10-Q 1 wfc-03312015x10q.htm 10-Q WFC-03.31.2015-10Q


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 March 31, 2015
 
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
 
 
April 30, 2015
Common stock, $1-2/3 par value
 
5,149,204,973
          




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
 
 
Mar 31, 2015 from
 
($ in millions, except per share amounts)
Mar 31,
2015

 
Dec 31,
2014

 
Mar 31,
2014

 
Dec 31,
2014

 
Mar 31,
2014

For the Period
 
 
 
 
 
 
 
 
 
Wells Fargo net income
$
5,804

 
5,709

 
5,893

 
2
 %
 
(2
)
Wells Fargo net income applicable to common stock
5,461

 
5,382

 
5,607

 
1

 
(3
)
Diluted earnings per common share
1.04

 
1.02

 
1.05

 
2

 
(1
)
Profitability ratios (annualized):
 
 
 
 
 
 
 
 
 
Wells Fargo net income to average assets (ROA)
1.38
%
 
1.36

 
1.57

 
1

 
(12
)
Wells Fargo net income applicable to common stock to average Wells Fargo common stockholders' equity (ROE)
13.17

 
12.84

 
14.35

 
3

 
(8
)
Efficiency ratio (1)
58.8

 
59.0

 
57.9

 

 
2

Total revenue
21,278

 
21,443

 
20,625

 
(1
)
 
3

Pre-tax pre-provision profit (PTPP) (2)
8,771

 
8,796

 
8,677

 

 
1

Dividends declared per common share
0.35

 
0.35

 
0.30

 

 
17

Average common shares outstanding
5,160.4

 
5,192.5

 
5,262.8

 
(1
)
 
(2
)
Diluted average common shares outstanding
5,243.6

 
5,279.2

 
5,353.3

 
(1
)
 
(2
)
Average loans
$
863,261

 
849,429

 
823,790

 
2

 
5

Average assets
1,707,798

 
1,663,760

 
1,525,905

 
3

 
12

Average core deposits (3)
1,063,234

 
1,035,999

 
973,801

 
3

 
9

Average retail core deposits (4)
731,413

 
714,572

 
690,643

 
2

 
6

Net interest margin
2.95
%
 
3.04

 
3.20

 
(3
)
 
(8
)
At Period End
 
 
 
 
 
 
 
 
 
Investment securities
$
324,736

 
312,925

 
270,327

 
4

 
20

Loans
861,231

 
862,551

 
826,443

 

 
4

Allowance for loan losses
12,176

 
12,319

 
13,695

 
(1
)
 
(11
)
Goodwill
25,705

 
25,705

 
25,637

 

 

Assets
1,737,737

 
1,687,155

 
1,546,707

 
3

 
12

Core deposits (3)
1,086,993

 
1,054,348

 
994,185

 
3

 
9

Wells Fargo stockholders' equity
188,796

 
184,394

 
175,654

 
2

 
7

Total equity
189,964

 
185,262

 
176,469

 
3

 
8

Tier 1 capital (5)
158,787

 
154,666

 
147,549

 
3

 
8

Total capital (5)
196,204

 
192,940

 
183,559

 
2

 
7

Capital ratios (5):
 
 
 
 
 
 
 
 
 
Total equity to assets
10.93
%
 
10.98

 
11.41

 

 
(4
)
Risk-based capital:
 
 
 
 
 
 
 
 
 
Tier 1 capital
12.20

 
12.45

 
12.63

 
(2
)
 
(3
)
Total capital
15.08

 
15.53

 
15.71

 
(3
)
 
(4
)
Tier 1 leverage
9.48

 
9.45

 
9.84

 

 
(4
)
Common Equity Tier 1
10.69

 
11.04

 
11.36

 
(3
)
 
(6
)
Common shares outstanding
5,162.9

 
5,170.3

 
5,265.7

 

 
(2
)
Book value per common share
$
32.70

 
32.19

 
30.48

 
2

 
7

Common stock price:
 
 
 
 
 
 
 
 
 
High
56.29

 
55.95

 
49.97

 
1

 
13

Low
50.42

 
46.44

 
44.17

 
9

 
14

Period end
54.40

 
54.82

 
49.74

 
(1
)
 
9

Team members (active, full-time equivalent)
266,000

 
264,500

 
265,300

 
1

 

(1)
The efficiency ratio is noninterest expense divided by total revenue (net interest income and noninterest income).
(2)
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.
(3)
Core deposits are noninterest-bearing deposits, interest-bearing checking, savings certificates, certain market rate and other savings, and certain foreign deposits (Eurodollar sweep balances).
(4)
Retail core deposits are total core deposits excluding Wholesale Banking core deposits and retail mortgage escrow deposits.
(5)
See the "Capital Management" section and Note 19 (Regulatory and Agency Capital Requirements) to Financial Statements in this Report for additional information.

2


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, 2014 (2014 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 nationwide, diversified, community-based financial services company with $1.7 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 8,700 locations, 12,500 ATMs, the internet (wellsfargo.com) and mobile banking, and we have offices in 36 countries to support customers who conduct business in the global economy. With approximately 266,000 active, full-time equivalent team members, we serve one in three households in the United States and rank No. 29 on Fortune’s 2014 rankings of America’s largest corporations. We ranked fourth in assets and first in the market value of our common stock among all U.S. banks at March 31, 2015.
We use our Vision and Values to guide us toward growth and success. Our vision is to satisfy all 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. Important to our strategy to achieve this vision is to increase the number of our products our customers utilize and to offer them all of the financial products that fulfill their financial needs. We aspire to create deep and enduring relationships with our customers by discovering their needs and delivering the most relevant products, services, advice, and guidance.
We have six 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. Sixth, we strive 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.
 
Financial Performance
Wells Fargo net income was $5.8 billion in first quarter 2015 with diluted earnings per share (EPS) of $1.04, compared with $5.9 billion and $1.05, respectively, from a year ago. Our solid
 
earnings reflected the benefit of our diversified business model and our continued focus on serving the needs of our customers.
Compared with a year ago:
revenue grew 3% as a result of increases in both net interest income and noninterest income;
our loans increased $34.8 billion, or 4%, even with the planned runoff in our non-strategic/liquidating portfolios, and our core loan portfolio grew by $54.2 billion, or 7%; 
our liquidating portfolio declined $19.4 billion and was only 7% of our total loans, down from 9% a year ago;
our deposit franchise continued to generate strong customer and balance growth, with total deposits reaching a record $1.2 trillion, up $102.1 billion, or 9%, and we grew the number of primary consumer checking customers by 5.7%;
our credit performance continued to be very strong with total net charge-offs down $117 million, or 14%, and represented only 33 basis points (annualized) of average loans; and
we continued to maintain our solid customer relationships across our company, with Retail Banking cross-sell of 6.13 products per household (February 2015); Wholesale Banking cross-sell of 7.2 products (December 2014); and Wealth, Brokerage and Retirement cross-sell of 10.44 products (February 2015).
 
Balance Sheet and Liquidity
Our balance sheet continued to strengthen in first quarter 2015 as we increased our liquidity position, generated core loan and deposit growth, experienced continued improvement in credit quality and maintained strong capital levels. We have been able to grow our loans on a year-over-year basis for 15 consecutive quarters (for the past 12 quarters year-over-year loan growth has been 3% or greater) despite the planned runoff from our non-strategic/liquidating portfolios. Our non-strategic/liquidating loan portfolios decreased $2.2 billion during the quarter and our core loan portfolio increased $914 million. Our investment securities increased by $11.8 billion during the quarter, driven primarily by our purchases of U.S. Treasuries, federal agency mortgage-backed securities (MBS) and municipal securities.
Deposit growth remained strong with period-end deposits up $28.4 billion, or 2%, from December 31, 2014. This increase reflected solid growth across both our commercial and consumer businesses. Our average deposit cost was 9 basis points, consistent with fourth quarter 2014 and down 2 basis points from a year ago. We successfully grew our primary consumer checking customers by 5.7% and primary business checking customers by 5.5% from a year ago (February 2015 compared with February 2014). Our ability to consistently grow primary checking customers is important to our results because these customers have more interactions with us, have higher cross-sell and are more than twice as profitable as non-primary customers.
 


3

Overview (continued)

Credit Quality
Credit quality remained strong in first quarter 2015 as losses remained at historically low levels, nonperforming assets (NPAs) continued to decline, and we continued to originate high quality loans, reflecting our long-term risk focus. Net charge-offs were $708 million, or 0.33% (annualized) of average loans, in first quarter 2015, compared with $825 million a year ago (0.41%), a 14% year-over-year decrease in credit losses. Our commercial portfolio net charge-offs were $44 million, or 4 basis points of average commercial loans. Net consumer credit losses declined to 60 basis points in first quarter 2015 from 75 basis points in first quarter 2014. Our commercial real estate portfolios were in a net recovery position for the ninth consecutive quarter, reflecting our conservative risk discipline and improved market conditions. Losses on our consumer real estate portfolios declined $156 million from a year ago, down 43%, which included a $46 million decline in losses in our core 1-4 family first mortgage portfolio. The lower consumer loss levels reflected the benefit of the improving economy and our continued focus on originating high quality loans. Approximately 61% of the consumer first mortgage portfolio was originated after 2008, when more stringent underwriting standards were implemented.
Our provision for credit losses reflected a release from the allowance for credit losses of $100 million in first quarter 2015, which was $400 million less than what we released a year ago. Future allowance levels may increase or decrease based on a variety of factors, including loan growth, portfolio performance and general economic conditions.
In addition to lower net charge-offs and provision expense, NPAs also improved and were down $618 million, or 4%, from December 31, 2014, the tenth consecutive quarter of decline. Nonaccrual loans declined $338 million from the prior quarter while foreclosed assets were down $280 million.

 
Capital
Our financial performance in first quarter 2015 resulted in strong capital generation, which increased total equity to $190.0 billion at March 31, 2015, up $4.7 billion from the prior quarter. We continued to reduce our common share count through the repurchase of 48.4 million common shares in the quarter. We also entered into a $750 million forward repurchase contract in January 2015 with an unrelated third party that settled in April 2015 for 14.0 million shares. In addition, we entered into another $750 million forward repurchase contract with an unrelated third party in April 2015 that is expected to settle before August 2015 for approximately 14 million shares. We expect to reduce our common shares outstanding through share repurchases throughout the remainder of 2015. In March 2015, the Federal Reserve Board (FRB) announced no objection to our 2015 Capital Plan (the Plan) under the Comprehensive Capital Analysis and Review (CCAR) of the nation's largest banks. The Plan included a proposed increase to our quarterly dividend rate by 7% to $0.375 per common share for second quarter 2015, which was approved by our Board of Directors on April 28, 2015. This result again demonstrates the benefit of our diversified business model and conservative risk discipline, which have positioned us well to return more capital to shareholders while maintaining strong capital levels.
We believe an important measure of our capital strength is the estimated Common Equity Tier 1 ratio under Basel III, using the Advanced Approach, fully phased-in, which increased to 10.48% at March 31, 2015. 
Our regulatory capital ratios under Basel III (Standardized Approach with Transition Requirements) were strong with a total risk-based capital ratio of 15.08%, Tier 1 risk-based capital ratio of 12.20% and Tier 1 leverage ratio of 9.48% at March 31, 2015. See the “Capital Management” section in this Report for more information regarding our capital, including the calculation of common equity for regulatory purposes.



4


Earnings Performance
Wells Fargo net income for first quarter 2015 was $5.8 billion ($1.04 diluted earnings per common share), compared with $5.9 billion ($1.05 diluted per share) for first quarter 2014. Our first quarter 2015 earnings reflected strong execution of our business strategy as we continued to satisfy our customers' financial needs. We generated diversified sources of revenue across many of our businesses and grew loans and deposits.
Revenue, the sum of net interest income and noninterest income, was $21.3 billion in first quarter 2015, compared with $20.6 billion in first quarter 2014. Our diversified sources of revenue generated by our businesses continued to be balanced between net interest income and noninterest income. The increase in revenue for first quarter 2015 compared with the same period in 2014 was primarily due to an increase in net interest income, reflecting increases in interest income from loans and trading assets. In first quarter 2015, net interest income of $11.0 billion represented 52% of revenue, compared with $10.6 billion (51%) in the same period in 2014.
Noninterest income was $10.3 billion in first quarter 2015, representing 48% of revenue, compared with $10.0 billion (49%) in first quarter 2014. The increase was driven predominantly by higher trust and investment fees and card fees, as well as net gains on debt securities, partially offset by lower net gains from equity investments.
Noninterest expense was $12.5 billion in first quarter 2015, compared with $11.9 billion in first quarter 2014. The increase in noninterest expense in first quarter 2015, compared with first quarter 2014, reflected higher personnel expense, including higher commission and incentive compensation. Noninterest expense as a percentage of revenue (efficiency ratio) was 58.8% in first quarter 2015 compared with 57.9% in first quarter 2014.

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 sources of interest income, such as resolutions from purchased credit-impaired (PCI) loans, loan prepayment fees and collection of interest on nonaccrual loans, can vary from period to period. Net interest income growth has been challenged during the prolonged low interest rate environment as higher yielding loans and securities runoff have been replaced with lower yielding assets. The pace of this repricing has slowed in recent quarters.
 
Net interest income on a taxable-equivalent basis was $11.2 billion in the first quarter of 2015, up from $10.8 billion for the same period a year ago. The net interest margin was 2.95% for the first quarter of 2015, down from 3.20% in the same period a year ago. The increase in net interest income in the first quarter of 2015 from the same period a year ago was largely driven by growth in earning assets, including growth in short-term investments, investment securities, commercial and industrial loans, and trading assets, which offset a decrease in earning asset yields. Lower funding expense, due to an increase in noninterest bearing funding sources and reduced deposit and long-term debt costs, also contributed to higher net interest income. The decline in net interest margin in first quarter of 2015, compared with the same period a year ago was primarily driven by higher funding balances, including customer-driven deposit growth and actions we took in 2014 in response to increased regulatory liquidity expectations which raised long- term debt and term deposits. This growth in funding increased cash and federal funds sold and other short-term investments which are dilutive to net interest margin although essentially neutral to net interest income.
Average earning assets increased $169.9 billion in first quarter 2015 from a year ago, as average investment securities increased $49.5 billion and average federal funds sold and other short-term investments increased $62.4 billion for the same period, respectively. In addition, average loans increased $39.5 billion in first quarter 2015, compared with the same period a year ago.
Core deposits are an important low-cost source of funding and affect both net interest income and the net interest margin. Core deposits include noninterest-bearing deposits, interest-bearing checking, savings certificates, market rate and other savings, and certain foreign deposits (Eurodollar sweep balances). Average core deposits rose to $1.1 trillion in first quarter 2015, compared with $973.8 billion in first quarter 2014, and funded 123% of average loans compared with 118% a year ago. Average core deposits decreased to 69% of average earning assets in first quarter 2015, compared with 71% a year ago. The cost of these deposits has continued to decline due to a sustained low interest rate environment and a shift in our deposit mix from higher cost certificates of deposit to lower yielding checking and savings products. About 97% of our average core deposits are in checking and savings deposits, one of the highest industry percentages.




5


Table 1:  Average Balances, Yields and Rates Paid (Taxable-Equivalent Basis) (1)(2)
  
Quarter ended March 31,
 
  
  
 
  
 
2015

 
  
 
  
 
2014

(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
$
275,731

 
0.28
%
 
$
190

 
213,284

 
0.27
%
 
$
144

Trading assets
62,977

 
2.88

 
453

 
48,231

 
3.17

 
381

Investment securities (3): 
 
 
 
 
 
 
 
 
 
 
 
Available-for-sale securities:
 
 
 
 
 
 
 
 
 
 
 
Securities of U.S. Treasury and federal agencies
26,163

 
1.55

 
100

 
6,572

 
1.68

 
28

Securities of U.S. states and political subdivisions
44,948

 
4.20

 
472

 
42,600

 
4.37

 
465

Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
Federal agencies
102,193

 
2.76

 
706

 
117,641

 
2.94

 
864

Residential and commercial
23,938

 
5.71

 
342

 
28,035

 
6.12

 
429

Total mortgage-backed securities
126,131

 
3.32

 
1,048

 
145,676

 
3.55

 
1,293

Other debt and equity securities
47,051

 
3.43

 
400

 
49,156

 
3.59

 
438

Total available-for-sale securities
244,293

 
3.32

 
2,020

 
244,004

 
3.65

 
2,224

Held-to-maturity securities:
 
 
 
 
 
 
 
 
 
 
 
Securities of U.S. Treasury and federal agencies
42,869

 
2.21

 
234

 
1,104

 
2.18

 
6

Securities of U.S. states and political subdivisions
1,948

 
5.16

 
25

 

 

 

Federal agency mortgage-backed securities
11,318

 
1.87

 
53

 
6,162

 
3.11

 
48

Other debt securities
6,792

 
1.72

 
29

 
6,414

 
1.86

 
29

Total held-to-maturity securities
62,927

 
2.19

 
341

 
13,680

 
2.45

 
83

Total investment securities
307,220

 
3.08

 
2,361

 
257,684

 
3.59

 
2,307

Mortgages held for sale (4)
19,583

 
3.61

 
177

 
16,556

 
4.11

 
170

Loans held for sale (4)
700

 
2.67

 
5

 
111

 
6.28

 
2

Loans:
  
 
  
 
  
 
  
 
  
 
  
Commercial:
  
 
  
 
  
 
  
 
  
 
  
Commercial and industrial - U.S.
227,682

 
3.28

 
1,844

 
193,865

 
3.43

 
1,641

Commercial and industrial - Non U.S.

45,062

 
1.88

 
209

 
42,181

 
1.92

 
200

Real estate mortgage
111,497

 
3.57

 
981

 
112,824

 
3.56

 
990

Real estate construction
19,492

 
3.52

 
169

 
17,071

 
4.38

 
184

Lease financing
12,319

 
4.95

 
152

 
12,262

 
6.12

 
188

Total commercial
416,052

 
3.26

 
3,355

 
378,203

 
3.43

 
3,203

Consumer:
  
 
  
 
  
 
  
 
 
 
  
Real estate 1-4 family first mortgage
265,823

 
4.13

 
2,741

 
259,488

 
4.17

 
2,705

Real estate 1-4 family junior lien mortgage
58,880

 
4.27

 
621

 
65,014

 
4.30

 
692

Credit card
30,380

 
11.78

 
883

 
26,283

 
12.32

 
798

Automobile
56,004

 
5.95

 
821

 
51,794

 
6.50

 
831

Other revolving credit and installment
36,122

 
6.01

 
535

 
43,008

 
5.00

 
531

Total consumer
447,209

 
5.05

 
5,601

 
445,587

 
5.02

 
5,557

Total loans (4)
863,261

 
4.19

 
8,956

 
823,790

 
4.29

 
8,760

Other
4,730

 
5.41

 
63

 
4,655

 
5.72

 
66

Total earning assets
$
1,534,202

 
3.21
%
 
$
12,205

 
1,364,311

 
3.49
%
 
$
11,830

Funding sources
 
 
 
 
 
 
 
 
 
 
 
Deposits:
  
 
  
 
  
 
  
 
  
 
  
Interest-bearing checking
$
39,155

 
0.05
%
 
$
5

 
36,799

 
0.07
%
 
$
6

Market rate and other savings
613,413

 
0.06

 
97

 
579,044

 
0.07

 
105

Savings certificates
34,608

 
0.75

 
64

 
40,535

 
0.89

 
89

Other time deposits
56,549

 
0.39

 
56

 
45,822

 
0.42

 
48

Deposits in foreign offices
105,537

 
0.14

 
36

 
91,050

 
0.14

 
31

Total interest-bearing deposits
849,262

 
0.12

 
258

 
793,250

 
0.14

 
279

Short-term borrowings
71,712

 
0.11

 
18

 
54,502

 
0.09

 
13

Long-term debt
183,763

 
1.32

 
604

 
153,793

 
1.62

 
619

Other liabilities
16,894

 
2.30

 
97

 
12,859

 
2.72

 
87

Total interest-bearing liabilities
1,121,631

 
0.35

 
977

 
1,014,404

 
0.40

 
998

Portion of noninterest-bearing funding sources
412,571

 


 

 
349,907

 

 

Total funding sources
$
1,534,202

 
0.26

 
977

 
1,364,311

 
0.29

 
998

Net interest margin and net interest income on
a taxable-equivalent basis (5)
 
 
2.95
%
 
$
11,228

 
 
 
3.20
%
 
$
10,832

Noninterest-earning assets
  
 
  
 
  
 
  
 
  
 
  
Cash and due from banks
$
17,059

 
  
 
  
 
16,363

 
  
 
  
Goodwill
25,705

 
  
 
  
 
25,637

 
  
 
  
Other
130,832

 
 
 
 
 
119,594

 
 
 
 
Total noninterest-earning assets
$
173,596

 
 
 
 
 
161,594

 
 
 
 
Noninterest-bearing funding sources
 
 
 
 
 
 
  
 
 
 
 
Deposits
$
325,531

 
 
 
 
 
284,069

 
 
 
 
Other liabilities
71,988

 
 
 
 
 
52,955

 
 
 
 
Total equity
188,648

 
 
 
 
 
174,477

 
 
 
 
Noninterest-bearing funding sources used to fund earning assets
(412,571
)
 
 
 
 
 
(349,907
)
 
 
 
 
Net noninterest-bearing funding sources
$
173,596

 
 
 
 
 
161,594

 
 
 
 
Total assets
$
1,707,798

 
 
 
 
 
1,525,905

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1)
Our average prime rate was 3.25% for the quarters ended March 31, 2015 and 2014. The average three-month London Interbank Offered Rate (LIBOR) was 0.26% and 0.24% for the quarters ended March 31, 2015 and 2014, respectively.
(2)
Yield/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 $242 million and $217 million for the quarters ended March 31, 2015 and 2014, respectively, primarily related to tax-exempt income on certain loans and securities. The federal statutory tax rate utilized was 35% for the periods presented.

6

Earnings Performance (continued)

Noninterest Income
 
 
Table 2:  Noninterest Income
 
 
 
 
Quarter ended Mar 31,
 
 
 
(in millions)
 
2015

 
2014

 
% Change

Service charges on deposit accounts
 
$
1,215

 
1,215

 
 %
Trust and investment fees:
 
 
 
 
 
 
Brokerage advisory, commissions and other fees
 
2,380

 
2,241

 
6

Trust and investment management
 
852

 
844

 
1

Investment banking
 
445

 
327

 
36

Total trust and investment fees
 
3,677

 
3,412

 
8

Card fees
 
871

 
784

 
11

Other fees:
 
 
 
 
 

Charges and fees on loans
 
309

 
367

 
(16
)
Merchant processing fees
 
187

 
172

 
9

Cash network fees
 
125

 
120

 
4

Commercial real estate brokerage commissions
 
129

 
72

 
79

Letters of credit fees
 
88

 
96

 
(8
)
All other fees
 
240

 
220

 
9

Total other fees
 
1,078


1,047

 
3

Mortgage banking:
 
 
 
 
 

Servicing income, net
 
523

 
938

 
(44
)
Net gains on mortgage loan origination/sales activities
 
1,024

 
572

 
79

Total mortgage banking
 
1,547


1,510

 
2

Insurance
 
430

 
432

 

Net gains from trading activities
 
408

 
432

 
(6
)
Net gains on debt securities
 
278

 
83

 
235

Net gains from equity investments
 
370

 
847

 
(56
)
Lease income
 
132

 
133

 
(1
)
Life insurance investment income
 
145

 
132

 
10

All other
 
141

 
(17
)
 
NM

Total
 
$
10,292


10,010

 
3

NM - Not meaningful

Noninterest income of $10.3 billion represented 48% of revenue for first quarter 2015, compared with $10.0 billion, or 49% for first quarter 2014. The increase in noninterest income reflected growth in many of our businesses, including credit and debit cards, commercial banking, commercial real estate, corporate banking, investment banking, principal investments, asset-backed finance, real estate capital markets, wealth management and retail brokerage.
Service charges on deposit accounts was $1.2 billion in first quarter 2015, unchanged from first quarter 2014. Lower overdraft fees driven by changes implemented in early October 2014 designed to provide customers with more real time information were offset by higher fees from new commercial product sales and commercial product re-pricing.
Brokerage advisory, commissions and other fees are received for providing services to full-service and discount brokerage customers. Income from these brokerage-related activities include asset-based fees, which are based on the market value of the customer’s assets, and transactional commissions based on the number and size of transactions executed at the customer’s direction. These fees increased to $2.4 billion in first quarter 2015 from $2.2 billion for the same period in 2014. The increase in brokerage income was predominantly due to higher asset-based fees as a result of higher market values and growth in assets under management. Retail brokerage client assets totaled $1.44 trillion at March 31, 2015, up 4% from $1.38 trillion at March 31, 2014.
 
We earn trust and investment management fees from managing and administering assets, including mutual funds, corporate trust, personal trust, employee benefit trust and agency assets. Trust and investment management fees are largely based on a tiered scale relative to the market value of the assets under management or administration. These fees increased to $852 million in first quarter 2015 from $844 million for the same period in 2014, with growth primarily due to higher market values. At March 31, 2015, these assets totaled $2.5 trillion, an increase from $2.4 trillion at March 31, 2014.
We earn investment banking fees from underwriting debt and equity securities, arranging loan syndications, and performing other related advisory services. Investment banking fees increased to $445 million in first quarter 2015 from $327 million for the same period in 2014, driven by advisory services and broad based equity and debt origination performance in an active domestic market.
Card fees were $871 million in first quarter 2015, compared with $784 million from the same period a year ago. The increase was primarily due to account growth and increased purchase activity.
Other fees of $1.1 billion in first quarter 2015 increased $31 million compared with the same period a year ago as increases in commercial real estate brokerage commissions and merchant processing fees more than offset a decline in charges and fees on loans. Charges and fees on loans decreased to $309 million in first quarter 2015 compared with $367 million


7


for the same period a year ago primarily due to the phase out of the direct deposit advance product during the first half of 2014. Commercial real estate brokerage commissions increased by $57 million in first quarter 2015 compared with the same period a year ago, driven by increased sales and other property-related activities including financing and advisory services.
Mortgage banking noninterest income, consisting of net servicing income and net gains on loan origination/sales activities, totaled $1.5 billion in first quarter 2015, unchanged from first quarter 2014.
In addition to servicing fees, net mortgage loan servicing income includes amortization of commercial mortgage servicing rights (MSRs), changes in the fair value of residential MSRs during the period, as well as changes in the value of derivatives (economic hedges) used to hedge the residential MSRs. Net servicing income for first quarter 2015 included a $108 million net MSR valuation gain ($773 million decrease in the fair value of the MSRs and a $881 million hedge gain) and for first quarter 2014 included a $407 million net MSR valuation gain ($441 million decrease in the fair value of the MSRs offset by an $848 million hedge gain). The decrease in net MSR valuation gains in first quarter 2015, compared with the same period in 2014, was primarily attributable to MSR valuation adjustments in first quarter 2015 that reflected higher prepayment expectations due to the reduction in FHA mortgage insurance premiums as well as overall lower actual prepayments in first quarter of 2014.
Our portfolio of residential and commercial loans serviced for others was $1.84 trillion at March 31, 2015, and $1.86 trillion at December 31, 2014. At March 31, 2015, the ratio of combined residential and commercial MSRs to related loans serviced for others was 0.71%, compared with 0.75% at December 31, 2014. See the “Risk Management – Mortgage Banking Interest Rate and Market Risk” section of this Report for additional information regarding our MSRs risks and hedging approach.
Net gains on mortgage loan origination/sale activities were $1.0 billion in first quarter 2015, up from $572 million for the same period a year ago. The increase in first quarter 2015, compared with the same period a year ago, was primarily driven by increased origination volumes and margins. Mortgage loan originations were $49.0 billion for first quarter 2015, of which 45% were for home purchases, compared with $36 billion and 66% for the same period a year ago. The year-over-year increase was primarily driven by lower mortgage interest rates. Mortgage applications were $93 billion in first quarter 2015 compared with $60 billion for the same period a year ago. The real estate 1-4 family first mortgage unclosed pipeline was $44 billion at March 31, 2015, its highest level since June 30, 2013, compared with $27 billion at March 31, 2014. For additional information about our mortgage banking activities and results, see the “Risk Management – Mortgage Banking Interest Rate and Market Risk” section and Note 8 (Mortgage Banking Activities) and Note 13 (Fair Values of Assets and Liabilities) to Financial Statements in this Report.
Net gains on mortgage loan origination/sales activities include adjustments to the mortgage repurchase liability. Mortgage loans are repurchased from third parties based on standard representations and warranties, and early payment default clauses in mortgage sale contracts. For the first quarter of 2015, we released a net $16 million from the repurchase liability, compared with a provision of $6 million for the first quarter of 2014. For additional information about mortgage loan repurchases, see the “Risk Management – Credit Risk Management – Liability for Mortgage Loan Repurchase Losses” section and Note 8 (Mortgage Banking Activities) to Financial Statements in this Report.
 
We engage in trading activities primarily to accommodate the investment activities of our customers, execute economic hedging to manage certain of our balance sheet risks and for a very limited amount of proprietary trading for our own account. Net gains from trading activities, which reflect unrealized changes in fair value of our trading positions and realized gains and losses, were $408 million in first quarter 2015 compared with $432 million for the same period a year ago. The first quarter year-over-year decrease was primarily driven by lower customer accommodation trading within our capital markets business partly offset by higher deferred compensation gains (offset in employee benefits expense).
Net gains from trading activities do not include interest and dividend income and expense on trading securities. Those amounts are reported within interest income from trading assets and other interest expense from trading liabilities. Interest and fees related to proprietary trading are reported in their corresponding income statement line items. Proprietary trading activities are not significant to our client-focused business model. For additional information about proprietary and other trading, see the “Risk Management – Asset and Liability Management – Market Risk – Trading Activities” section in this Report. 
Net gains on debt and equity securities totaled $648 million for first quarter 2015 and $930 million for first quarter 2014, net of other-than-temporary impairment (OTTI) write-downs of $73 million and $135 million for first quarter 2015 and 2014, respectively. The decrease in net gains on debt and equity securities was primarily due to lower net gains from equity investments as our portfolio benefited from strong public and private equity markets in first quarter 2014.
All other income was $141 million in first quarter 2015, compared with $(17) million for the same period a year ago. All other income includes ineffectiveness recognized on derivatives that qualify for hedge accounting, losses on low income housing tax credit investments, foreign currency adjustments, and income from investments accounted for under the equity method of accounting, any of which can cause decreases and net losses in other income. Higher other income for first quarter 2015, compared with the same period a year ago, reflected higher income from equity method investments and larger ineffectiveness gains on derivatives that qualify for hedge accounting.



8

Earnings Performance (continued)

Noninterest Expense
 
 
 
 
 
Table 3:  Noninterest Expense
 
Quarter ended Mar 31,
 
 
 
(in millions)
2015

 
2014

 
% Change

Salaries
$
3,851

 
3,728

 
3
 %
Commission and incentive compensation
2,685

 
2,416

 
11

Employee benefits
1,477

 
1,372

 
8

Equipment
494

 
490

 
1

Net occupancy
723

 
742

 
(3
)
Core deposit and other intangibles
312

 
341

 
(9
)
FDIC and other deposit assessments
248

 
243

 
2

Outside professional services
548

 
559

 
(2
)
Operating losses
295

 
159

 
86

Outside data processing
253

 
241

 
5

Contract services
225

 
234

 
(4
)
Travel and entertainment
158

 
219

 
(28
)
Postage, stationery and supplies
171

 
191

 
(11
)
Advertising and promotion
118

 
118

 

Foreclosed assets
135

 
132

 
2

Telecommunications
111

 
114

 
(2
)
Insurance
140

 
125

 
12

Operating leases
62

 
50

 
25

All other
501

 
474

 
6

Total
$
12,507

 
11,948

 
5


Noninterest expense was $12.5 billion in first quarter 2015, up 5% from $11.9 billion in the same period a year ago, driven predominantly by higher personnel expenses ($8.0 billion, up from $7.5 billion a year ago) and higher operating losses ($295 million, up from $159 million a year ago). These increases were partially offset by lower travel and entertainment expense ($158 million, down from $219 million a year ago).
Personnel expenses, which include salaries, commissions, incentive compensation and employee benefits, were up $497 million, or 7%, in first quarter 2015 compared with the same quarter last year, largely due to higher revenue-related compensation, annual salary increases, higher deferred compensation (offset in trading income) and other benefits.
Operating losses were up $136 million, or 86%, in first quarter 2015 compared with the same period a year ago, primarily reflecting higher litigation accruals.
 
Travel and entertainment expenses were down $61 million, or 28%, in first quarter 2015 compared with the same period in 2014, primarily driven by travel expense reduction initiatives.
The efficiency ratio was 58.8% in first quarter 2015, compared with 57.9% in first quarter 2014. The Company expects to operate within its targeted efficiency ratio range of 55 to 59% for full year 2015.

Income Tax Expense
Our effective tax rate was 28.2% and 27.9% for first quarter 2015 and 2014, respectively. The effective tax rates for first quarter 2015 and 2014 reflected $359 million and $423 million, respectively, of discrete tax benefits primarily from reductions in reserves for uncertain tax positions due to audit resolutions of prior period matters with U.S. federal and state taxing authorities. Absent additional discrete tax benefits in 2015, we expect the effective income tax rate for full year 2015 to be higher than the effective tax rate for first quarter 2015.



9


Operating Segment Results
We are organized for management reporting purposes into three operating segments: Community Banking; Wholesale Banking; and Wealth, Brokerage and Retirement. These segments are defined by product type and customer segment and their results are based on our management accounting process, for which there is no comprehensive, authoritative financial accounting
 
guidance equivalent to generally accepted accounting principles (GAAP). Table 4 and the following discussion present our results by operating segment. For additional description of our operating segments, including additional financial information and the underlying management accounting process, see Note 18 (Operating Segments) to Financial Statements in this Report.
 


Table 4:  Operating Segment Results – Highlights
(income/expense in millions,
 
Community Banking
 
 
Wholesale Banking
 
 
Wealth, Brokerage
and Retirement
 
 
Other (1)
 
 
Consolidated
Company
 
average balances in billions)
 
2015

 
2014

 
2015

 
2014

 
2015

 
2014

 
2015

 
2014

 
2015

 
2014

Quarter ended March 31,
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue
 
$
12,784

 
12,593

 
5,912

 
5,580

 
3,733

 
3,468

 
(1,151
)
 
(1,016
)
 
21,278

 
20,625

Provision (reversal of provision) for credit losses
 
617

 
419

 
(6
)
 
(93
)
 
(3
)
 
(8
)
 

 
7

 
608

 
325

Noninterest expense
 
7,064

 
6,774

 
3,409

 
3,215

 
2,831

 
2,711

 
(797
)
 
(752
)
 
12,507

 
11,948

Net income (loss)
 
3,665

 
3,844

 
1,797

 
1,742

 
561

 
475

 
(219
)
 
(168
)
 
5,804

 
5,893

Average loans
 
$
506.4

 
505.0

 
337.6

 
301.9

 
56.9

 
50.0

 
(37.6
)
 
(33.1
)
 
863.3

 
823.8

Average core deposits
 
668.9

 
626.5

 
303.4

 
259.0

 
161.4

 
156.0

 
(70.5
)
 
(67.7
)
 
1,063.2

 
973.8

(1)
Includes corporate items not specific to a business segment and the elimination of certain items that are included in more than one business segment, substantially all of which represents products and services for wealth management customers provided in Community Banking stores.

Cross-sell Our cross-sell strategy is to increase the number of products our customers use by offering them all of the financial products that satisfy their financial needs. We track our cross-sell activities based on whether the customer is a retail banking household or has a wholesale banking relationship. For additional information regarding our cross-sell metrics, see the "Earnings Performance – Operating Segments – Cross-sell" section in our 2014 Form 10-K.

 
Operating Segment Results
The following discussion provides a description of each of our operating segments, including cross-sell metrics and financial results.

Community Banking offers a complete line of diversified financial products and services for consumers and small businesses including checking and savings accounts, credit and debit cards, and auto, student, and small business lending. These products also include investment, insurance and trust services in 39 states and D.C., and mortgage and home equity loans in all 50 states and D.C. through its Regional Banking and Wells Fargo Home Lending business units. The Community Banking segment also includes the results of our Corporate Treasury activities net of allocations in support of the other operating segments and results of investments in our affiliated venture capital partnerships. Our retail banking household cross-sell was 6.13 products per household in February 2015, compared with 6.17 in February 2014. The February 2015 retail banking household cross-sell ratio includes the impact of the sale of government guaranteed student loans in fourth quarter 2014. Our goal of eight products per retail banking household equates to approximately one-half of our estimate of potential demand for an average U.S. household. We believe there is continued opportunity to earn more business from our customers as we build lifelong relationships with them. Our approach is needs-based – some customers will benefit from more than eight products, some may need less, but on average our goal is to have eight products per retail banking household. In February 2015, one of every four of our retail banking households had eight or more of our products. Table 4a provides additional financial information for Community Banking.


10

Earnings Performance (continued)

Table 4a - Community Banking
 
 
 
 
 
 
Quarter ended March 31,
 
 
 
(in millions, except average balances which are in billions)
2015

 
2014

 
% Change

Net interest income
$
7,561

 
7,275

 
4
 %
Noninterest income:
 
 
 
 
 
Service charges on deposit accounts
772

 
817

 
(6
)
Trust and investment fees:
 
 
 
 

Brokerage advisory, commissions and other fees
506

 
433

 
17

Trust and investment management
214

 
199

 
8

Investment banking (1)
(36
)
 
(7
)
 
414

Total trust and investment fees
684

 
625

 
9

Card fees
802

 
721

 
11

Other fees
551

 
593

 
(7
)
Mortgage banking
1,435

 
1,424

 
1

Insurance
31

 
32

 
(3
)
Net gains from trading activities
83

 
36

 
131

Net gains on debt securities
206

 
10

 
NM

Net gains from equity investments (2)
290

 
755

 
(62
)
Other income of the segment
369

 
305

 
21

Total noninterest income
5,223

 
5,318

 
(2
)
 
 
 
 
 

Total revenue
12,784

 
12,593

 
2

 
 
 
 
 

Provision for credit losses
617

 
419

 
47

Noninterest expense:
 
 
 
 

Personnel expense
4,548

 
4,259

 
7

Equipment
436

 
420

 
4

Net occupancy
534

 
555

 
(4
)
Core deposit and other intangibles
146

 
158

 
(8
)
FDIC and other deposit assessments
147

 
152

 
(3
)
Outside professional services
207

 
224

 
(8
)
Operating losses
230

 
119

 
93

Other expense of the segment
816

 
887

 
(8
)
Total noninterest expense
7,064

 
6,774

 
4

Income before income tax expense and noncontrolling interests
5,103

 
5,400

 
(6
)
Income tax expense
1,364

 
1,376

 
(1
)
Net income from noncontrolling interests (3)
74

 
180

 
(59
)
Net income
$
3,665

 
3,844

 
(5
)
Average loans
$
506.4

 
505.0

 

Average core deposits
668.9

 
626.5

 
7

NM - Not meaningful
(1)
Represents syndication and underwriting fees paid to Wells Fargo Securities which are offset in our Wholesale Banking segment.
(2)
Predominantly represents gains resulting from venture capital investments.
(3)
Reflects results attributable to noncontrolling interests primarily associated with the Company’s consolidated merchant services joint venture and venture capital investments.

Community Banking reported net income of $3.7 billion in first quarter 2015, down $179 million, or 5%, from first quarter 2014. Revenue of $12.8 billion increased $191 million, or 2%, from a year ago primarily due to higher net interest income, gains on sale of debt securities, and higher card fees and trust and investment fees, partially offset by lower gains on equity investments and lower service charges on deposit accounts. Average core deposits increased $42.4 billion, or 7%, from first quarter 2014. Primary consumer checking customers as of February 2015 (customers who actively use their checking account with transactions such as debit card purchases, online bill payments, and direct deposit) were up 5.7% from February 2014. Noninterest expense increased $290 million, or 4%, from first quarter 2014, driven by higher personnel expenses and operating losses, partially offset by lower travel, occupancy, and
 
other expenses. Net charge-offs decreased $172 million from first quarter 2014 primarily due to credit improvement in consumer real estate loan portfolios. The provision for credit losses was $198 million higher than first quarter 2014 as the improvement in net charge-offs was more than offset by a lower allowance release.

Wholesale Banking provides financial solutions to businesses across the United States and globally with annual sales generally in excess of $20 million. Products and business segments include Middle Market Commercial Banking, Government and Institutional Banking, Corporate Banking, Commercial Real Estate, Treasury Management, Wells Fargo Capital Finance, Insurance, International, Real Estate Capital Markets, Commercial Mortgage Servicing, Corporate Trust, Equipment


11


Finance, Wells Fargo Securities, Principal Investments, Asset Backed Finance, and Asset Management. Wholesale Banking cross-sell was 7.2 products per relationship in first quarter 2015, consistent with the first quarter of 2014. Table 4b provides additional financial information for Wholesale Banking.
 


Table 4b - Wholesale Banking
 
 
 
 
 
 
Quarter ended March 31,
 
 
 
(in millions, except average balances which are in billions)
2015

 
2014

 
% Change

Net interest income
$
2,921

 
2,891

 
1
 %
Noninterest income:
 
 
 
 
 
Service charges on deposit accounts
443

 
398

 
11

Trust and investment fees:
 
 
 
 

Brokerage advisory, commissions and other fees
85

 
76

 
12

Trust and investment management
453

 
460

 
(2
)
Investment banking
484

 
337

 
44

Total trust and investment fees
1,022

 
873

 
17

Card fees
69

 
62

 
11

Other fees
526

 
453

 
16

Mortgage banking
113

 
86

 
31

Insurance
344

 
361

 
(5
)
Net gains from trading activities
283

 
360

 
(21
)
Net gains on debt securities
61

 
69

 
(12
)
Net gains from equity investments
77

 
88

 
(13
)
Other income of the segment
53

 
(61
)
 
NM

Total noninterest income
2,991

 
2,689

 
11

 
 
 
 
 

Total revenue
5,912

 
5,580

 
6

 
 
 
 
 

Reversal of provision for credit losses
(6
)
 
(93
)
 
(94
)
Noninterest expense:
 
 
 
 

Personnel expense
1,951

 
1,790

 
9

Equipment
47

 
60

 
(22
)
Net occupancy
113

 
111

 
2

Core deposit and other intangibles
85

 
96

 
(11
)
FDIC and other deposit assessments
79

 
70

 
13

Outside professional services
236

 
243

 
(3
)
Operating losses
37

 
19

 
95

Other expense of the segment
861

 
826

 
4

Total noninterest expense
3,409

 
3,215

 
6

Income before income tax expense and noncontrolling interests
2,509

 
2,458

 
2

Income tax expense
706

 
714

 
(1
)
Net income from noncontrolling interests
6

 
2

 
200

Net income
$
1,797

 
1,742

 
3

Average loans
$
337.6

 
301.9

 
12

Average core deposits
303.4

 
259.0

 
17

NM - Not meaningful

Wholesale Banking reported net income of $1.8 billion, up $55 million, or 3%, from first quarter 2014 driven by revenue growth. Revenue grew $332 million, or 6%, from first quarter 2014 on both increased net interest income and noninterest income. Net interest income increased $30 million, or 1%, driven by loan and other earning asset growth. Noninterest income increased $302 million, or 11%, on increased investment banking, commercial real estate brokerage, treasury management, foreign exchange and loan fees, and improved mortgage banking activity and earnings on nonmarketable equity investments. Average loans of $337.6 billion increased $35.7 billion, or 12%, from first quarter 2014, driven by growth in asset backed finance, capital
 
finance, commercial banking, commercial real estate, corporate banking, equipment finance, government and institutional banking and real estate capital markets. Average core deposits of $303.4 billion increased $44.4 billion, or 17%, from first quarter 2014 reflecting continued strong customer liquidity. Noninterest expense increased $194 million, or 6%, from first quarter 2014 due primarily to higher personnel expenses related to growth initiatives, compliance, and regulatory requirements. The provision for credit losses increased $87 million from first quarter 2014 due primarily to lower recoveries.


12

Earnings Performance (continued)

Wealth, Brokerage and Retirement provides a full range of financial advisory services to clients using a planning approach to meet each client's financial needs. Wealth Management provides affluent and high net worth clients with a complete range of wealth management solutions, including financial planning, private banking, credit, investment management and fiduciary services. Abbot Downing, a Wells Fargo business, provides comprehensive wealth management services to ultra-high net worth families and individuals as well as endowments and foundations. Brokerage serves customers' advisory, brokerage and financial needs as part of one of the largest full-service
 
brokerage firms in the United States. Retirement is a national leader in providing retirement and trust services (including 401(k) and pension plan record keeping) for institutional clients and reinsurance services for the life insurance industry. Wealth, Brokerage and Retirement cross-sell was 10.44 products per retail banking household in February 2015, up from 10.42 a year ago. Table 4c provides additional financial information for Wealth, Brokerage and Retirement.



Table 4c - Wealth, Brokerage and Retirement
 
 
 
 
 
 
Quarter ended March 31,
 
 
 
(in millions, except average balances which are in billions)
2015

 
2014

 
% Change

Net interest income
$
861

 
768

 
12
 %
Noninterest income:
 
 
 
 
 
Service charges on deposit accounts
4

 
4

 

Trust and investment fees:
 
 
 
 
 
Brokerage advisory, commissions and other fees
2,294

 
2,164

 
6

Trust and investment management
407

 
392

 
4

Investment banking (1)
(3
)
 
(3
)
 

Total trust and investment fees
2,698

 
2,553

 
6

Card fees
1

 
1

 

Other fees
4

 
4

 

Mortgage banking
(2
)
 
(1
)
 
100

Insurance
55

 
39

 
41

Net gains from trading activities
42

 
36

 
17

Net gains on debt securities
11

 
4

 
175

Net gains from equity investments
3

 
4

 
(25
)
Other income of the segment
56

 
56

 

Total noninterest income
2,872

 
2,700

 
6

 
 
 
 
 
 
Total revenue
3,733

 
3,468

 
8

 
 
 
 
 
 
Reversal of provision for credit losses
(3
)
 
(8
)
 
(63
)
Noninterest expense:
 
 
 
 
 
Personnel expense
1,932

 
1,847

 
5

Equipment
12

 
11

 
9

Net occupancy
105

 
103

 
2

Core deposit and other intangibles
81

 
87

 
(7
)
FDIC and other deposit assessments
37

 
35

 
6

Outside professional services
112

 
100

 
12

Operating losses
30

 
24

 
25

Other expense of the segment
522

 
504

 
4

Total noninterest expense
2,831

 
2,711

 
4

Income before income tax expense and noncontrolling interests
905

 
765

 
18

Income tax expense
344

 
290

 
19

Net income from noncontrolling interests

 

 

Net income
$
561

 
475

 
18

Average loans
$
56.9

 
50.0

 
14

Average core deposits
161.4

 
156.0

 
3

(1)
Represents syndication and underwriting fees paid to Wells Fargo Securities which are offset in our Wholesale Banking segment.

Wealth, Brokerage and Retirement reported net income of $561 million in first quarter 2015, up 18% from first quarter 2014 driven by higher net interest income and noninterest income. Revenue of $3.7 billion in first quarter 2015 was up 8% from first quarter 2014, predominantly due to strong growth in asset-based
 
fees and higher net interest income primarily driven by growth in investment and loan portfolios. Noninterest expense increased 4% from first quarter 2014, primarily due to brokerage volume-based expenses and higher other expenses. Total provision for credit losses increased $5 million from first quarter 2014. 


13


Balance Sheet Analysis 
At March 31, 2015, our assets totaled $1.7 trillion, up $50.6 billion from December 31, 2014. The predominant areas of asset growth were in federal funds sold and other short-term investments, which increased $32.9 billion, investment securities, which increased $11.8 billion, and mortgages held for sale, which increased $4.1 billion. Deposit growth of $28.4 billion, an increase in short-term borrowings of $14.2 billion, and total equity growth of $4.7 billion from December 31, 2014, were the predominant sources that funded our asset growth in first quarter 2015. Equity growth benefited from $3.6 billion in
 
earnings net of dividends paid. The strength of our business model produced solid earnings and continued internal capital generation.
The following discussion provides additional information about the major components of our balance sheet. Information regarding our capital and changes in our asset mix is included in the “Earnings Performance – Net Interest Income” and “Capital Management” sections and Note 19 (Regulatory and Agency Capital Requirements) to Financial Statements in this Report.
 


Investment Securities
 
Table 5:  Investment Securities – Summary
 
March 31, 2015
 
 
December 31, 2014
 
(in millions)
Amortized Cost

 
Net
 unrealized
gain

 
Fair value

 
Amortized Cost

 
Net
unrealized
gain

 
Fair value

Available-for-sale securities:
 
 
 
 
 
 
 
 
 
 
 
Debt securities
$
247,757

 
6,342

 
254,099

 
247,747

 
6,019

 
253,766

Marketable equity securities
1,919

 
1,585

 
3,504

 
1,906

 
1,770

 
3,676

Total available-for-sale securities
249,676

 
7,927

 
257,603

 
249,653

 
7,789

 
257,442

Held-to-maturity debt securities
67,133

 
1,648

 
68,781

 
55,483

 
876

 
56,359

Total investment securities (1)
$
316,809

 
9,575

 
326,384

 
305,136

 
8,665

 
313,801

(1)
Available-for-sale securities are carried on the balance sheet at fair value. Held-to-maturity securities are carried on the balance sheet at amortized cost.

Table 5 presents a summary of our investment securities portfolio, which increased $11.8 billion from December 31, 2014, predominantly due to purchases of U.S. Treasury securities and Federal agency mortgage-backed securities. The total net unrealized gains on available-for-sale securities were $7.9 billion at March 31, 2015, up from $7.8 billion at December 31, 2014, due primarily to a decrease in long-term interest rates. For a discussion of our investment management objectives and practices, see the "Balance Sheet Analysis" section of our 2014 Form 10-K. Also, see the “Risk Management - Asset/Liability Management” section in this Report for information on our use of investments to manage liquidity and interest rate risk.
We analyze securities for other-than-temporary impairment (OTTI) quarterly or more often if a potential loss-triggering event occurs. Of the $73 million in OTTI write-downs recognized in earnings in first quarter 2015, $31 million related to debt securities and $42 million related to nonmarketable equity investments, which are included in other assets. For a discussion of our OTTI accounting policies and underlying considerations and analysis see Note 1 (Summary of Significant Accounting Policies) to Financial Statements in our 2014 Form 10-K and Note 4 (Investment Securities) to Financial Statements in this Report.
At March 31, 2015, investment securities included $49.5 billion of municipal bonds, of which 92.1% were rated “A-” or better based predominantly on external and, in some cases, internal ratings. Additionally, some of the securities in our total municipal bond portfolio are guaranteed against loss by bond insurers. These guaranteed bonds are substantially all investment grade and were generally underwritten in accordance with our own investment standards prior to the determination to purchase, without relying on the bond insurer’s guarantee in
 
making the investment decision. Our municipal bond holdings are monitored as part of our ongoing impairment analysis.
The weighted-average expected maturity of debt securities available-for-sale was 6.0 years at March 31, 2015. Because 50% of this portfolio is MBS, the expected remaining maturity is shorter than the remaining contractual maturity because borrowers generally have the right to prepay obligations before the underlying mortgages mature. The estimated effects of a 200 basis point increase or decrease in interest rates on the fair value and the expected remaining maturity of the MBS available-for-sale portfolio are shown in Table 6.
Table 6:  Mortgage-Backed Securities
(in billions)
Fair value

 
Net unrealized gain (loss)

 
Expected remaining maturity
(in years)
At March 31, 2015
 
 
 
&