EX-13 7 wfc-12312016xex13.htm EXHIBIT 13 Exhibit
Exhibit 13



                                                                                                                                                                                                                                                        
 
 
 
 
Financial Review
 
 
 
 
 
 
 
 
 
Overview
 
 
3

 
Cash, Loan and Dividend Restrictions
 
 
 
Earnings Performance
 
 
4

 
Federal Funds Sold, Securities Purchased under Resale Agreements and Other Short-Term Investments
 
 
 
Balance Sheet Analysis
 
 
5

 
Investment Securities
 
 
 
Off-Balance Sheet Arrangements
 
 
6

 
Loans and Allowance for Credit Losses
 
 
 
Risk Management
 
 
7

 
Premises, Equipment, Lease Commitments and Other Assets
 
 
 
Capital Management
 
 
8

 
Securitizations and Variable Interest Entities
 
 
 
Regulatory Matters
 
 
9

 
Mortgage Banking Activities
 
 
 
Critical Accounting Policies
 
 
10

 
Intangible Assets
 
 
 
Current Accounting Developments
 
 
11

 
Deposits
 
 
 
Forward-Looking Statements
 
 
12

 
Short-Term Borrowings
 
 
 
Risk Factors
 
 
13

 
Long-Term Debt
 
 
 
 
 
 
 
14

 
Guarantees, Pledged Assets and Collateral
 
 
 
 
Controls and Procedures
 
 
15

 
Legal Actions
 
 
 
Disclosure Controls and Procedures
 
 
16

 
Derivatives
 
 
 
Internal Control Over Financial Reporting
 
 
17

 
Fair Values of Assets and Liabilities
 
 
 
Management's Report on Internal Control over Financial Reporting
 
 
18

 
Preferred Stock
 
 
 
Report of Independent Registered Public Accounting Firm
 
 
19

 
Common Stock and Stock Plans
 
 
 
 
 
 
 
20

 
Employee Benefits and Other Expenses
 
 
 
 
Financial Statements
 
 
21

 
Income Taxes
 
 
 
Consolidated Statement of Income
 
 
22

 
Earnings Per Common Share
 
 
 
Consolidated Statement of Comprehensive Income
 
 
23

 
Other Comprehensive Income
 
 
 
Consolidated Balance Sheet
 
 
24

 
Operating Segments
 
 
 
Consolidated Statement of Changes in Equity
 
 
25

 
Parent-Only Financial Statements
 
 
 
Consolidated Statement of Cash Flows
 
 
26

 
Regulatory and Agency Capital Requirements
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Notes to Financial Statements
 
 
 
 
Report of Independent Registered Public Accounting Firm
 
1

 
Summary of Significant Accounting Policies
 
 
 
 
Quarterly Financial Data
 
2

 
Business Combinations
 
 
 
 
Glossary of Acronyms


 
Wells Fargo & Company
35



Overview (continued)

This Annual 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” and “Risk Factors” sections, and in the “Regulation and Supervision” section of our Annual Report on Form 10-K for the year ended December 31, 2016 (2016 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. When we refer to “legacy Wells Fargo,” we mean Wells Fargo excluding Wachovia Corporation (Wachovia). See the Glossary of Acronyms for terms used throughout this Report.
 
Financial Review

Overview
Wells Fargo & Company is a diversified, community-based financial services company with $1.9 trillion in assets. Founded in 1852 and headquartered in San Francisco, we provide banking, insurance, investments, mortgage, and consumer and commercial finance through more than 8,600 locations, 13,000 ATMs, digital (online, mobile and social), and contact centers (phone, email and correspondence), and we have offices in 42 countries and territories to support customers who conduct business in the global economy. With approximately 269,000 active, full-time equivalent team members, we serve one in three households in the United States and ranked No. 27 on Fortune’s 2016 rankings of America’s largest corporations. We ranked third in assets and second in the market value of our common stock among all U.S. banks at December 31, 2016
We use our Vision and Values to guide us toward growth and success. Our vision is to satisfy our customers’ financial needs, help them succeed financially, be recognized as the premier financial services company in our markets and be one of America’s great companies. We aspire to create deep and enduring relationships with our customers by providing them with an exceptional experience and by discovering their needs and delivering the most relevant products, services, advice, and guidance.
We have five primary values, which are based on our vision and provide the foundation for everything we do. First, we value and support our people as a competitive advantage and strive to attract, develop, retain and motivate the most talented people we can find. Second, we strive for the highest ethical standards with our team members, our customers, our communities and our shareholders. Third, with respect to our customers, we strive to base our decisions and actions on what is right for them in everything we do. Fourth, for team members we strive to build and sustain a diverse and inclusive culture – one where they feel valued and respected for who they are as well as for the skills and experiences they bring to our company. Fifth, we also look to each of our team members to be leaders in establishing, sharing and communicating our vision. In addition to our five primary values, one of our key day-to-day priorities is to make risk management a competitive advantage by working hard to ensure that appropriate controls are in place to reduce risks to our customers, maintain and increase our competitive market position, and protect Wells Fargo’s long-term safety, soundness and reputation.
 
Sales Practices Matters
On September 8, 2016, we announced settlements with the Consumer Financial Protection Bureau (CFPB), the Office of the Comptroller of the Currency (OCC) and the Office of the Los Angeles City Attorney regarding allegations that some of our retail customers received products and services they did not request. Our current top priority is rebuilding trust through a comprehensive action plan that includes making things right for our customers and team members and building a better Company for the future. The job of rebuilding trust in Wells Fargo will be a long-term effort – one requiring our commitment, patience and perseverance. Our commitment to addressing the concerns raised by these settlements and our priority of rebuilding trust has included the following:
Reached out to 40 million retail and 3 million small business customers through statement messaging, other mailings and online communications, including over 168,000 potentially unauthorized credit card customers called as of December 31, 2016.
Established a Sales Practices Consent Order Program Office in October 2016, reporting directly to our Chief Risk Officer, which coordinates actions being taken across the Company to meet the requirements of the consent orders that were issued as part of the settlements in September.
Submitted our reimbursement and redress plans in response to the consent orders to the OCC and CFPB in December 2016.
Refunded a total of $3.2 million to customers for potentially unauthorized accounts that incurred fees and charges, including the addition of consumer and small business unsecured line of credit accounts, for the period of May 2011 through June 2015.
Expanded the time periods of our review to cover the entire consent order period of January 2011 through September 2016; also expanded data analysis for potentially unauthorized accounts to 2009 through 2010.
As part of this expanded review as well as our ongoing data analysis, including our review and validation of the identification of potentially unauthorized accounts by a third party consulting firm, we continue to refine our practices and methodology used to identify, prevent and remediate sales practices related matters. This work could lead to, among other things, an increase in the identified number of potentially impacted customers; however, we would not expect any incremental customer remediation costs to have a significant financial impact.

36
Wells Fargo & Company
 


Hired an independent consultant to perform sales practices evaluation and root cause analysis as outlined in the consent orders.
Performing additional work beyond the requirements of the consent orders, including:
Established a voluntary, no-cost to the consumer mediation program nation-wide (beyond the requirements in the Los Angeles Stipulated Judgment to do so for California).
Hired an additional third party consultant to evaluate sales practices more broadly across Wells Fargo.
Continuing analysis of potential credit score and related impacts to customers to develop a plan for regulatory approval.
Implemented a new retail banking compensation program in 2017 that includes:
No product sales goals, which were eliminated in October 2016.
Performance based on customer service, branch primary customer growth, household relationship balance growth, and risk management, with a larger allocation of incentives associated with direct customer feedback and product usage.
Metrics heavily weighted towards team goals, not just individual goals.
Additional centralized monitoring and controls in place to provide enhanced oversight of sales processes.
Periodic reviews and checkpoints to monitor unintended outcomes or behavior prompted by the new compensation program.
Investments in enhanced team member training and monitoring and controls have been made, including reinforcement of our Code of Ethics and Business Conduct and our EthicsLine.
Established an Office of Ethics, Oversight and Integrity in January 2017, reporting directly to our Chief Risk Officer, aligning many of the groups responsible for conduct-related risks into one function to provide more connectivity, consistency, and stronger governance.
Established a Rebuilding Trust Office in January 2017, which will provide support to the many efforts currently underway to rebuild trust in Wells Fargo, including driving the formation of cross-business teams and problem-solving on behalf of all the businesses.
Determination by the Board on February 28, 2017, that certain members of the Company’s Operating Committee will not receive annual bonuses for 2016 and will forfeit up to 50% of their long-term performance share equity compensation awards scheduled to be distributed in March 2017.

As we move forward we have a specific action plan in place that is focused on outreach to those who have been affected by retail banking sales practices including our community, our customers, our regulators, our team members and our investors. For additional information regarding sales practices matters, including related legal matters, see the “Risk Factors” section and Note 15 (Legal Actions) to Financial Statements in this Report.

Financial Performance
In 2016, we generated $21.9 billion of net income and diluted earnings per common share (EPS) of $3.99. We grew loans and deposits, enhanced our risk management practices, increased our capital and liquidity levels and rewarded our shareholders by
 
increasing our dividend and continuing to repurchase shares of our common stock. Our achievements during 2016 continued to demonstrate the benefit of our diversified business model and our ability to perform well in a challenging environment. Noteworthy financial performance items for 2016 included: 
revenue of $88.3 billion, up 3% from 2015;
total loans of $967.6 billion, up $51.0 billion, or 6%;
deposit growth, with total deposits of $1.3 trillion, up $82.8 billion, or 7%;
strong credit performance as our net charge-off ratio was 37 basis points of average loans;
strengthening our capital levels as total equity exceeded $200 billion for the first time; and
returning $12.5 billion in capital to our shareholders through increased common stock dividends and additional net share repurchases.

Balance Sheet and Liquidity
Our balance sheet grew 8% in 2016 to $1.9 trillion, as we increased our liquidity position, held more capital and continued to experience solid credit quality. Our loan portfolio increased $51.0 billion from December 31, 2015, predominantly due to growth in commercial and industrial, real estate mortgage, credit card, automobile, and lease financing loans within the commercial loan portfolio segment, which included $27.9 billion of commercial and industrial loans and capital leases acquired from GE Capital in 2016. We have grown loans on a year-over-year basis for 22 consecutive quarters.
We further strengthened our liquidity position in 2016 in advance of the increase on January 1, 2017, to the minimum liquidity coverage ratio (LCR) regulatory requirement. We grew our investment securities portfolio by $60.4 billion in 2016. Our federal funds sold, securities purchased under resale agreements and other short-term investments (collectively referred to as federal funds sold and other short-term investments elsewhere in this Report) decreased by $4.1 billion, or 2%, during 2016.
Deposits at December 31, 2016, were up $82.8 billion, or 7%, from 2015. This increase reflected growth across our commercial and consumer businesses. Our average deposit cost increased 3 basis points from a year ago driven by commercial deposit pricing. We 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 3.0%.
 
Credit Quality
Credit quality remained stable in 2016, driven by continued strong performance in the commercial and consumer real estate portfolios. Performance in several of our commercial and consumer loan portfolios remained near historically low loss levels and reflected our long-term risk focus. Net charge-offs of $3.5 billion were 0.37% of average loans, compared with $2.9 billion and 0.33%, respectively, from a year ago. Net losses in our commercial portfolio were $1.1 billion, or 22 basis points of average loans, in 2016, compared with $387 million, or 9 basis points, in 2015, driven by higher losses in our oil and gas portfolio. Our commercial real estate portfolios were in a net recovery position for each quarter of the last four years, reflecting our conservative risk discipline and improved market conditions.
Net consumer losses declined to 53 basis points in 2016 from 55 basis points in 2015. Losses on our consumer real estate portfolios declined $330 million, or 52%, from a year ago. As of December 31, 2016, approximately 73% of our real estate 1-4 family first lien mortgage portfolio was originated after 2008,

 
Wells Fargo & Company
37



Overview (continued)

when new underwriting standards were implemented. The consumer loss levels reflected the benefit of the improving housing market and our continued focus on originating high quality loans, partially offset by increased losses in our credit card, auto, and other revolving and installment loan portfolios.
The allowance for credit losses of $12.5 billion at December 31, 2016, was up slightly compared with the prior year. Our provision for credit losses in 2016 was $3.8 billion compared with $2.4 billion a year ago reflecting a build of $250 million in the allowance for credit losses, compared with a release of $450 million in 2015. The build in 2016 was primarily due to deterioration in the oil and gas portfolio, while the release in 2015 was due to strong underlying credit performance and improvement in the housing market.
Nonperforming assets (NPAs) at the end of 2016 were down $1.4 billion, or 11%, from the end of 2015. Nonaccrual loans declined $998 million from the prior year end while foreclosed assets were down $447 million from 2015.

Capital
Our capital levels remained strong in 2016 with total equity increasing to $200.5 billion at December 31, 2016, up $6.6 billion from the prior year. We returned $12.5 billion to shareholders in 2016 ($12.6 billion in 2015) through common
 
stock dividends and net share repurchases and our net payout ratio (which is the ratio of (i) common stock dividends and share repurchases less issuances and stock compensation-related items, divided by (ii) net income applicable to common stock) was 61%. During 2016 we increased our quarterly common stock dividend from $0.375 to $0.38 per share. In 2016, our common shares outstanding declined by 76.0 million shares as we continued to reduce our common share count through the repurchase of 159.6 million common shares during the year. We also entered into a $750 million forward repurchase contract with an unrelated third party in fourth quarter 2016 that settled in first quarter 2017 for 14.7 million shares. In addition, we entered into a $750 million forward repurchase contract with an unrelated third party in January 2017 that is expected to settle in second quarter 2017 for approximately 14 million shares. We expect our share count to continue to decline in 2017 as a result of anticipated net share repurchases.
We believe an important measure of our capital strength is the Common Equity Tier 1 ratio on a fully phased-in basis, which was 10.77% as of both December 31, 2016 and 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.
Table 1: Six-Year Summary of Selected Financial Data
(in millions, except per share amounts)
2016

 
2015

 
2014

 
2013

 
2012

 
2011

 
%
Change
2016/
2015

 
Five-year
compound
growth
rate 

Income statement
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net interest income
$
47,754

 
45,301

 
43,527

 
42,800

 
43,230

 
42,763

 
5
 %
 
2

Noninterest income
40,513

 
40,756

 
40,820

 
40,980

 
42,856

 
38,185

 
(1
)
 
1

Revenue
88,267

 
86,057


84,347


83,780


86,086


80,948

 
3

 
2

Provision for credit losses
3,770

 
2,442

 
1,395

 
2,309

 
7,217

 
7,899

 
54

 
(14
)
Noninterest expense
52,377

 
49,974

 
49,037

 
48,842

 
50,398

 
49,393

 
5

 
1

Net income before noncontrolling interests
22,045

 
23,276

 
23,608

 
22,224

 
19,368

 
16,211

 
(5
)
 
6

Less: Net income from noncontrolling interests
107

 
382

 
551

 
346

 
471

 
342

 
(72
)
 
(21
)
Wells Fargo net income
21,938

 
22,894


23,057


21,878


18,897


15,869

 
(4
)
 
7

Earnings per common share
4.03

 
4.18

 
4.17

 
3.95

 
3.40

 
2.85

 
(4
)
 
7

Diluted earnings per common share
3.99

 
4.12

 
4.10

 
3.89

 
3.36

 
2.82

 
(3
)
 
7

Dividends declared per common share
1.515

 
1.475

 
1.350

 
1.150

 
0.880

 
0.480

 
3

 
26

Balance sheet (at year end)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Investment securities
$
407,947

 
347,555

 
312,925

 
264,353

 
235,199

 
222,613

 
17
 %
 
13

Loans
967,604

 
916,559

 
862,551

 
822,286

 
798,351

 
769,631

 
6

 
5

Allowance for loan losses
11,419

 
11,545

 
12,319

 
14,502

 
17,060

 
19,372

 
(1
)
 
(10
)
Goodwill
26,693

 
25,529

 
25,705

 
25,637

 
25,637

 
25,115

 
5

 
1

Assets
1,930,115

 
1,787,632

 
1,687,155

 
1,523,502

 
1,421,746

 
1,313,867

 
8

 
8

Deposits
1,306,079

 
1,223,312

 
1,168,310

 
1,079,177

 
1,002,835

 
920,070

 
7

 
7

Long-term debt
255,077

 
199,536

 
183,943

 
152,998

 
127,379

 
125,354

 
28

 
15

Wells Fargo stockholders' equity
199,581

 
192,998

 
184,394

 
170,142

 
157,554

 
140,241

 
3

 
7

Noncontrolling interests
916

 
893

 
868

 
866

 
1,357

 
1,446

 
3

 
(9
)
Total equity
200,497

 
193,891

 
185,262

 
171,008

 
158,911

 
141,687

 
3

 
7




38
Wells Fargo & Company
 


Table 2: Ratios and Per Common Share Data
 
Year ended December 31, 
 
 
2016

 
2015

 
2014

Profitability ratios
 
 
 
 
 
Wells Fargo net income to average assets (ROA)
1.16
%
 
1.31

 
1.45

Wells Fargo net income applicable to common stock to average Wells Fargo common stockholders' equity (ROE)
11.49

 
12.60

 
13.41

Return on average tangible common equity (ROTCE) (1)
13.85

 
15.17

 
16.22

Efficiency ratio (2)
59.3

 
58.1

 
58.1

Capital ratios (3)(4)
 
 
 
 
 
At year end:
 
 
 
 
 
Wells Fargo common stockholders' equity to assets
9.14

 
9.62

 
9.86

Total equity to assets
10.39

 
10.85

 
10.98

Risk-based capital:
 
 
 
 
 
Common Equity Tier 1
11.13

 
11.07

 
11.04

Tier 1 capital
12.82

 
12.63

 
12.45

Total capital
16.04

 
15.45

 
15.53

Tier 1 leverage
8.95

 
9.37

 
9.45

Average balances:
 
 
 
 
 
Average Wells Fargo common stockholders' equity to average assets
9.40

 
9.78

 
10.22

Average total equity to average assets
10.64

 
10.99

 
11.32

Per common share data
 
 
 
 
 
Dividend payout (5)
38.0

 
35.8

 
32.9

Book value (6)
$
35.18

 
33.78

 
32.19

Market price (7)
 
 
 
 
 
High
58.02

 
58.77

 
55.95

Low
43.55

 
47.75

 
44.17

Year end
55.11

 
54.36

 
54.82

(1)
Tangible common equity is a non-GAAP financial measure and represents total equity less preferred equity, noncontrolling interests, and goodwill and certain identifiable intangible assets (including goodwill and intangible assets associated with certain of our nonmarketable equity investments but excluding mortgage servicing rights), net of applicable deferred taxes. The methodology of determining tangible common equity may differ among companies. Management believes that return on average tangible common equity, which utilizes tangible common equity, is a useful financial measure because it enables investors and others to assess the Company's use of equity. For additional information, including a corresponding reconciliation to GAAP financial measures, see the "Capital Management – Tangible Common Equity" section in this Report.
(2)
The efficiency ratio is noninterest expense divided by total revenue (net interest income and noninterest income).
(3)
The risk-based capital ratios presented at December 31, 2016 and 2015 were calculated under the lower of Standardized or Advanced Approach determined pursuant to Basel III with Transition Requirements. Accordingly, the total capital ratio was calculated under the Advanced Approach and the other ratios were calculated under the Standardized Approach. The risk-based capital ratios were calculated under the Basel III General Approach at December 31, 2014.
(4)
See the "Capital Management" section and Note 26 (Regulatory and Agency Capital Requirements) to Financial Statements in this Report for additional information.
(5)
Dividend payout ratio is dividends declared per common share as a percentage of diluted earnings per common share.
(6)
Book value per common share is common stockholders' equity divided by common shares outstanding.
(7)
Based on daily prices reported on the New York Stock Exchange Composite Transaction Reporting System.


 
Wells Fargo & Company
39



Earnings Performance (continued)

Earnings Performance
Wells Fargo net income for 2016 was $21.9 billion ($3.99 diluted earnings per common share), compared with $22.9 billion ($4.12 diluted per share) for 2015 and $23.1 billion ($4.10 diluted per share) for 2014. Our financial performance in 2016 benefited from a $2.5 billion increase in net interest income, which was offset by a $1.3 billion increase in our provision for credit losses and a $2.4 billion increase in noninterest expense. Noninterest income of $40.5 billion in 2016 was relatively stable compared with the prior year.
 
Revenue, the sum of net interest income and noninterest income, was $88.3 billion in 2016, compared with $86.1 billion in 2015 and $84.3 billion in 2014. The increase in revenue for 2016 compared with 2015 was predominantly due to an increase in net interest income, reflecting increases in interest income from loans and trading assets, partially offset by higher long-term debt and deposit interest expense. Our diversified sources of revenue generated by our businesses continued to be balanced between net interest income and noninterest income. In 2016, net interest income of $47.8 billion represented 54% of revenue, compared with $45.3 billion (53%) in 2015 and $43.5 billion (52%) in 2014. Table 3 presents the components of revenue and noninterest expense as a percentage of revenue for year-over-year results.
See later in this section for discussions of net interest income, noninterest income and noninterest expense.


40
Wells Fargo & Company
 


Table 3: Net Interest Income, Noninterest Income and Noninterest Expense as a Percentage of Revenue
 
Year ended December 31, 
 
(in millions)
2016

 
% of revenue 

 
2015

 
% of revenue 

 
2014

 
% of revenue 

Interest income (on a taxable-equivalent basis)
 
 
 
 
 
 
 
 
 
 
 
Trading assets
$
2,553

 
3
 %
 
$
2,010

 
2
 %
 
$
1,712

 
2
 %
Investment securities
10,316

 
11

 
9,906

 
12

 
9,253

 
11

Mortgages held for sale (MHFS)
784

 
1

 
785

 
1

 
767

 
1

Loans held for sale (LHFS)
9

 

 
19

 

 
78

 

Loans
39,630

 
45

 
36,663

 
43

 
35,715

 
42

Other interest income
1,614

 
2

 
990

 
1

 
932

 
1

Total interest income (on a taxable-equivalent basis)
54,906

 
62

 
50,373

 
59

 
48,457

 
57

Interest expense (on a taxable-equivalent basis)
 
 
 
 
 
 
 
 
 
 
 
Deposits
1,395

 
2

 
963

 
1

 
1,096

 
1

Short-term borrowings
333

 

 
64

 

 
62

 

Long-term debt
3,830

 
5

 
2,592

 
4

 
2,488

 
3

Other interest expense
354

 

 
357

 

 
382

 

Total interest expense (on a taxable-equivalent basis)
5,912

 
7

 
3,976

 
5

 
4,028

 
4

Net interest income (on a taxable-equivalent basis)
48,994

 
55

 
46,397

 
54

 
44,429

 
53

Taxable-equivalent adjustment
(1,240
)
 
(1
)
 
(1,096
)
 
(1
)
 
(902
)
 
(1
)
Net interest income (A) 
47,754

 
54

 
45,301

 
53

 
43,527

 
52

Noninterest income
 
 
 
 
 
 
 
 
 
 
 
Service charges on deposit accounts
5,372

 
6

 
5,168

 
6

 
5,050

 
6

Trust and investment fees (1)
14,243

 
16

 
14,468

 
16

 
14,280

 
17

Card fees
3,936

 
5

 
3,720

 
4

 
3,431

 
4

Other fees (1)
3,727

 
4

 
4,324

 
5

 
4,349

 
5

Mortgage banking (1)
6,096

 
7

 
6,501

 
7

 
6,381

 
8

Insurance
1,268

 
2

 
1,694

 
2

 
1,655

 
2

Net gains from trading activities
834

 
1

 
614

 
1

 
1,161

 
1

Net gains on debt securities
942

 
1

 
952

 
1

 
593

 
1

Net gains from equity investments
879

 
1

 
2,230

 
3

 
2,380

 
3

Lease income
1,927

 
2

 
621

 
1

 
526

 
1

Other
1,289

 
1

 
464

 
1

 
1,014

 
1

Total noninterest income (B)
40,513

 
46

 
40,756

 
47

 
40,820

 
48

Noninterest expense
 
 
 
 
 
 
 
 
 
 
 
Salaries
16,552

 
19

 
15,883

 
19

 
15,375

 
18

Commission and incentive compensation
10,247

 
12

 
10,352

 
12

 
9,970

 
12

Employee benefits
5,094

 
6

 
4,446

 
5

 
4,597

 
5

Equipment
2,154

 
2

 
2,063

 
2

 
1,973

 
2

Net occupancy
2,855

 
3

 
2,886

 
3

 
2,925

 
3

Core deposit and other intangibles
1,192

 
1

 
1,246

 
1

 
1,370

 
2

FDIC and other deposit assessments
1,168

 
1

 
973

 
1

 
928

 
1

Other (2)
13,115

 
15

 
12,125

 
15

 
11,899

 
14

Total noninterest expense
52,377

 
59

 
49,974

 
58

 
49,037

 
58

Revenue (A) + (B)
$
88,267

 
 
 
$
86,057

 
 
 
$
84,347

 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1)
See Table 7 – Noninterest Income in this Report for additional detail.
(2)
See Table 8 – Noninterest Expense in this Report for additional detail.


 
Wells Fargo & Company
41



Earnings Performance (continued)

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 5 to consistently reflect income from taxable and tax-exempt loans and securities based on a 35% federal statutory tax rate.
While the Company believes that it has the ability to increase net interest income over time, net interest income and the net interest margin in any one period can be significantly affected by a variety of factors including the mix and overall size of our earning assets portfolio and the cost of funding those assets. In addition, some variable sources of interest income, such as resolutions from purchased credit-impaired (PCI) loans, loan fees and collection of interest on nonaccrual loans, can vary from period to period. Net interest income and net interest margin growth has been challenged during the prolonged low interest rate environment as higher yielding loans and securities have run off and have been replaced with lower yielding assets.
Net interest income on a taxable-equivalent basis was $49.0 billion in 2016, compared with $46.4 billion in 2015, and $44.4 billion in 2014. The net interest margin was 2.86% in 2016, down 9 basis points from 2.95% in 2015, which was down 16 basis points from 3.11% in 2014. The increase in net interest income for 2016, compared with 2015, resulted from growth in loans, including the GE Capital business acquisitions that closed in 2016, investment securities, trading balances, and the net benefit of higher interest rates, partially offset by an increase in funding interest expense from growth and repricing of wholesale and other business deposits, short-term borrowings, and long-term debt.
 
The decline in net interest margin in 2016, compared with 2015, was primarily due to growth and repricing of long-term debt balances, and growth in deposits. This was partially offset by growth and repricing of loans and investment securities. The growth in customer-driven deposits and funding balances during 2016 kept cash, federal funds sold, and other short-term investments elevated, which diluted net interest margin but was essentially neutral to net interest income.
Table 4 presents the components of earning assets and funding sources as a percentage of earning assets to provide a more meaningful analysis of year-over-year changes that influenced net interest income.
Average earning assets increased $139.0 billion in 2016 from a year ago, as average loans increased $64.5 billion, average investment securities increased $30.1 billion, and average trading assets increased $21.7 billion in 2016, compared with a year ago. In addition, average federal funds sold and other short-term investments increased $20.9 billion in 2016, compared with a year ago.
Deposits are an important low-cost source of funding and affect both net interest income and the net interest margin. Deposits include noninterest-bearing deposits, interest-bearing checking, market rate and other savings, savings certificates, other time deposits, and deposits in foreign offices. Average deposits increased to $1.3 trillion in 2016, compared with $1.2 trillion in 2015, and represented 132% of average loans compared with 135% a year ago. Average deposits decreased to 73% of average earning assets in 2016, compared with 76% a year ago as the growth in total loans outpaced deposit growth.
Table 5 presents the individual components of net interest income and the net interest margin. The effect on interest income and costs of earning asset and funding mix changes described above, combined with rate changes during 2016, are analyzed in Table 6.

42
Wells Fargo & Company
 


Table 4: Average Earning Assets and Funding Sources as a Percentage of Average Earning Assets
 
Year ended December 31,
 
 
2016
 
 
2015
 
(in millions)
Average
balance

 
% of
earning
assets

 
Average
balance

 
% of
earning
assets

Earning assets
 
 
 
 
 
 
 
Federal funds sold, securities purchased under resale agreements and other short-term investments
$
287,718

 
17
%
 
$
266,832

 
17
%
Trading assets
88,400

 
5

 
66,679

 
4

Investment securities:
 
 


 
 
 


Available-for-sale securities:
 
 


 
 
 


Securities of U.S. Treasury and federal agencies
29,418

 
2

 
32,093

 
2

Securities of U.S. states and political subdivisions
52,959

 
3

 
47,404

 
3

Mortgage-backed securities:
 
 


 
 
 


Federal agencies
110,637

 
7

 
100,218

 
6

Residential and commercial
18,725

 
1

 
22,490

 
2

Total mortgage-backed securities
129,362

 
8

 
122,708

 
8

Other debt and equity securities
53,433

 
3

 
49,752

 
3

Total available-for-sale securities
265,172

 
16

 
251,957

 
16

Held-to-maturity securities
90,941

 
5

 
74,048

 
5

Mortgages held for sale (1)
22,412

 
1

 
21,603

 
2

Loans held for sale (1)
218

 

 
573

 

Loans:
 
 


 
 
 


Commercial:
 
 


 
 
 


Commercial and industrial - U.S.
268,182

 
16

 
237,844

 
15

Commercial and industrial - Non U.S.
51,601

 
3

 
46,028

 
3

Real estate mortgage
127,232

 
8

 
116,893

 
7

Real estate construction
23,197

 
1

 
20,979

 
1

Lease financing
17,950

 
1

 
12,301

 
1

Total commercial
488,162

 
29

 
434,045

 
27

Consumer:
 
 


 
 
 


Real estate 1-4 family first mortgage
276,712

 
16

 
268,560

 
17

Real estate 1-4 family junior lien mortgage
49,735

 
3

 
56,242

 
4

Credit card
34,178

 
2

 
31,307

 
2

Automobile
61,566

 
4

 
57,766

 
4

Other revolving credit and installment
39,607

 
2

 
37,512

 
2

Total consumer
461,798

 
27

 
451,387

 
29

Total loans (1)
949,960

 
56

 
885,432

 
56

Other
6,262

 

 
4,947

 

Total earning assets
$
1,711,083

 
100
%
 
$
1,572,071

 
100
%
Funding sources
 
 


 
 
 


Deposits:
 
 


 
 
 


Interest-bearing checking
$
42,379

 
2
%
 
$
38,640

 
2
%
Market rate and other savings
663,557

 
39

 
625,549

 
40

Savings certificates
25,912

 
2

 
31,887

 
2

Other time deposits
55,846

 
3

 
51,790

 
3

Deposits in foreign offices
103,206

 
6

 
107,138

 
7

Total interest-bearing deposits
890,900

 
52

 
855,004

 
54

Short-term borrowings
115,187

 
7

 
87,465

 
6

Long-term debt
239,471

 
14

 
185,078

 
12

Other liabilities
16,702

 
1

 
16,545

 
1

Total interest-bearing liabilities
1,262,260

 
74

 
1,144,092

 
73

Portion of noninterest-bearing funding sources
448,823

 
26

 
427,979

 
27

Total funding sources
$
1,711,083

 
100
%
 
$
1,572,071

 
100
%
Noninterest-earning assets
 
 
 
 
 
 
 
Cash and due from banks
$
18,617

 
 
 
17,327

 
 
Goodwill
26,700

 
 
 
25,673

 
 
Other
129,041

 
 
 
127,848

 
 
Total noninterest-earning assets
$
174,358

 
 
 
170,848

 
 
Noninterest-bearing funding sources
 
 
 
 
 
 
 
Deposits
$
359,666

 
 
 
339,069

 
 
Other liabilities
62,825

 
 
 
68,174

 
 
Total equity
200,690

 
 
 
191,584

 
 
Noninterest-bearing funding sources used to fund earning assets
(448,823
)
 
 
 
(427,979
)
 
 
Net noninterest-bearing funding sources
$
174,358

 
 
 
170,848

 
 
Total assets
$
1,885,441

 
 
 
1,742,919

 
 
 
 
 
 
 
 
 
 
(1)
Nonaccrual loans are included in their respective loan categories.


 
Wells Fargo & Company
43



Earnings Performance (continued)

Table 5: Average Balances, Yields and Rates Paid (Taxable-Equivalent Basis) (1)(2)
 
 
 
 
 
2016

 
 
 
 
 
2015

(in millions) 
Average 
balance 

 
Yields/ 
rates 

 
Interest 
income/ 
expense 

 
Average 
balance 

 
Yields/ 
rates 

 
Interest 
income/ 
expense 

Earning assets
 
 
 
 
 
 
 
 
 
 
 
Federal funds sold, securities purchased under
resale agreements and other short-term investments
$
287,718

 
0.51
%
 
$
1,457

 
266,832

 
0.28
%
 
$
738

Trading assets
88,400

 
2.89

 
2,553

 
66,679

 
3.01

 
2,010

Investment securities (3):
 
 
 
 
 
 
 
 
 
 
 
Available-for-sale securities:
 
 
 
 
 
 
 
 
 
 
 
Securities of U.S. Treasury and federal agencies
29,418

 
1.56

 
457

 
32,093

 
1.58

 
505

Securities of U.S. states and political subdivisions
52,959

 
4.20

 
2,225

 
47,404

 
4.23

 
2,007

Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
Federal agencies
110,637

 
2.50

 
2,764

 
100,218

 
2.73

 
2,733

Residential and commercial
18,725

 
5.49

 
1,029

 
22,490

 
5.73

 
1,289

Total mortgage-backed securities
129,362

 
2.93

 
3,793

 
122,708

 
3.28

 
4,022

Other debt and equity securities
53,433

 
3.44

 
1,841

 
49,752

 
3.42

 
1,701

Total available-for-sale securities
265,172

 
3.14

 
8,316

 
251,957

 
3.27

 
8,235

Held-to-maturity securities:
 
 
 
 
 
 
 
 
 
 
 
Securities of U.S. Treasury and federal agencies
44,675

 
2.19

 
979

 
44,173

 
2.19

 
968

Securities of U.S. states and political subdivisions
2,893

 
5.32

 
154

 
2,087

 
5.40

 
113

Federal agency and other mortgage-backed securities
39,330

 
2.00

 
786

 
21,967

 
2.23

 
489

Other debt securities
4,043

 
2.01

 
81

 
5,821

 
1.73

 
101

Held-to-maturity securities
90,941

 
2.20

 
2,000

 
74,048

 
2.26

 
1,671

Total investment securities
356,113

 
2.90

 
10,316

 
326,005

 
3.04

 
9,906

Mortgages held for sale (4)
22,412

 
3.50

 
784

 
21,603

 
3.63

 
785

Loans held for sale (4)
218

 
4.01

 
9

 
573

 
3.25

 
19

Loans:
 
 
 
 
 
 
 
 
 
 
 
Commercial:
 
 
 
 
 
 
 
 
 
 
 
Commercial and industrial - U.S.
268,182

 
3.45

 
9,243

 
237,844

 
3.29

 
7,836

Commercial and industrial - non U.S.
51,601

 
2.36

 
1,219

 
46,028

 
1.90

 
877

Real estate mortgage
127,232

 
3.44

 
4,371

 
116,893

 
3.41

 
3,984

Real estate construction
23,197

 
3.55

 
824

 
20,979

 
3.57

 
749

Lease financing
17,950

 
5.10

 
916

 
12,301

 
4.70

 
577

Total commercial
488,162

 
3.39

 
16,573

 
434,045

 
3.23

 
14,023

Consumer:
 
 
 
 
 
 
 
 
 
 
 
Real estate 1-4 family first mortgage
276,712

 
4.01

 
11,096

 
268,560

 
4.10

 
11,002

Real estate 1-4 family junior lien mortgage
49,735

 
4.39

 
2,183

 
56,242

 
4.25

 
2,391

Credit card
34,178

 
11.62

 
3,970

 
31,307

 
11.70

 
3,664

Automobile
61,566

 
5.62

 
3,458

 
57,766

 
5.84

 
3,374

Other revolving credit and installment
39,607

 
5.93

 
2,350

 
37,512

 
5.89

 
2,209

Total consumer
461,798

 
4.99

 
23,057

 
451,387

 
5.02

 
22,640

Total loans (4)
949,960

 
4.17

 
39,630

 
885,432

 
4.14

 
36,663

Other
6,262

 
2.51

 
157

 
4,947

 
5.11

 
252

Total earning assets
$
1,711,083

 
3.21
%
 
$
54,906

 
1,572,071

 
3.20
%
 
$
50,373

Funding sources
 
 
 
 
 
 
 
 
 
 
 
Deposits:
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing checking
$
42,379

 
0.14
%
 
$
60

 
38,640

 
0.05
%
 
$
20

Market rate and other savings
663,557

 
0.07

 
449

 
625,549

 
0.06

 
367

Savings certificates
25,912

 
0.35

 
91

 
31,887

 
0.63

 
201

Other time deposits
55,846

 
0.91

 
508

 
51,790

 
0.45

 
232

Deposits in foreign offices
103,206

 
0.28

 
287

 
107,138

 
0.13

 
143

Total interest-bearing deposits
890,900

 
0.16

 
1,395

 
855,004

 
0.11

 
963

Short-term borrowings
115,187

 
0.29

 
333

 
87,465

 
0.07

 
64

Long-term debt
239,471

 
1.60

 
3,830

 
185,078

 
1.40

 
2,592

Other liabilities
16,702

 
2.12

 
354

 
16,545

 
2.15

 
357

Total interest-bearing liabilities
1,262,260

 
0.47

 
5,912

 
1,144,092

 
0.35

 
3,976

Portion of noninterest-bearing funding sources
448,823

 

 

 
427,979

 

 

Total funding sources
$
1,711,083

 
0.35

 
5,912

 
1,572,071

 
0.25

 
3,976

Net interest margin and net interest income on a taxable-equivalent basis (5) 
 
 
2.86
%
 
$
48,994

 
 
 
2.95
%
 
$
46,397

Noninterest-earning assets
 
 
 
 
 
 
 
 
 
 
 
Cash and due from banks
$
18,617

 
 
 
 
 
17,327

 
 
 
 
Goodwill
26,700

 
 
 
 
 
25,673

 
 
 
 
Other
129,041

 
 
 
 
 
127,848

 
 
 
 
Total noninterest-earning assets
$
174,358

 
 
 
 
 
170,848

 
 
 
 
Noninterest-bearing funding sources
 
 
 
 
 
 
 
 
 
 
 
Deposits
$
359,666

 
 
 
 
 
339,069

 
 
 
 
Other liabilities
62,825

 
 
 
 
 
68,174

 
 
 
 
Total equity
200,690

 
 
 
 
 
191,584

 
 
 
 
Noninterest-bearing funding sources used to fund earning assets
(448,823
)
 
 
 
 
 
(427,979
)
 
 
 
 
Net noninterest-bearing funding sources
$
174,358

 
 
 
 
 
170,848

 
 
 
 
Total assets
$
1,885,441

 
 
 
 
 
1,742,919

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1)
Our average prime rate was 3.51% for the year ended December 31, 2016, 3.26% for the year ended December 31, 2015 and 3.25% for the years ended December 31, 2014, 2013, and 2012 . The average three-month London Interbank Offered Rate (LIBOR) was 0.74%, 0.32%, 0.23%, 0.27%, and 0.43% for the same years, respectively.
(2)
Yield/rates and amounts include the effects of hedge and risk management activities associated with the respective asset and liability categories.


44
Wells Fargo & Company
 



 
 
 
 
2014

 
 
 
 
 
2013

 
 
 
 
 
2012

Average 
balance 

 
Yields/ 
rates 

 
Interest 
income/ 
expense 

 
Average 
balance 

 
Yields/ 
rates 

 
Interest 
income/ 
expense 

 
Average 
balance 

 
Yields/ 
rates 

 
Interest 
income/ 
expense 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$
241,282

 
0.28
%
 
$
673

 
154,902

 
0.32
%
 
$
489

 
84,081

 
0.45
%
 
$
378

55,140

 
3.10

 
1,712

 
44,745

 
3.14

 
1,406

 
41,950

 
3.29

 
1,380

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10,400

 
1.64

 
171

 
6,750

 
1.66

 
112

 
3,604

 
1.31

 
47

43,138

 
4.29

 
1,852

 
39,922

 
4.38

 
1,748

 
34,875

 
4.48

 
1,561

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
114,076

 
2.84

 
3,235

 
107,148

 
2.83

 
3,031

 
92,887

 
3.12

 
2,893

26,475

 
6.03

 
1,597

 
30,717

 
6.47

 
1,988

 
33,545

 
6.75

 
2,264

140,551

 
3.44

 
4,832

 
137,865

 
3.64

 
5,019

 
126,432

 
4.08

 
5,157

47,488

 
3.66

 
1,741

 
55,002

 
3.53

 
1,940

 
49,245

 
4.04

 
1,992

241,577

 
3.56

 
8,596

 
239,539

 
3.68

 
8,819

 
214,156

 
4.09

 
8,757

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
17,239

 
2.23

 
385

 

 

 

 

 

 

246

 
4.93

 
12

 

 

 

 

 

 

5,921

 
2.55

 
151

 
701