoting environmental sustainability.
•
Shareholder value – deliver long-term value for shareholders.

Federal Reserve Board Consent Order Regarding Governance Oversight and Compliance and Operational Risk Management
On February 2, 2018, the Company entered into a consent order with the Board of Governors of the Federal Reserve System (FRB). As required by the consent order, the Board submitted to the FRB a plan to further enhance the Board’s governance and oversight of the Company, and the Company submitted to the FRB a plan to further improve the Company’s compliance and operational risk management program. The consent order also requires the Company, following the FRB’s acceptance and approval of the plans and the Company’s adoption and implementation of the plans, to complete third-party reviews of the enhancements and improvements provided for in the plans. Until these third-party reviews are complete and the plans are approved and implemented to the satisfaction of the FRB, the Company’s total consolidated assets will be limited to the level as of December 31, 2017. Compliance with this asset cap will be measured on a two-quarter daily average basis to allow for management of temporary fluctuations. The Company has had constructive dialogue with, and has received detailed feedback from, the FRB regarding the plans. In order to have enough time to incorporate this feedback into the plans in a thoughtful manner and to complete the required third-party reviews, which were initially due September 30, 2018, the Company is planning to operate under the asset cap through the first part of 2019. A second third-party review must also be conducted to assess the efficacy and sustainability of the improvements. As of the end of third quarter 2018, our total consolidated assets, as calculated

3

pursuant to the requirements of the consent order, were below our level of total assets as of December 31, 2017.

Consent Orders with the Bureau of Consumer Financial Protection (BCFP - formerly known as the Consumer Financial Protection Bureau) and Office of the Comptroller of the Currency (OCC) Regarding Compliance Risk Management Program, Automobile Collateral Protection Insurance Policies, and Mortgage Interest Rate Lock Extensions
On April 20, 2018, the Company entered into consent orders with the BCFP and OCC to pay an aggregate of $1 billion in civil money penalties to resolve matters regarding the Company’s compliance risk management program and past practices involving certain automobile collateral protection insurance policies and certain mortgage interest rate lock extensions. As required by the consent orders, the Company submitted to the BCFP and OCC an enterprise-wide compliance risk management plan and a plan to enhance the Company's internal audit program with respect to federal consumer financial law and the terms of the consent orders. In addition, as required by the consent orders, the Company submitted for non-objection plans to remediate customers affected by the automobile collateral protection insurance and mortgage interest rate lock matters, as well as a plan for the management of remediation activities conducted by the Company.

 
Retail Sales Practices Matters
As we have previously reported, in September 2016 we announced settlements with the BCFP, the OCC, and the Office of the Los Angeles City Attorney, and entered into consent orders with the BCFP and the OCC, in connection with allegations that some of our retail customers received products and services they did not request. As a result, it remains our top priority to rebuild trust through a comprehensive action plan that includes making things right for our customers, team members, and other stakeholders, and building a better Company for the future.
Our priority of rebuilding trust has included numerous actions focused on identifying potential financial harm and customer remediation. The Board and management are conducting company-wide reviews of sales practices issues. These reviews are ongoing. In August 2017, a third-party consulting firm completed an expanded data-driven review of retail banking accounts opened from January 2009 to September 2016 to identify financial harm stemming from potentially unauthorized accounts. We have completed financial remediation for the customers identified through the expanded account analysis. Additionally, customer outreach under the $142 million class-action lawsuit settlement concerning improper retail sales practices (Jabbari v. Wells Fargo Bank, N.A.) into which the Company entered to provide further remediation to customers, concluded in June 2018 and the period for customers to submit claims closed on July 7, 2018. The settlement administrator will pay claims following the calculation of compensatory damages and favorable resolution of pending appeals in the case.
For additional information regarding sales practices matters, including related legal matters, see the “Risk Factors” section in our 2017 Form 10-K and Note 13 (Legal Actions) to Financial Statements in this Report.


4
Overview (continued)

Additional Efforts to Rebuild Trust
Our priority of rebuilding trust has also included an effort to identify other areas or instances where customers may have experienced financial harm. We are working with our regulatory agencies in this effort, and we have accrued for the reasonably estimable remediation costs related to these matters, which amounts may change based on additional facts and information, as well as ongoing reviews and communications with our regulators. As part of this effort, we are focused on the following key areas:
•
Automobile Lending Business The Company is reviewing practices concerning the origination, servicing, and/or collection of consumer automobile loans, including matters related to certain insurance products. For example:
◦
In July 2017, the Company announced it would remediate customers who may have been financially harmed due to issues related to automobile collateral protection insurance (CPI) policies purchased through a third-party vendor on their behalf (based on an understanding that the borrowers did not have physical damage insurance coverage on their automobiles as required during the term of their automobile loans). The practice of placing CPI had been previously discontinued by the Company. Commencing in August 2017, the Company began sending refund checks and/or letters to affected customers through which they may claim or otherwise receive remediation compensation for policies placed between October 15, 2005, and September 30, 2016. During third quarter 2018, as a result of enhancing our remediation plan to provide greater payments and increasing the population of potentially affected customers, the Company accrued an additional $241 million for remediation activities for this matter.
◦
The Company has identified certain issues related to the unused portion of guaranteed automobile protection waiver or insurance agreements between the dealer and, by assignment, the lender, which will result in refunds to customers in certain states.
•
Mortgage Interest Rate Lock Extensions In October 2017, the Company announced plans to reach out to all home lending customers who paid fees for mortgage rate lock extensions requested from September 16, 2013, through February 28, 2017, and to provide refunds, with interest, to customers who believe they should not have paid those fees. The plan to issue refunds follows an internal review that determined a rate lock extension policy implemented in September 2013 was, at times, not consistently applied, resulting in some borrowers being charged fees in cases where the Company was primarily responsible for the delays that made the extensions necessary. Effective March 1, 2017, the Company changed how it manages the mortgage rate lock extension process by establishing a centralized review team that reviews all rate lock extension requests for consistent application of the policy. Although the Company believes a substantial number of the rate lock extension fees during the period in question were appropriately charged under its policy, due to our customer-oriented remediation approach, we have issued refunds and interest to substantially all of our customers who paid rate lock extension fees during the period in question. While our remediation plan remains subject to regulatory approval, we believe we have substantially completed the remediation process.
•
Add-on Products The Company is reviewing practices
 
related to certain consumer “add-on” products, including identity theft and debt protection products that were subject to an OCC consent order entered into in June 2015, as well as home and automobile warranty products, and memberships in discount programs. The products were sold to customers through a number of distribution channels and, in some cases, were acquired by the Company in connection with the purchase of loans. Sales of certain of these products have been discontinued over the past few years primarily due to decisions made in the normal course of business, and by mid-2017, the Company had ceased selling any of them to consumers. We are providing remediation where we identify affected customers, and may also provide refunds to customers who purchased certain products. The review of the Company's historical practices with respect to these products is ongoing, focusing on, among other topics, sales practices, adequacy of disclosures, customer servicing, and volume and type of customer complaints.
•
Consumer Deposit Account Freezing/Closing The Company is reviewing procedures regarding the freezing (and, in many cases, closing) of consumer deposit accounts after the Company detected suspected fraudulent activity (by third-parties or account holders) that affected those accounts. This review is ongoing.
•
Review of Certain Activities Within Wealth and Investment Management A review of certain activities within Wealth and Investment Management (WIM) being conducted by the Board, in response to inquiries from federal government agencies, is assessing whether there have been inappropriate referrals or recommendations, including with respect to rollovers for 401(k) plan participants, certain alternative investments, or referrals of brokerage customers to the Company’s investment and fiduciary services business. The review is ongoing.
•
Fiduciary and Custody Account Fee Calculations The Company is reviewing fee calculations within certain fiduciary and custody accounts in its investment and fiduciary services business, which is part of the wealth management business within WIM. The Company has determined that there have been instances of incorrect fees being applied to certain assets and accounts, resulting in both overcharges and undercharges to customers. These issues include the incorrect set-up and maintenance in the system of record of the values associated with certain assets. Systems, operations, and account-level reviews are underway to determine the extent of any assets and accounts affected, and root cause analyses are being performed with the assistance of third parties. These reviews are ongoing and, as a result of its reviews to date, the Company has suspended the charging of fees on some assets and accounts, has notified the affected customers, and is continuing its analysis of those assets and accounts. The review of customer accounts is ongoing to determine the extent of any additional necessary remediation, including with respect to additional accounts not yet reviewed, which may lead to additional accruals and fee suspensions.
•
Foreign Exchange Business The Company has substantially completed an assessment, with the assistance of a third party, of its policies, practices, and procedures in its foreign exchange (FX) business. The business is in the process of revising and implementing new policies, practices, and procedures, including those related to pricing. The Company's review of affected customers is ongoing to determine the extent of any additional remediation for

5

customers that may have received pricing inconsistent with commitments made to those customers.

•
Mortgage Loan Modifications An internal review of the Company’s use of a mortgage loan modification underwriting tool identified a calculation error regarding foreclosure attorneys’ fees affecting certain accounts that were in the foreclosure process between April 13, 2010, and October 2, 2015, when the error was corrected. A subsequent expanded review identified related errors regarding the maximum allowable foreclosure attorneys’ fees permitted for certain accounts that were in the foreclosure process between March 15, 2010, and April 30, 2018, when new controls were implemented. Similar to the initial calculation error, these errors caused an overstatement of the attorneys’ fees that were included for purposes of determining whether a customer qualified for a mortgage loan modification or repayment plan pursuant to the requirements of government-sponsored enterprises (such as Fannie Mae and Freddie Mac), the Federal Housing Administration (FHA), and the U.S. Department of Treasury's Home Affordable Modification Program (HAMP). Customers were not actually charged the incorrect attorneys’ fees. As a result of these errors, taken together and subject to final validation, approximately 870 customers were incorrectly denied a loan modification or were not offered a loan modification or repayment plan in cases where they otherwise would have qualified. In approximately 545 of these instances, after the loan modification was denied or the customer was deemed ineligible to be offered a loan modification or repayment plan, a foreclosure was completed. The Company has contacted a substantial majority of the approximately 870 affected customers to provide remediation and the option also to pursue no-cost mediation with an independent mediator. Attempts to contact the remaining affected customers are ongoing. Also, the Company’s review of these matters is ongoing, including a review of its mortgage loan modification tools. 
 
To the extent issues are identified, we will continue to assess any customer harm and provide remediation as appropriate. This effort to identify other instances in which customers may have experienced harm is ongoing, and it is possible that we may identify other areas of potential concern. For more information, including related legal and regulatory risk, see the “Risk Factors” section in our 2017 Form 10-K and Note 13 (Legal Actions) to Financial Statements in this Report.


6
Overview (continued)

Financial Performance
Wells Fargo net income was $6.0 billion in third quarter 2018 with diluted earnings per common share (EPS) of $1.13, compared with $4.5 billion and $0.83, respectively, a year ago. Diluted earnings per common share for third quarter 2018 was reduced by $0.03 per share as a result of the elimination of the discount recorded on our Non-Cumulative Perpetual Class A Preferred Stock, Series J, which was redeemed during the third quarter. Also in third quarter 2018:
•
revenue was $21.9 billion, up $92 million compared with a year ago, with net interest income up $123 million, or 1%, and noninterest income down $31 million;
•
average loans were $939.5 billion, down $12.9 billion, or 1%, from a year ago;
•
average deposits were $1.3 trillion, down $40.0 billion, or 3%, from a year ago;
•
return on assets (ROA) of 1.27% and return on equity (ROE) of 12.04%, were up from 0.93% and 8.96%, respectively, a year ago;
•
our credit results improved with a net charge-off rate of 0.29% (annualized) of average loans in third quarter 2018, compared with 0.30% a year ago;
•
nonaccrual loans of $7.1 billion were down $1.6 billion, or 18%, from a year ago; and
•
we returned $8.9 billion to shareholders through common stock dividends and net share repurchases, which was more than double the $4.0 billion we returned in third quarter 2017 and the 13th consecutive quarter of returning more than $3 billion.

Balance Sheet and Liquidity
Despite the asset cap placed on us from the consent order with the FRB, our balance sheet remained strong during third quarter 2018 with strong credit quality and solid levels of liquidity and capital. Our total assets were $1.87 trillion at September 30, 2018. Cash and other short-term investments decreased $53.0 billion from December 31, 2017, reflecting lower deposit balances. Debt securities were $472.3 billion at September 30, 2018, a decrease of $1.1 billion from December 31, 2017, driven by runoff and sales in the available-for-sale portfolio, partially offset by an increase in debt securities held for trading. Loans were down $14.5 billion, or 2%, from December 31, 2017, predominantly due to a decline in automobile and junior lien mortgage loans.
Average deposits in third quarter 2018 were $1.27 trillion, down $40.0 billion from third quarter 2017. The decline was driven by a decrease in commercial deposits from financial institutions, which includes actions the Company took in the first half of 2018 in response to the asset cap, partially offset by higher interest-bearing checking deposits. Our average deposit cost in third quarter 2018 was 47 basis points, up 21 basis points from a year ago, primarily driven by an increase in Wholesale Banking and Wealth and Investment Management deposit rates.

Credit Quality
Solid overall credit results continued in third quarter 2018 as losses remained low and we continued to originate high quality loans, reflecting our long-term risk focus. Net charge-offs were $680 million, or 0.29% (annualized) of average loans, in third quarter 2018, compared with $717 million a year ago (0.30%). The decrease in net charge-offs in third quarter 2018, compared with a year ago, was predominantly driven by lower losses in the automobile portfolio.
Our commercial portfolio net charge-offs were $152 million, or 12 basis points of average commercial loans, in third quarter
 
2018, compared with net charge-offs of $113 million, or 9 basis points, a year ago. Net consumer credit losses decreased to 47 basis points (annualized) of average consumer loans in third quarter 2018 from 53 basis points (annualized) in third quarter 2017. Approximately 83% of the consumer first mortgage loan portfolio outstanding at September 30, 2018, was originated after 2008, when more stringent underwriting standards were implemented.
The allowance for credit losses as of September 30, 2018, decreased $1.2 billion compared with a year ago and decreased $1.0 billion from December 31, 2017. We had a $100 million release in the allowance for credit losses in third quarter 2018, compared with no release a year ago. The allowance coverage for total loans was 1.16% at September 30, 2018, compared with 1.27% a year ago and 1.25% at December 31, 2017. The allowance covered 4.1 times annualized third quarter net charge-offs, compared with 4.3 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 $580 million in third quarter 2018, down from $717 million a year ago, reflecting an improvement in our outlook for 2017 hurricane-related losses, as well as continued improvement in residential real estate and lower loan balances.
Nonperforming assets decreased $410 million, or 5%, from June 30, 2018, the 10th consecutive quarter of decreases, with improvement in the consumer and commercial real estate portfolios. Nonperforming assets were 0.80% of total loans, the lowest level since the merger with Wachovia in 2008. Nonaccrual loans decreased $433 million from the prior quarter primarily due to a decrease in real estate 1-4 family first mortgage nonaccruals. Foreclosed assets were up $23 million from the prior quarter.

Capital
Our financial performance in third quarter 2018 allowed us to maintain a solid capital position, with total equity of $199.7 billion at September 30, 2018, compared with $208.1 billion at December 31, 2017. We returned $8.9 billion to shareholders in third quarter 2018 through common stock dividends and net share repurchases, more than double the amount we returned in third quarter 2017. 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 163%. We continued to reduce our common shares outstanding through the repurchase of 146.5 million common shares in the quarter. We entered into a $1 billion forward repurchase contract with an unrelated third party in October 2018 that is expected to settle in first quarter 2019 for approximately 19 million common shares. We expect to reduce our common shares outstanding through share repurchases throughout the remainder of 2018.
We believe an important measure of our capital strength is the Common Equity Tier 1 (CET1) ratio under Basel III, fully phased-in, which was 11.91% at September 30, 2018, flat compared with December 31, 2017, but well above our internal target of 10%. 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.

7

Earnings Performance 
Wells Fargo net income for third quarter 2018 was $6.0 billion ($1.13 diluted earnings per common share), compared with $4.5 billion ($0.83 diluted per share) for third quarter 2017. Third quarter 2018 included the redemption of our Series J Preferred Stock on September 17, 2018, which reduced
diluted EPS by $0.03 per share as a result of eliminating the purchase accounting discount recorded on these shares at the time of the Wachovia acquisition. Net income in third quarter 2018 included net discrete income tax expense of $168 million primarily related to the re-measurement of our initial estimates for the impacts of the Tax Cuts & Jobs Act recognized in fourth quarter 2017. Third quarter 2018 results benefited from the lower U.S. federal statutory income tax rate. Net income for the first nine months of 2018 was $16.3 billion, compared with $16.0 billion for the same period a year ago. The increase in net income in the first nine months of 2018, compared with the same period a year ago, resulted from a $107 million increase in net interest income, a $654 million decrease in our provision for credit losses, and a $1.9 billion decline in income tax expense reflecting the lower U.S. federal statutory income tax rate in 2018, partially offset by a $1.0 billion decrease in noninterest income, and a $1.1 billion increase in noninterest expense. In the first nine months of 2018, net interest income represented 57% of revenue, compared with 56% for the same period a year ago. Noninterest income was $28.1 billion in the first nine months of 2018, representing 43% of revenue, compared with $29.1 billion (44%) in the first nine months of 2017.
Revenue, the sum of net interest income and noninterest income, was $21.9 billion in third quarter 2018, compared with $21.8 billion in the same period a year ago. The increase in revenue in third quarter 2018, compared with the same period a year ago, was due to an increase in net interest income, partially offset by a decrease in noninterest income. Revenue for the first nine months of 2018 was $65.4 billion, compared with $66.3 billion for the first nine months of 2017. The decline in revenue in the first nine months of 2018, compared with the same period a year ago, was substantially due to a decline in noninterest income.

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 reflect income from taxable and tax-exempt loans and debt and equity securities based on a 21% and 35% federal statutory tax rate for the periods ended September 30, 2018 and 2017, respectively.
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 on a taxable-equivalent basis was $12.7 billion and $37.8 billion in the third quarter and first nine months of 2018, respectively, compared with $12.8 billion and $38.2 billion for the same periods a year ago.
 
The decrease in net interest income in the third quarter of 2018, compared with the same period a year ago, was driven by:
•
loan and deposit runoff;
•
lower loan swap income due to unwinding the receive-fixed loan swap portfolio; 
•
lower tax-equivalent net interest income from updated tax-equivalent factors reflecting new tax law; and
•
higher premium amortization;
partially offset by:
•
the net repricing benefit of higher interest rates;
•
higher variable income; and
•
higher benefit from hedge ineffectiveness accounting results.

The decrease in net interest income in the first nine months of 2018, compared with the same period a year ago, was driven by:
•
loan and deposit runoff;
•
lower loan swap income due to unwinding the receive-fixed loan swap portfolio; 
•
lower tax-equivalent net interest income from updated tax-equivalent factors reflecting new tax law;
•
higher premium amortization; and
•
lower benefit from hedge ineffectiveness accounting results;
partially offset by
•
the net repricing benefit of higher interest rates;, and
•
higher variable income.

Net interest margin on a taxable-equivalent basis was 2.94% and 2.90% in the third quarter and first nine months of 2018, respectively, compared to 2.86% and 2.88% for the same periods a year ago.
The increase in net interest margin in the third quarter of 2018, compared with the same period a year ago, was driven by:
•
the net repricing benefit of higher interest rates;
•
loan and deposit runoff;
•
higher variable income; and
•
higher benefit from hedge ineffectiveness accounting results,
partially offset by:
•
lower loan swap income due to unwinding the receive-fixed loan swap portfolio;
•
lower tax-equivalent net interest income from updated tax equivalent factors reflecting new tax law; and
•
higher premium amortization.

The increase in net interest margin in the first nine months of 2018, compared with the same period a year ago, was driven by:
•
the net repricing benefit of higher interest rates; and
•
higher variable income;
partially offset by:
•
lower loan swap income due to unwinding the receive-fixed loan swap portfolio;
•
lower tax-equivalent net interest income from updated tax equivalent factors reflecting new tax law;
•
loan and deposit runoff;
•
higher premium amortization; and
•
lower benefit from hedge ineffectiveness accounting results.
 
Average earning assets decreased $54.4 billion and $36.1 billion in the third quarter and first nine months of 2018, respectively, compared with the same periods a year ago. Also, compared with the same periods a year ago:

8
Earnings Performance (continued)




•
average loans decreased 12.9 billion and $12.8 billion in the third quarter and first nine months of 2018, respectively;
•
average interest-earning deposits decreased $56.9 billion and $47.7 billion in the third quarter and first nine months of 2018, respectively;
•
average federal funds sold and securities purchased under resale agreements increased $9.3 billion and $5.1 billion in the third quarter and first nine months of 2018, respectively;
•
average debt securities increased $10.3 billion and $16.3 billion in the third quarter and first nine months of 2018, respectively;
•
average equity securities increased $2.1 billion and $2.9 billion in the third quarter and first nine months of 2018, respectively; and
•
other earning assets decreased $4.0 billion in third quarter 2018 and increased $1.0 billion in the first nine months of 2018.

 
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 were $1.27 trillion and $1.28 trillion in the third quarter and first nine months of 2018, respectively, compared with $1.31 trillion and $1.30 trillion in the same periods a year ago, and represented 135% of average loans in both the third quarter and first nine months of 2018, compared with 137% in third quarter 2017 and 136% in the first nine months of 2017. Average deposits were 73% of average earning assets in both the third quarter and first nine months of 2018, flat compared with the same periods a year ago. The average deposit cost for third quarter 2018 was 47 basis points, up 7 basis points from the prior quarter and 21 basis points from a year ago, primarily driven by an increase in Wholesale Banking and Wealth and Investment Management deposit rates.

9

Table 1: Average Balances, Yields and Rates Paid (Taxable-Equivalent Basis) (1)(2)
  
Quarter ended September 30,
 
 
 
 
 
 
2018

 
 
 
 
 
2017

(in millions)
Average
balance

 
Yields/
rates

 
Interest
income/
expense

 
Average
balance

 
Yields/
rates

 
Interest
income/
expense

Earning assets
 
 
 
 
 
 
 
 
 
 
 
Interest-earning deposits with banks (3)
$
148,565

 
1.93
%
 
$
721

 
205,489

 
1.21
%
 
$
629

Federal funds sold and securities purchased under resale agreements (3)
79,931

 
1.93

 
390

 
70,640

 
1.14

 
203

Debt securities (4): 
 
 
 
 
 
 
 
 
 
 
 
Trading debt securities
84,481

 
3.45

 
730

 
76,627

 
3.21

 
616

Available-for-sale debt securities:
 
 
 
 
 
 
 
 
 
 
 
Securities of U.S. Treasury and federal agencies
6,421

 
1.65

 
27

 
14,529

 
1.31

 
48

Securities of U.S. states and political subdivisions (7)
46,615

 
3.76

 
438

 
52,500

 
4.08

 
535

Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
Federal agencies
155,525

 
2.77

 
1,079

 
139,781

 
2.58

 
903

Residential and commercial (7)
7,318

 
4.68

 
85

 
11,013

 
5.44

 
149

Total mortgage-backed securities
162,843

 
2.86

 
1,164

 
150,794

 
2.79

 
1,052

Other debt securities (7)
46,353

 
4.39

 
512

 
47,592

 
3.73

 
447

Total available-for-sale debt securities (7)
262,232

 
3.26

 
2,141

 
265,415

 
3.13

 
2,082

Held-to-maturity debt securities:
 
 
 
 
 
 
 
 
 
 
 
Securities of U.S. Treasury and federal agencies
44,739

 
2.18

 
246

 
44,708

 
2.18

 
246

Securities of U.S. states and political subdivisions
6,251

 
4.33

 
68

 
6,266

 
5.44

 
85

Federal agency and other mortgage-backed securities
95,298

 
2.27

 
539

 
88,272

 
2.26

 
498

Other debt securities
106

 
5.61

 
2

 
1,488

 
3.05

 
12

Total held-to-maturity debt securities
146,394

 
2.33

 
855

 
140,734

 
2.38

 
841

Total debt securities (7)
493,107

 
3.02

 
3,726

 
482,776

 
2.93

 
3,539

Mortgage loans held for sale (5)(7)
19,343

 
4.33

 
210

 
22,923

 
3.79

 
217

Loans held for sale (5)
2,619

 
5.28

 
35

 
1,383

 
4.39

 
15

Commercial loans:
 
 
 
 
 
 
 
 
 
 
 
Commercial and industrial – U.S.
273,814

 
4.22

 
2,915

 
270,091

 
3.81

 
2,590

Commercial and industrial – Non U.S. (7)
60,884

 
3.63

 
556

 
57,738

 
2.89

 
422

Real estate mortgage
121,284

 
4.35

 
1,329

 
129,087

 
3.83

 
1,245

Real estate construction
23,276

 
5.05

 
296

 
24,981

 
4.18

 
263

Lease financing (7)
19,512

 
4.69

 
229

 
19,155

 
4.59

 
219

Total commercial loans
498,770

 
4.24

 
5,325

 
501,052

 
3.76

 
4,739

Consumer loans:
 
 
 
 
 
 
 
 
 
 
 
Real estate 1-4 family first mortgage
284,133

 
4.07

 
2,891

 
278,371

 
4.03

 
2,809

Real estate 1-4 family junior lien mortgage
35,863

 
5.50

 
496

 
41,916

 
4.95

 
521

Credit card
36,893

 
12.77

 
1,187

 
35,657

 
12.41

 
1,114

Automobile
46,963

 
5.20

 
616

 
56,746

 
5.34

 
764

Other revolving credit and installment
36,840

 
6.78

 
630

 
38,601

 
6.31

 
615

Total consumer loans
440,692

 
5.26

 
5,820

 
451,291

 
5.14

 
5,823

Total loans (5)
939,462

 
4.72

 
11,145

 
952,343

 
4.41

 
10,562

Equity securities
37,902

 
2.98

 
283

 
35,846

 
2.12

 
191

Other
4,702

 
1.47

 
16

 
8,656

 
0.90

 
20

Total earning assets (7)
$
1,725,631

 
3.81
%
 
$
16,526

 
1,780,056

 
3.44
%
 
$
15,376

Funding sources
 
 
 
 
 
 
 
 
 
 
 
Deposits:
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing checking
$
51,177

 
1.01
%
 
$
131

 
48,278

 
0.57
%
 
$
69

Market rate and other savings
693,937

 
0.35

 
614

 
681,187

 
0.17

 
293

Savings certificates
20,586

 
0.62

 
32

 
21,806

 
0.31

 
16

Other time deposits (7)
87,752

 
2.35

 
519

 
66,046

 
1.51

 
251

Deposits in foreign offices
53,933

 
1.50

 
203

 
124,746

 
0.76

 
240

Total interest-bearing deposits (7)
907,385

 
0.66

 
1,499

 
942,063

 
0.37

 
869

Short-term borrowings
105,472

 
1.74

 
463

 
99,193

 
0.91

 
226

Long-term debt (7)
220,654

 
3.02

 
1,667

 
243,507

 
2.28

 
1,392

Other liabilities
27,108

 
2.40

 
164

 
24,851

 
1.74

 
109

Total interest-bearing liabilities (7)
1,260,619

 
1.20

 
3,793

 
1,309,614

 
0.79

 
2,596

Portion of noninterest-bearing funding sources (7)
465,012

 
—

 
—

 
470,442

 
—

 
—

Total funding sources (7)
$
1,725,631

 
0.87

 
3,793

 
1,780,056

 
0.58

 
2,596

Net interest margin and net interest income on a taxable-equivalent basis (6)(7)
 
 
2.94
%
 
$
12,733

 
 
 
2.86
%
 
$
12,780

Noninterest-earning assets
 
 
 
 
 
 
 
 
 
 
 
Cash and due from banks
$
18,356

 
  
 
  
 
18,456

 
  
 
  
Goodwill
26,429

 
  
 
  
 
26,600

 
  
 
  
Other (7)
105,867

 
 
 
 
 
113,349

 
 
 
 
Total noninterest-earning assets (7)
$
150,652

 
 
 
 
 
158,405

 
 
 
 
Noninterest-bearing funding sources
 
 
 
 
 
 
  
 
 
 
 
Deposits
$
358,993

 
 
 
 
 
364,293

 
 
 
 
Other liabilities (7)
53,845

 
 
 
 
 
56,831

 
 
 
 
Total equity (7)
202,826

 
 
 
 
 
207,723

 
 
 
 
Noninterest-bearing funding sources used to fund earning assets (7)
(465,012
)
 
 
 
 
 
(470,442
)
 
 
 
 
Net noninterest-bearing funding sources (7)
$
150,652

 
 
 
 
 
158,405

 
 
 
 
Total assets (7)
$
1,876,283

 
 
 
 
 
1,938,461

 
 
 
 
(1)
Our average prime rate was 5.01% and 4.25% for the quarters ended September 30, 2018 and 2017, respectively and 4.78% and 4.03% for the first nine months of 2018 and 2017, respectively. The average three-month London Interbank Offered Rate (LIBOR) was 2.34% and 1.31% for the quarters ended September 30, 2018 and 2017, respectively, and 2.20% and 1.20% for the first nine months of 2018 and 2017, respectively.
(2)
Yields/rates and amounts include the effects of hedge and risk management activities associated with the respective asset and liability categories.
(3)
Financial information for the prior periods has been revised to reflect the impact of the adoption of Accounting Standards Update (ASU) 2016-18 – Statement of Cash Flows (Topic 230): Restricted Cash in which we changed the presentation of our cash and cash equivalents to include both cash and due from banks as well as interest-earning deposits with banks, which are inclusive of any restricted cash.
(4)
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.


10



 
Nine months ended September 30,
 
 
  
 
  
 
2018

 
  
 
  
 
2017

(in millions)
Average
balance

 
Yields/
rates

 
Interest
income/
expense

 
Average
balance

 
Yields/
rates

 
Interest
income/
expense

Earning assets
 
 
 
 
 
 
 
 
 
 
 
Interest-earning deposits with banks (3)
$
158,480

 
1.71
%
 
$
2,029

 
206,161

 
1.01
%
 
$
1,557

Federal funds sold and securities purchased under resale agreements (3)
79,368

 
1.69

 
1,005

 
74,316

 
0.91

 
505

Debt securities (4):
 
 
 
 
 
 
 
 
 
 
 
Trading debt securities
81,307

 
3.38

 
2,062

 
72,080

 
3.16

 
1,709

Available-for-sale debt securities: 
 
 
 
 
 
 
 
 
 
 
 
Securities of U.S. Treasury and federal agencies
6,424

 
1.66

 
80

 
19,182

 
1.48

 
212

Securities of U.S. states and political subdivisions (7)
47,974

 
3.68

 
1,323

 
52,748

 
3.97

 
1,569

Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
Federal agencies
156,298

 
2.75

 
3,220

 
142,748

 
2.60

 
2,782

Residential and commercial (7)
8,140

 
4.54

 
277

 
12,671

 
5.44

 
517

Total mortgage-backed securities (7)
164,438

 
2.84

 
3,497

 
155,419

 
2.83

 
3,299

Other debt securities (7)
47,146

 
4.14

 
1,462

 
48,727

 
3.70

 
1,351

Total available-for-sale debt securities (7)
265,982

 
3.19

 
6,362

 
276,076

 
3.11

 
6,431

Held-to-maturity debt securities:
 
 
 
 
 
 
 
 
 
 
 
Securities of U.S. Treasury and federal agencies
44,731

 
2.19

 
733

 
44,701

 
2.19

 
733

Securities of U.S. states and political subdivisions
6,255

 
4.34

 
204

 
6,270

 
5.35

 
251

Federal agency and other mortgage-backed securities
93,699

 
2.32

 
1,632

 
74,525

 
2.38

 
1,329

Other debt securities
460

 
4.02

 
14

 
2,531

 
2.48

 
47

Total held-to-maturity debt securities
145,145

 
2.38

 
2,583

 
128,027

 
2.46

 
2,360

Total debt securities (7)
492,434

 
2.98

 
11,007

 
476,183

 
2.94

 
10,500

Mortgage loans held for sale (5)(7)
18,849

 
4.15

 
587

 
20,869

 
3.77

 
590

Loans held for sale (5)
2,706

 
5.28

 
107

 
1,485

 
3.47

 
38

Commercial loans:
  
 
 
 
  
 
  
 
 
 
  
Commercial and industrial – U.S.
273,711

 
4.08

 
8,350

 
272,621

 
3.70

 
7,547

Commercial and industrial – Non U.S. (7)
60,274

 
3.46

 
1,559

 
56,512

 
2.83

 
1,197

Real estate mortgage
123,804

 
4.22

 
3,910

 
130,931

 
3.69

 
3,615

Real estate construction
23,783

 
4.82

 
857

 
24,949

 
4.00

 
747

Lease financing (7)
19,349

 
4.82

 
700

 
19,094

 
4.78

 
684

Total commercial loans
500,921

 
4.10

 
15,376

 
504,107

 
3.66

 
13,790

Consumer loans:
 
 
 
 
 
 
 
 
 
 
 
Real estate 1-4 family first mortgage
283,814

 
4.05

 
8,613

 
276,330

 
4.04

 
8,380

Real estate 1-4 family junior lien mortgage
37,308

 
5.31

 
1,484

 
43,589

 
4.77

 
1,557

Credit card
36,416

 
12.73

 
3,467

 
35,322

 
12.19

 
3,219

Automobile
48,983

 
5.18

 
1,899

 
59,105

 
5.41

 
2,392

Other revolving credit and installment
37,371

 
6.62

 
1,851

 
39,128

 
6.15

 
1,801

Total consumer loans
443,892

 
5.21

 
17,314

 
453,474

 
5.11

 
17,349

Total loans (5)
944,813

 
4.62

 
32,690

 
957,581

 
4.34

 
31,139

Equity securities
38,322

 
2.57

 
738

 
35,466

 
2.16

 
575

Other
5,408

 
1.38

 
56

 
4,383

 
0.83

 
28

Total earning assets (7)
$
1,740,380

 
3.70
%
 
$
48,219

 
1,776,444

 
3.38
%
 
$
44,932

Funding sources
 
 
 
 
 
 
 
 
 
 
 
Deposits:
  
 
 
 
  
 
  
 
 
 
  
Interest-bearing checking
$
66,364

 
0.89
%
 
$
441

 
49,134

 
0.43
%
 
$
156

Market rate and other savings
683,279

 
0.28

 
1,416

 
682,780

 
0.13

 
664

Savings certificates
20,214

 
0.46

 
70

 
22,618

 
0.30

 
50

Other time deposits (7)
82,175

 
2.16

 
1,331

 
59,414

 
1.41

 
625

Deposits in foreign offices
66,590

 
1.20

 
599

 
123,553

 
0.64

 
587

Total interest-bearing deposits (7)
918,622

 
0.56

 
3,857

 
937,499

 
0.30

 
2,082

Short-term borrowings
103,696

 
1.51

 
1,173

 
97,837

 
0.69

 
505

Long-term debt (7)
223,485

 
2.93

 
4,901

 
251,114

 
2.03

 
3,813

Other liabilities
27,743

 
2.14

 
446

 
20,910

 
1.97

 
309

Total interest-bearing liabilities (7)
1,273,546

 
1.09

 
10,377

 
1,307,360

 
0.69

 
6,709

Portion of noninterest-bearing funding sources (7)
466,834

 
 
 
—

 
469,084

 
—

 
—

Total funding sources (7)
$
1,740,380

 
0.80

 
10,377

 
1,776,444

 
0.50

 
6,709

Net interest margin and net interest income on a taxable-equivalent basis (6)(7)
  
 
2.90
%
 
$
37,842

 
  
 
2.88
%
 
$
38,223

Noninterest-earning assets
  
 
  
 
  
 
  
 
  
 
  
Cash and due from banks
$
18,604

 
 
 
 
 
18,443

 
 
 
 
Goodwill
26,463

 
 
 
 
 
26,645

 
 
 
 
Other (7)
106,762

 
 
 
 
 
110,669

 
 
 
 
Total noninterest-earning assets (7)
$
151,829

 
 
 
 
 
155,757

 
 
 
 
Noninterest-bearing funding sources
  
 
 
 
 
 
  
 
 
 
 
Deposits
$
359,563

 
 
 
 
 
364,774

 
 
 
 
Other liabilities (7)
54,088

 
 
 
 
 
55,032

 
 
 
 
Total equity (7)
205,012

 
 
 
 
 
205,035

 
 
 
 
Noninterest-bearing funding sources used to fund earning assets (7)
(466,834
)
 
 
 
 
 
(469,084
)
 
 
 
 
Net noninterest-bearing funding sources (7)
$
151,829

 
 
 
 
 
155,757

 
 
 
 
Total assets (7)
$
1,892,209

 
 
 
 
 
1,932,201

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(5)
Nonaccrual loans and related income are included in their respective loan categories.
(6)
Includes taxable-equivalent adjustments of $161 million and $332 million for the quarters ended September 30, 2018 and 2017, respectively, and $491 million and $980 million for the first nine months of 2018 and 2017, respectively, predominantly related to tax-exempt income on certain loans and securities. The federal statutory tax rate utilized was 21% and 35% for periods ended September 30, 2018 and 2017, respectively.
(7)
Financial information for the prior periods has been revised to reflect the impact of the adoption in fourth quarter 2017 of ASU 2017-12 – Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities.


11

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

 
Nine months ended Sep 30,
 
 
%

(in millions)
2018

 
2017

 
Change

 
2018

 
2017

 
Change

Service charges on deposit accounts
$
1,204

 
1,276

 
(6
)%
 
$
3,540

 
3,865

 
(8
)%
Trust and investment fees:
 
 
 
 
 
 
 
 
 
 
 
Brokerage advisory, commissions and other fees
2,334

 
2,304

 
1

 
7,091

 
6,957

 
2

Trust and investment management
835

 
840

 
(1
)
 
2,520

 
2,506

 
1

Investment banking
462

 
465

 
(1
)
 
1,378

 
1,345

 
2

Total trust and investment fees
3,631

 
3,609

 
1

 
10,989

 
10,808

 
2

Card fees
1,017

 
1,000

 
2

 
2,926

 
2,964

 
(1
)
Other fees:
 
 
 
 
 
 
 
 
 
 

Charges and fees on loans
298

 
318

 
(6
)
 
903

 
950

 
(5
)
Cash network fees
121

 
126

 
(4
)
 
367

 
386

 
(5
)
Commercial real estate brokerage commissions
129

 
120

 
8

 
323

 
303

 
7

Letters of credit fees
72

 
77

 
(6
)
 
223

 
227

 
(2
)
Wire transfer and other remittance fees
120

 
114

 
5

 
357

 
333

 
7

All other fees
110

 
122

 
(10
)
 
323

 
445

 
(27
)
Total other fees
850

 
877

 
(3
)
 
2,496


2,644

 
(6
)
Mortgage banking: