10-Q 1 wfc-06302015x10q.htm 10-Q WFC-06.30.2015-10Q


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 June 30, 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
 
 
July 31, 2015
Common stock, $1-2/3 par value
 
5,133,359,268
          




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
 
 
June 30, 2015 from
 
 
Six months ended
 
 
  

($ in millions, except per share amounts)
June 30,
2015

 
March 31,
2015

 
June 30,
2014

 
March 31,
2015

 
June 30,
2014

 
June 30,
2015


June 30,
2014

 
%
Change

For the Period
 
 
 
 
 
 
 
 
 
 
  
 
  
 
  
Wells Fargo net income
$
5,719

 
5,804

 
5,726

 
(1
)%
 

 
11,523

 
11,619

 
(1
)%
Wells Fargo net income applicable to common stock
5,363

 
5,461

 
5,424

 
(2
)
 
(1
)
 
10,824

 
11,031

 
(2
)
Diluted earnings per common share
1.03

 
1.04

 
1.01

 
(1
)
 
2

 
2.07

 
2.06

 

Profitability ratios (annualized):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Wells Fargo net income to average assets (ROA)
1.33
%
 
1.38

 
1.47

 
(4
)
 
(10
)
 
1.35

 
1.52

 
(11
)
Wells Fargo net income applicable to common stock to average Wells Fargo common stockholders' equity (ROE)
12.71

 
13.17

 
13.40

 
(3
)
 
(5
)
 
12.94

 
13.86

 
(7
)
Efficiency ratio (1)
58.5

 
58.8

 
57.9

 
(1
)
 
1

 
58.6

 
57.9

 
1

Total revenue
21,318

 
21,278

 
21,066

 

 
1

 
42,596

 
41,691

 
2

Pre-tax pre-provision profit (PTPP) (2)
8,849

 
8,771

 
8,872

 
1

 

 
17,620

 
17,549

 

Dividends declared per common share
0.375

 
0.35

 
0.35

 
7

 
7

 
0.725

 
0.65

 
12

Average common shares outstanding
5,151.9

 
5,160.4

 
5,268.4

 

 
(2
)
 
5,156.1

 
5,265.6

 
(2
)
Diluted average common shares outstanding
5,220.5

 
5,243.6

 
5,350.8

 

 
(2
)
 
5,233.2

 
5,353.2

 
(2
)
Average loans
$
870,446

 
863,261

 
831,043

 
1

 
5

 
866,873

 
827,436

 
5

Average assets
1,729,278

 
1,707,798

 
1,564,003

 
1

 
11

 
1,718,597

 
1,545,060

 
11

Average core deposits (3)
1,079,160

 
1,063,234

 
991,727

 
1

 
9

 
1,071,241

 
982,814

 
9

Average retail core deposits (4)
741,500

 
731,413

 
698,763

 
1

 
6

 
736,484

 
694,726

 
6

Net interest margin
2.97
%
 
2.95

 
3.15

 
1

 
(6
)
 
2.96

 
3.17

 
(7
)
At Period End
 
 
 
 
 
 
 
 
 
 
  
 
  
 
  
Investment securities
$
340,769

 
324,736

 
279,069

 
5

 
22

 
340,769

 
279,069

 
22

Loans
888,459

 
861,231

 
828,942

 
3

 
7

 
888,459

 
828,942

 
7

Allowance for loan losses
11,754

 
12,176

 
13,101

 
(3
)
 
(10
)
 
11,754

 
13,101

 
(10
)
Goodwill
25,705

 
25,705

 
25,705

 

 

 
25,705

 
25,705

 

Assets
1,720,617

 
1,737,737

 
1,598,874

 
(1
)
 
8

 
1,720,617

 
1,598,874

 
8

Core deposits (3)
1,082,634

 
1,086,993

 
1,007,485

 

 
7

 
1,082,634

 
1,007,485

 
7

Wells Fargo stockholders' equity
189,558

 
188,796

 
180,859

 

 
5

 
189,558

 
180,859

 
5

Total equity
190,676

 
189,964

 
181,549

 

 
5

 
190,676

 
181,549

 
5

Capital ratios (5)(6):
 
 
 
 
 
 
 
 
 
 
  
 
  
 
  
Total equity to assets
11.08
%
 
10.93

 
11.35

 
1

 
(2
)
 
11.08

 
11.35

 
(2
)
Risk-based capital:
 
 
 
 
 
 
 
 
 
 
  
 
  
 
  
Common Equity Tier 1
10.78

 
10.69

 
11.31

 
NM

 
NM

 
10.78

 
11.31

 
NM

Tier 1 capital
12.28

 
12.20

 
12.72

 
NM

 
NM

 
12.28

 
12.72

 
NM

Total capital
14.45

 
15.08

 
15.89

 
NM

 
NM

 
14.45

 
15.89

 
NM

Tier 1 leverage
9.45

 
9.48

 
9.86

 
NM

 
NM

 
9.45

 
9.86

 
NM

Common shares outstanding
5,145.2

 
5,162.9

 
5,249.9

 

 
(2
)
 
5,145.2

 
5,249.9

 
(2
)
Book value per common share
$
32.96

 
32.70

 
31.18

 
1

 
6

 
32.96

 
31.18

 
6

Common stock price:
 
 
 
 
 
 
 
 
 
 
  
 
  
 
  
High
58.26

 
56.29

 
53.05

 
3

 
10

 
58.26

 
53.05

 
10

Low
53.56

 
50.42

 
46.72

 
6

 
15

 
50.42

 
44.17

 
14

Period end
56.24

 
54.40

 
52.56

 
3

 
7

 
56.24

 
52.56

 
7

Team members (active, full-time equivalent)
265,800

 
266,000

 
263,500

 

 
1

 
265,800

 
263,500

 
1

NM - Not meaningful
(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)
The risk-based capital ratios presented were calculated: (a) under the Basel III Standardized Approach with Transition Requirements at June 30 and March 31, 2015, except for total capital ratio at June 30, 2015, which was calculated under the Basel III Advanced Approach with Transition Requirements, and (b) under the Basel III General Approach at June 30, 2014.
(6)
See the "Capital Management" section and Note 19 (Regulatory and Agency Capital Requirements) to Financial Statements in this Report for additional information.



2

Overview (continued)

This Quarterly Report, including the Financial Review and the Financial Statements and related Notes, contains forward-looking statements, which may include forecasts of our financial results and condition, expectations for our operations and business, and our assumptions for those forecasts and expectations. Do not unduly rely on forward-looking statements. Actual results may differ materially from our forward-looking statements due to several factors. Factors that could cause our actual results to differ materially from our forward-looking statements are described in this Report, including in the “Forward-Looking Statements” section, and the “Risk Factors” and “Regulation and Supervision” sections of our Annual Report on Form 10-K for the year ended December 31, 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 8,700 locations, 12,800 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. 30 on Fortune’s 2015 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 June 30, 2015.
We use our Vision and Values to guide us toward growth and success. Our vision is to satisfy our customers’ financial needs, help them succeed financially, be recognized as the premier financial services company in our markets and be one of America’s great companies. Important to our strategy to achieve this vision is to increase the number of our products our customers use 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 $5.7 billion in second quarter 2015 with diluted earnings per share (EPS) of $1.03, compared with $5.7 billion and $1.01, respectively, a year ago. Our results
 
reflected the benefit of our diversified business model, and our financial strength and competitive positioning allowed us to capture opportunities for growth - both organically and through acquisitions.
Compared with a year ago:
revenue grew 1%, with 4% growth in net interest income;
our total loans reached a record $888.5 billion, an increase of $59.5 billion, or 7%, even with the planned runoff in our non-strategic/liquidating portfolios, and our core loan portfolio grew by $68.5 billion, or 9%; 
our liquidating portfolio declined $9.0 billion and was only 6% of our total loans, down from 8% a year ago;
our deposit franchise continued to generate strong customer and balance growth, with average deposits up $83.8 billion, or 8%, and we grew the number of primary consumer checking customers by 5.6% (May 2015 compared with May 2014);
our credit performance continued to improve with total net charge-offs down $67 million, or 9%, and represented only 30 basis points (annualized) of average loans; and
we increased the quarterly dividend rate on our common stock by 7% to $0.375 per share.
 
Balance Sheet and Liquidity
Our balance sheet continued to strengthen in second 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 16 consecutive quarters (for the past 13 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 $29.4 billion, which included $11.5 billion from the GE Capital loan purchase and associated financing transaction announced in first quarter 2015. Our investment securities increased by $16.0 billion during the quarter, driven primarily by purchases of federal agency mortgage-backed securities (MBS), U.S. Treasuries, and municipal securities, which were partially offset by maturities, amortization and sales.
Deposit growth continued in second quarter 2015 with period-end deposits up $17.5 billion, or 1%, from December 31, 2014. This increase reflected growth across both our commercial and consumer businesses. Our average deposit cost was 8 basis points, down 2 basis points from a year ago. We successfully grew our primary consumer checking customers (i.e., customers who actively use their checking account with transactions such as debit card purchases, online bill payments, and direct deposit) by 5.6% and primary business checking customers by 5.3% from a year ago (May 2015 compared with May 2014). Our ability to consistently grow primary checking customers is important to our results because these customers have more interactions with


3

Overview (continued)

us and are more than twice as profitable as non-primary customers.
 
Credit Quality
Credit quality improved in second 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 $650 million, or 0.30% (annualized) of average loans, in second quarter 2015, compared with $717 million a year ago (0.35%), a 9% year-over-year decrease in credit losses. Our commercial portfolio net charge-offs were $62 million, or 6 basis points of average commercial loans. Net consumer credit losses declined to 53 basis points of average consumer loans in second quarter 2015 from 62 basis points in second quarter 2014. Our commercial real estate portfolios were in a net recovery position for the tenth consecutive quarter, reflecting our conservative risk discipline and improved market conditions. Losses on our consumer real estate portfolios declined $136 million from a year ago, down 46%, which included a $15 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 63% 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 $350 million in second quarter 2015, which was $150 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 $438 million, or 3%, from March 31, 2015, the eleventh consecutive quarter of decline. Nonaccrual loans declined $67 million from the prior quarter despite an increase in nonaccrual loans in our energy portfolio. The oil and gas portfolio represented only 2% of our total loan portfolio and balances in this portfolio declined by $1.1 billion from first quarter primarily due to pay downs. In addition, foreclosed assets were down $371 million from the prior quarter.

 
Capital
Our financial performance in second quarter 2015 resulted in strong capital generation, which increased total equity to $190.7 billion at June 30, 2015, up $712 million from the prior quarter. We continued to reduce our common share count through the repurchase of 36.3 million common shares in the quarter. We also entered into a $750 million forward repurchase contract in April 2015 with an unrelated third party that settled in July 2015 for 13.6 million shares. In addition, we entered into a $1.0 billion forward repurchase contract with an unrelated third party in July 2015 that is expected to settle in fourth quarter 2015 for approximately 17.5 million shares. We expect to reduce our common shares outstanding through share repurchases throughout the remainder of 2015. Our dividend payout ratio increased to 36% in second quarter 2015 as we increased the quarterly dividend rate on our common stock by 7%.
We believe an important measure of our capital strength is the Common Equity Tier 1 ratio under Basel III, fully phased-in, which increased to 10.55% at June 30, 2015. 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.



4

Earnings Performance (continued)

Earnings Performance
Wells Fargo net income for second quarter 2015 was $5.7 billion ($1.03 diluted earnings per common share), compared with $5.7 billion ($1.01) for second quarter 2014. Net income for the first half of 2015 was $11.5 billion ($2.07), compared with $11.6 billion ($2.06) for the same period a year ago. Our second quarter 2015 earnings reflected execution of our business strategy as we continued to satisfy our customers' financial needs. The key drivers of our financial performance in the second quarter and first half of 2015 were balanced net interest income and noninterest income, diversified sources of fee income, a diversified and growing loan portfolio and strong underlying credit performance.
Revenue, the sum of net interest income and noninterest income, was $21.3 billion in second quarter 2015, compared with $21.1 billion in second quarter 2014. Revenue for the first half of 2015 was $42.6 billion, up 2% from the first half of 2014. The increase in revenue for the second quarter and first half of 2015, compared with the same periods in 2014, was primarily due to an increase in net interest income, reflecting increases in interest income from loans and trading assets. In the second quarter and first half of 2015, net interest income represented 53% and 52% of revenue, respectively, compared with 51% for both the second quarter and first half of 2014.
Noninterest income represented 47% and 48% of revenue for the second quarter and first half of 2015, respectively, compared with 49% for both the second quarter and first half of 2014. The drivers of our noninterest income can differ depending on the interest rate and economic environment. For example, net gains on mortgage loan origination/sales activities were 12% of our fee income in second quarter 2015, up from 7% in the same period a year ago when the refinance market was not as strong. Other businesses, such as equity investments, brokerage and card, contributed more to fee income this quarter, demonstrating the benefit of our diversified business model.
Noninterest expense was $12.5 billion and $25.0 billion in the second quarter and first half of 2015, respectively, compared with $12.2 billion and $24.1 billion in the second quarter and first half of 2014, respectively. The increase for both periods reflected higher personnel expense, including higher commission and incentive compensation, as well as higher operating losses, partially offset by lower travel and entertainment expense.

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 have runoff and 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 $11.5 billion and $22.8 billion in the second quarter and first half of 2015, respectively, up from $11.0 billion and $21.8 billion for the same periods a year ago. The net interest margin was 2.97% and 2.96% for the second quarter and first half of 2015, respectively, down from 3.15% and 3.17% for the same periods a year ago. The increase in net interest income in the second quarter and first half of 2015 from the same periods a year ago, was primarily 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 costs, also contributed to higher net interest income. The decline in net interest margin in second quarter 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 $153.7 billion in the second quarter and $161.8 billion in the first half of 2015, compared with the same periods a year ago, as average investment securities increased $58.3 billion in the second quarter and $53.9 billion in the first half of 2015 from the same periods a year ago. In addition, average federal funds sold and other short-term investments increased $37.3 billion in the second quarter and $49.8 billion in the first half of 2015 from the same periods a year ago. Average loans increased $39.4 billion in both the second quarter and first half of 2015, compared with the same periods 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 second quarter 2015 ($1.1 trillion in the first half of 2015), compared with $991.7 billion in second quarter 2014 ($982.8 billion in the first half of 2014), and funded 124% of average loans in both the second quarter and first half of 2015, compared with 119% for the same periods a year ago. Average core deposits decreased to 69% of average earning assets in both the second quarter and first half of 2015, compared with 71% for the same periods 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 June 30,
 
  
  
 
  
 
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
$
267,101

 
0.28
%
 
$
186

 
229,770

 
0.28
%
 
$
161

Trading assets
67,615

 
2.91

 
492

 
54,347

 
3.05

 
414

Investment securities (3): 
 
 
 
 
 
 
 
 
 
 
 
Available-for-sale securities:
 
 
 
 
 
 
 
 
 
 
 
Securities of U.S. Treasury and federal agencies
31,748

 
1.58

 
125

 
6,580

 
1.78

 
29

Securities of U.S. states and political subdivisions
47,075

 
4.13

 
486

 
42,721

 
4.26

 
456

Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
Federal agencies
97,958

 
2.65

 
650

 
116,475

 
2.85

 
831

Residential and commercial
22,677

 
5.84

 
331

 
27,252

 
6.11

 
416

Total mortgage-backed securities
120,635

 
3.25

 
981

 
143,727

 
3.47

 
1,247

Other debt and equity securities
48,816

 
3.51

 
427

 
48,734

 
3.76

 
457

Total available-for-sale securities
248,274

 
3.25

 
2,019

 
241,762

 
3.62

 
2,189

Held-to-maturity securities:
 
 
 
 
 
 
 
 
 
 
 
Securities of U.S. Treasury and federal agencies
44,492

 
2.19

 
243

 
10,829

 
2.20

 
59

Securities of U.S. states and political subdivisions
2,090

 
5.17

 
27

 
8

 
6.00

 

Federal agency mortgage-backed securities
21,044

 
2.00

 
105

 
6,089

 
2.74

 
42

Other debt securities
6,270

 
1.70

 
26

 
5,206

 
1.90

 
25

Total held-to-maturity securities
73,896

 
2.18

 
401

 
22,132

 
2.28

 
126

Total investment securities
322,170

 
3.01

 
2,420

 
263,894

 
3.51

 
2,315

Mortgages held for sale (4)
23,456

 
3.57

 
209

 
18,824

 
4.16

 
195

Loans held for sale (4)
666

 
3.51

 
5

 
157

 
2.55

 
1

Loans:
  
 
  
 
  
 
  
 
  
 
  
Commercial:
  
 
  
 
  
 
  
 
  
 
  
Commercial and industrial - U.S.
231,551

 
3.36

 
1,939

 
199,246

 
3.39

 
1,687

Commercial and industrial - Non U.S.
45,123

 
1.93

 
217

 
43,045

 
2.06

 
221

Real estate mortgage
113,089

 
3.48

 
982

 
112,795

 
3.61

 
1,016

Real estate construction
20,771

 
4.12

 
214

 
17,458

 
4.18

 
182

Lease financing
12,364

 
5.16

 
160

 
12,151

 
5.68

 
172

Total commercial
422,898

 
3.33

 
3,512

 
384,695

 
3.42

 
3,278

Consumer:
  
 
  
 
  
 
  
 
 
 
  
Real estate 1-4 family first mortgage
266,023

 
4.12

 
2,740

 
259,985

 
4.20

 
2,729

Real estate 1-4 family junior lien mortgage
57,066

 
4.23

 
603

 
63,305

 
4.31

 
680

Credit card
30,373

 
11.69

 
885

 
26,442

 
11.97

 
790

Automobile
56,974

 
5.88

 
836

 
53,480

 
6.34

 
845

Other revolving credit and installment
37,112

 
5.88

 
544

 
43,136

 
5.07

 
545

Total consumer
447,548

 
5.02

 
5,608

 
446,348

 
5.02

 
5,589

Total loans (4)
870,446

 
4.20

 
9,120

 
831,043

 
4.28

 
8,867

Other
4,859

 
5.14

 
64

 
4,535

 
5.74

 
65

Total earning assets
$
1,556,313

 
3.22
%
 
$
12,496

 
1,402,570

 
3.43
%
 
$
12,018

Funding sources
 
 
 
 
 
 
 
 
 
 
 
Deposits:
  
 
  
 
  
 
  
 
  
 
  
Interest-bearing checking
$
38,551

 
0.05
%
 
$
5

 
40,193

 
0.07
%
 
$
7

Market rate and other savings
619,837

 
0.06

 
87

 
583,907

 
0.07

 
101

Savings certificates
32,454

 
0.63

 
52

 
38,754

 
0.86

 
82

Other time deposits
52,238

 
0.42

 
55

 
48,512

 
0.41

 
50

Deposits in foreign offices
104,334

 
0.13

 
33

 
94,232

 
0.15

 
35

Total interest-bearing deposits
847,414

 
0.11

 
232

 
805,598

 
0.14

 
275

Short-term borrowings
84,499

 
0.09

 
21

 
58,845

 
0.10

 
14

Long-term debt
185,093

 
1.34

 
620

 
159,233

 
1.56

 
620

Other liabilities
16,405

 
2.03

 
83

 
13,589

 
2.73

 
93

Total interest-bearing liabilities
1,133,411

 
0.34

 
956

 
1,037,265

 
0.39

 
1,002

Portion of noninterest-bearing funding sources
422,902

 


 

 
365,305

 

 

Total funding sources
$
1,556,313

 
0.25

 
956

 
1,402,570

 
0.28

 
1,002

Net interest margin and net interest income on a taxable-equivalent basis (5)
 
 
2.97
%
 
$
11,540

 
 
 
3.15
%
 
$
11,016

Noninterest-earning assets
  
 
  
 
  
 
  
 
  
 
  
Cash and due from banks
$
17,462

 
  
 
  
 
15,956

 
  
 
  
Goodwill
25,705

 
  
 
  
 
25,699

 
  
 
  
Other
129,798

 
 
 
 
 
119,778

 
 
 
 
Total noninterest-earning assets
$
172,965

 
 
 
 
 
161,433

 
 
 
 
Noninterest-bearing funding sources
 
 
 
 
 
 
  
 
 
 
 
Deposits
$
337,890

 
 
 
 
 
295,875

 
 
 
 
Other liabilities
67,595

 
 
 
 
 
51,184

 
 
 
 
Total equity
190,382

 
 
 
 
 
179,679

 
 
 
 
Noninterest-bearing funding sources used to fund earning assets
(422,902
)
 
 
 
 
 
(365,305
)
 
 
 
 
Net noninterest-bearing funding sources
$
172,965

 
 
 
 
 
161,433

 
 
 
 
Total assets
$
1,729,278

 
 
 
 
 
1,564,003

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1)
Our average prime rate was 3.25% for the quarters ended June 30, 2015 and 2014, and 3.25% for the first six months of both 2015 and 2014. The average three-month London Interbank Offered Rate (LIBOR) was 0.28% and 0.23% for the quarters ended June 30, 2015 and 2014, respectively, and 0.27% and 0.23% for the first six months of 2015 and 2014, respectively.
(2)
Yields/rates and amounts include the effects of hedge and risk management activities associated with the respective asset and liability categories.
(3)
Yields and rates are based on interest income/expense amounts for the period, annualized based on the accrual basis for the respective accounts. The average balance amounts represent amortized cost for the periods presented.
(4)
Nonaccrual loans and related income are included in their respective loan categories.
(5)
Includes taxable-equivalent adjustments of $270 million and $225 million for the quarters ended June 30, 2015 and 2014, respectively, and $512 million and $442 million for the first six months of 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



 
 
 
 
 
 
 
 
 
 
 
 
  
Six months ended June 30,
 
  
  
 
  
 
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
$
271,392

 
0.28
%
 
$
376

 
221,573

 
0.28
%
 
$
305

Trading assets
65,309

 
2.89

 
945

 
51,306

 
3.10

 
795

Investment securities (3):
 
 
 
 
 
 
 
 
 
 
 
Available-for-sale securities: 
 
 
 
 
 
 
 
 
 
 
 
Securities of U.S. Treasury and federal agencies
28,971

 
1.56

 
225

 
6,576

 
1.73

 
57

Securities of U.S. states and political subdivisions
46,017

 
4.16

 
958

 
42,661

 
4.32

 
921

Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
Federal agencies
100,064

 
2.71

 
1,356

 
117,055

 
2.90

 
1,695

Residential and commercial
23,304

 
5.77

 
673

 
27,641

 
6.12

 
845

Total mortgage-backed securities
123,368

 
3.29

 
2,029

 
144,696

 
3.51

 
2,540

Other debt and equity securities
47,938

 
3.47

 
827

 
48,944

 
3.68

 
895

Total available-for-sale securities
246,294

 
3.28

 
4,039

 
242,877

 
3.64

 
4,413

Held-to-maturity securities:
  
 
 
 
  
 
  
 
 
 
  
Securities of U.S. Treasury and federal agencies
43,685

 
2.20

 
477

 
5,993

 
2.20

 
65

Securities of U.S. states and political subdivisions
2,019

 
5.16

 
52

 
4

 
5.97

 

Federal agency mortgage-backed securities
16,208

 
1.95

 
158

 
6,125

 
2.93

 
90

Other debt securities
6,530

 
1.71

 
55

 
5,807

 
1.88

 
54

Total held-to-maturity securities
68,442

 
2.18

 
742

 
17,929

 
2.34

 
209

Total investment securities
314,736

 
3.04

 
4,781

 
260,806

 
3.55

 
4,622

Mortgages held for sale (4)
21,530

 
3.59

 
386

 
17,696

 
4.13

 
365

Loans held for sale (4)
683

 
3.08

 
10

 
134

 
4.08

 
3

Loans:
  
 
 
 
  
 
  
 
 
 
  
Commercial:
  
 
 
 
  
 
  
 
 
 
  
Commercial and industrial - U.S.
229,627

 
3.32

 
3,783

 
196,570

 
3.41

 
3,328

Commercial and industrial - Non U.S.
45,093

 
1.90

 
426

 
42,616

 
1.99

 
421

Real estate mortgage
112,298

 
3.52

 
1,963

 
112,810

 
3.58

 
2,006

Real estate construction
20,135

 
3.83

 
383

 
17,265

 
4.28

 
366

Lease financing
12,341

 
5.06

 
312

 
12,206

 
5.90

 
360

Total commercial
419,494

 
3.30

 
6,867

 
381,467

 
3.42

 
6,481

Consumer:
  
 
 
 
  
 
  
 
 
 
  
Real estate 1-4 family first mortgage
265,923

 
4.12

 
5,481

 
259,737

 
4.19

 
5,434

Real estate 1-4 family junior lien mortgage
57,968

 
4.25

 
1,224

 
64,155

 
4.31

 
1,372

Credit card
30,376

 
11.74

 
1,768

 
26,363

 
12.14

 
1,588

Automobile
56,492

 
5.91

 
1,657

 
52,642

 
6.42

 
1,676

Other revolving credit and installment
36,620

 
5.94

 
1,079

 
43,072

 
5.03

 
1,076

Total consumer
447,379

 
5.03

 
11,209

 
445,969

 
5.02

 
11,146

Total loans (4)
866,873

 
4.19

 
18,076

 
827,436

 
4.28

 
17,627

Other
4,795

 
5.27

 
127

 
4,595

 
5.73

 
131

Total earning assets
$
1,545,318

 
3.21
%
 
$
24,701

 
1,383,546

 
3.46
%
 
$
23,848

Funding sources
  
 
 
 
  
 
  
 
 
 
  
Deposits:
  
 
 
 
  
 
  
 
 
 
  
Interest-bearing checking
$
38,851

 
0.05
%
 
$
10

 
38,506

 
0.07
%
 
$
13

Market rate and other savings
616,643

 
0.06

 
184

 
581,489

 
0.07

 
206

Savings certificates
33,525

 
0.69

 
116

 
39,639

 
0.87

 
171

Other time deposits
54,381

 
0.41

 
111

 
47,174

 
0.42

 
98

Deposits in foreign offices
104,932

 
0.13

 
69

 
92,650

 
0.14

 
66

Total interest-bearing deposits
848,332

 
0.12

 
490

 
799,458

 
0.14

 
554

Short-term borrowings
78,141

 
0.10

 
39

 
56,686

 
0.10

 
27

Long-term debt
184,432

 
1.33

 
1,224

 
156,528

 
1.59

 
1,239

Other liabilities
16,648

 
2.17

 
180

 
13,226

 
2.72

 
180

Total interest-bearing liabilities
1,127,553

 
0.34

 
1,933

 
1,025,898

 
0.39

 
2,000

Portion of noninterest-bearing funding sources
417,765

 
 
 

 
357,648

 

 

Total funding sources
$
1,545,318

 
0.25

 
1,933

 
1,383,546

 
0.29

 
2,000

Net interest margin and net interest income on a taxable-equivalent basis (5)
  
 
2.96
%
 
$
22,768

 
  
 
3.17
%
 
$
21,848

Noninterest-earning assets
  
 
  
 
  
 
  
 
  
 
  
Cash and due from banks
$
17,262

 
  
 
  
 
16,159

 
  
 
  
Goodwill
25,705

 
  
 
  
 
25,668

 
  
 
  
Other
130,312

 
  
 
  
 
119,687

 
  
 
  
Total noninterest-earning assets
$
173,279

 
  
 
  
 
161,514

 
  
 
  
Noninterest-bearing funding sources
  
 
  
 
  
 
  
 
  
 
  
Deposits
$
331,745

 
  
 
  
 
290,004

 
  
 
  
Other liabilities
69,779

 
  
 
  
 
52,065

 
  
 
  
Total equity
189,520

 
  
 
  
 
177,093

 
  
 
  
Noninterest-bearing funding sources used to fund earning assets
(417,765
)
 
  
 
  
 
(357,648
)
 
  
 
  
Net noninterest-bearing funding sources
$
173,279

 
  
 
  
 
161,514

 
  
 
  
Total assets
$
1,718,597

 
  
 
  
 
1,545,060

 
  
 
  
 
 
 
 
 
 
 
 
 
 
 
 




7


Noninterest Income
 
 
Table 2:  Noninterest Income
 
 
 
  
 
  
 
  
 
Six months
 
 
 
 
Quarter ended June 30,
 
 
%

 
ended June 30,
 
 
 
(in millions)
2015

 
2014

 
Change

 
2015

 
2014

 
% Change

Service charges on deposit accounts
$
1,289

 
1,283

 
 %
 
$
2,504

 
2,498

 
 %
Trust and investment fees:
 
 
 
 
  
 
 
 
 
 
 
Brokerage advisory, commissions and other fees
2,399

 
2,280

 
5

 
4,779

 
4,521

 
6

Trust and investment management
861

 
838

 
3

 
1,713

 
1,682

 
2

Investment banking
450

 
491

 
(8
)
 
895

 
818

 
9

Total trust and investment fees
3,710

 
3,609

 
3

 
7,387

 
7,021

 
5

Card fees
930

 
847

 
10

 
1,801

 
1,631

 
10

Other fees:
 
 
 
 
  
 
 
 
 
 

Charges and fees on loans
304

 
342

 
(11
)
 
613

 
709

 
(14
)
Merchant processing fees
202

 
183

 
10

 
389

 
355

 
10

Cash network fees
132

 
128

 
3

 
257

 
248

 
4

Commercial real estate brokerage commissions
141

 
99

 
42

 
270

 
171

 
58

Letters of credit fees
90

 
92

 
(2
)
 
178

 
188

 
(5
)
All other fees
238

 
244

 
(2
)
 
478

 
464

 
3

Total other fees
1,107

 
1,088

 
2

 
2,185


2,135

 
2

Mortgage banking:
  
 
  
 
  
 
 
 
 
 

Servicing income, net
514

 
1,035

 
(50
)
 
1,037

 
1,973

 
(47
)
Net gains on mortgage loan origination/sales activities
1,191

 
688

 
73

 
2,215

 
1,260

 
76

Total mortgage banking
1,705

 
1,723

 
(1
)
 
3,252


3,233

 
1

Insurance
461

 
453

 
2

 
891

 
885

 
1

Net gains from trading activities
133

 
382

 
(65
)
 
541

 
814

 
(34
)
Net gains on debt securities
181

 
71

 
155

 
459

 
154

 
198

Net gains from equity investments
517

 
449

 
15

 
887

 
1,296

 
(32
)
Lease income
155

 
129

 
20

 
287

 
262

 
10

Life insurance investment income
145

 
138

 
5

 
290

 
270

 
7

All other
(285
)
 
103

 
NM

 
(144
)
 
86

 
NM

Total
$
10,048

 
10,275

 
(2
)
 
$
20,340


20,285

 

NM - Not meaningful

Noninterest income was $10.0 billion and $10.3 billion for second quarter 2015 and 2014, respectively, and $20.3 billion for both the first half of 2015 and 2014. This income represented 47% and 48% of revenue for the second quarter and first half of 2015, respectively, compared with 49% for both the second quarter and first half of 2014. Many of our businesses, including credit and debit cards, merchant card processing, commercial banking, asset-backed finance, real estate capital markets, international, wealth management and retirement grew noninterest income in the second quarter and first half of 2015. This growth was offset by lower other income driven by the accounting impact related to debt hedges.
Service charges on deposit accounts were $1.3 billion and $2.5 billion in the second quarter and first half of 2015, respectively, unchanged from the second quarter and first half of 2014, respectively. 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 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 and $4.8 billion in the second quarter and first half of 2015, respectively, from $2.3 billion and $4.5 billion for the same periods in 2014. The increase in retail 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 $1.43 trillion at June 30, 2015, up 1% from $1.42 trillion at June 30, 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 $861 million and $1.71 billion in the second quarter and first half of 2015, respectively, from $838 million and $1.68 billion for the same periods in 2014, with growth primarily due to higher market values. At June 30, 2015, these assets totaled $2.4 trillion, compared with $2.5 trillion at June 30, 2014.
We earn investment banking fees from underwriting debt and equity securities, arranging loan syndications, and performing other related advisory services. Investment banking fees decreased to $450 million in second quarter 2015 from $491 million for the same period in 2014, driven by declines in advisory services and equity origination. In the first half of 2015, investment banking fees increased to $895 million from


8

Earnings Performance (continued)

$818 million for the same period in 2014, driven by higher investment grade debt origination reflecting an active domestic market.
Card fees were $930 million and $1.8 billion in the second quarter and first half of 2015, respectively, compared with $847 million and $1.6 billion for the same periods a year ago. The increase was primarily due to account growth and increased purchase activity.
Other fees of $1.11 billion and $2.19 billion in the second quarter and first half of 2015, respectively, increased from $1.09 billion and $2.14 billion for the same periods 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 $304 million and $613 million in the second quarter and first half of 2015, respectively, compared with $342 million and $709 million for the same periods 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 $42 million and $99 million in the second quarter and first half of 2015, respectively, compared with the same periods 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 $1.7 billion in both second quarter 2015 and 2014, and totaled $3.3 billion for the first half of 2015, compared with $3.2 billion for the same period a year ago.
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 second quarter 2015 included a $107 million net MSR valuation gain ($1.1 billion increase in the fair value of the MSRs and a $946 million hedge loss) and for second quarter 2014 included a $475 million net MSR valuation gain ($835 million decrease in the fair value of the MSRs offset by an $1.3 billion hedge gain). For the first half of 2015, net servicing income included a $215 million net MSR valuation gain ($280 million increase in the fair value of the MSRs and a $65 million hedge loss) and for the same period of 2014 included a $882 million net MSR valuation gain ($1.3 billion decrease in the fair value of the MSRs offset by an $2.2 billion hedge gain). The decrease in net MSR valuation gains in the second quarter and first half of 2015, compared with the same periods in 2014, was primarily attributable to lower hedge gains, 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 the first half of 2014.
Our portfolio of residential and commercial loans serviced for others was $1.81 trillion at June 30, 2015, and $1.86 trillion at December 31, 2014. At June 30, 2015, the ratio of combined residential and commercial MSRs to related loans serviced for others was 0.77%, 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 $1.2 billion and $2.2 billion in the second quarter and first half of 2015, respectively, up from $688 million and $1.3 billion for the same periods a year ago. The increase in the second quarter and first half of 2015, compared with the same periods a year ago, was primarily driven by increased origination volumes and
 
margins. Mortgage loan originations were $62 billion for second quarter 2015, of which 54% were for home purchases, compared with $47 billion and 74%, respectively, for the same period a year ago. The year-over-year increase was primarily driven by higher refinance activity reflecting lower mortgage interest rates. Mortgage applications were $81 billion and $174 billion in the second quarter and first half of 2015, respectively, compared with $72 billion and $132 billion for the same periods a year ago. The real estate 1-4 family first mortgage unclosed pipeline was $38 billion at June 30, 2015, compared with $30 billion at June 30, 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 half of 2015, we released a net $34 million from the repurchase liability, including $18 million in second quarter 2015, compared with a net $20 million release for the first half of 2014, including $26 million in second quarter 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 components 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 $133 million and $541 million in the second quarter and first half of 2015, respectively, compared with $382 million and $814 million for the same periods a year ago. Both second quarter and first half year-over-year decreases were primarily driven by lower economic hedge income and lower 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 $698 million for second quarter 2015<