10-Q 1 wfc-03312017x10q.htm 10-Q Document


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2017
 
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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
 
 
Large accelerated filer    þ
 
Accelerated filer  o
 
 
 
 
 
 
 
Non-accelerated filer    o (Do not check if a smaller reporting company)
 
Smaller reporting company  o
 
 
 
 
Emerging growth company  o
 
          
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o
 
No þ
 
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
 
 
 
Shares Outstanding
 
 
April 26, 2017
Common stock, $1-2/3 par value
 
4,997,318,006
          




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 Matters
 
Critical Accounting Policies  
 
Current Accounting Developments
 
Forward-Looking Statements  
 
Risk Factors 
 
Glossary of Acronyms
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
Item 4.
Controls and Procedures
 
 
 
PART II
Other Information
 
Item 1.
Legal Proceedings
Item 1A.
Risk Factors
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
Item 6.
Exhibits
 
 
 
 
 
Signature
 
 
Exhibit Index

1



PART I - FINANCIAL INFORMATION

FINANCIAL REVIEW
Summary Financial Data
 
 
 
 
 
 
 
 
 
  
 
 
 
 
 
 
% Change
 
 
Quarter ended
 
 
Mar 31, 2017 from
 
($ in millions, except per share amounts)
Mar 31,
2017

 
Dec 31,
2016

 
Mar 31,
2016

 
Dec 31,
2016

 
Mar 31,
2016

For the Period
 
 
 
 
 
 
 
 
 
Wells Fargo net income
$
5,457

 
5,274

 
5,462

 
3
 %
 

Wells Fargo net income applicable to common stock
5,056

 
4,872

 
5,085

 
4

 
(1
)
Diluted earnings per common share
1.00

 
0.96

 
0.99

 
4

 
1

Profitability ratios (annualized):
 
 
 
 
 
 
 
 
 
Wells Fargo net income to average assets (ROA)
1.15
%
 
1.08

 
1.21

 
6

 
(5
)
Wells Fargo net income applicable to common stock to average Wells Fargo common stockholders' equity (ROE)
11.54

 
10.94

 
11.75

 
5

 
(2
)
Return on average tangible common equity (ROTCE) (1)
13.85

 
13.16

 
14.15

 
5

 
(2
)
Efficiency ratio (2)
62.7

 
61.2

 
58.7

 
2

 
7

Total revenue
$
22,002

 
21,582

 
22,195

 
2

 
(1
)
Pre-tax pre-provision profit (PTPP) (3)
8,210

 
8,367

 
9,167

 
(2
)
 
(10
)
Dividends declared per common share
0.380

 
0.380

 
0.375

 

 
1

Average common shares outstanding
5,008.6

 
5,025.6

 
5,075.7

 

 
(1
)
Diluted average common shares outstanding
5,070.4

 
5,078.2

 
5,139.4

 

 
(1
)
Average loans
$
963,645

 
964,147

 
927,220

 

 
4

Average assets
1,931,041

 
1,944,250

 
1,819,875

 
(1
)
 
6

Average total deposits
1,299,191

 
1,284,158

 
1,219,430

 
1

 
7

Average consumer and small business banking deposits (4)
758,754

 
749,946

 
714,837

 
1

 
6

Net interest margin
2.87
%
 
2.87

 
2.90

 

 
(1
)
At Period End
 
 
 
 
 
 
 
 
 
Investment securities
$
407,560

 
407,947

 
334,899

 

 
22

Loans
958,405

 
967,604

 
947,258

 
(1
)
 
1

Allowance for loan losses
11,168

 
11,419

 
11,621

 
(2
)
 
(4
)
Goodwill
26,666

 
26,693

 
27,003

 

 
(1
)
Assets
1,951,564

 
1,930,115

 
1,849,182

 
1

 
6

Deposits
1,325,444

 
1,306,079

 
1,241,490

 
1

 
7

Common stockholders' equity
178,388

 
176,469

 
175,534

 
1

 
2

Wells Fargo stockholders' equity
201,500

 
199,581

 
197,496

 
1

 
2

Total equity
202,489

 
200,497

 
198,504

 
1

 
2

Tangible common equity (1)
148,850

 
146,737

 
144,679

 
1

 
3

Capital ratios (5)(6):
 
 
 
 
 
 
 
 
 
Total equity to assets
10.38
%
 
10.39

 
10.73

 

 
(3
)
Risk-based capital:
 
 
 
 
 
 
 
 


Common Equity Tier 1
11.52

 
11.13

 
10.87

 
4

 
6

Tier 1 capital
13.27

 
12.82

 
12.49

 
4

 
6

Total capital
16.41

 
16.04

 
14.91

 
2

 
10

Tier 1 leverage
9.07

 
8.95

 
9.26

 
1

 
(2
)
Common shares outstanding
4,996.7

 
5,016.1

 
5,075.9

 

 
(2
)
Book value per common share (7)
$
35.70

 
35.18

 
34.58

 
1

 
3

Tangible book value per common share (1) (7)
29.79

 
29.25

 
28.50

 
2

 
5

Common stock price:
 
 
 
 
 
 
 
 
 
High
59.99

 
58.02

 
53.27

 
3

 
13

Low
53.35

 
43.55

 
44.50

 
23

 
20

Period end
55.66

 
55.11

 
48.36

 
1

 
15

Team members (active, full-time equivalent)
272,800

 
269,100

 
268,600

 
1

 
2

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

2

Overview (continued)

This Quarterly Report, including the Financial Review and the Financial Statements and related Notes, contains forward-looking statements, which may include forecasts of our financial results and condition, expectations for our operations and business, and our assumptions for those forecasts and expectations. Do not unduly rely on forward-looking statements. Actual results may differ materially from our forward-looking statements due to several factors. Factors that could cause our actual results to differ materially from our forward-looking statements are described in this Report, including in the “Forward-Looking Statements” section, and the “Risk Factors” and “Regulation and Supervision” sections of our Annual Report on Form 10-K for the year ended December 31, 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. 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 $1.95 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 8,500 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 273,000 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 March 31, 2017.
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.
In keeping with our primary values and risk management priorities, we announced six new long-term goals for the Company in March 2017, which entail becoming the leader in the following areas:
Customer service and advice – provide best-in-class service and guidance to our customers to help them reach their
 
financial goals.
Team member engagement – be a company where people matter, teamwork is rewarded, everyone feels respected and empowered to speak up, diversity and inclusion are embraced, and “how” our work gets done is just as important as getting the work done.
Innovation – create new kinds of lasting value for our customers and businesses by using innovative technologies and moving quickly to bring about change.
Risk management – desire to set the global standard in managing all forms of risk.
Corporate citizenship – make better every community in which we live and do business.
Shareholder value – earn the confidence of shareholders by maximizing long-term value.

Sales Practices Matters
As we have previously reported, 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. As a result, rebuilding trust through a comprehensive action plan that includes making things right for our customers, team members, and other stakeholders, and building a better Company for the future remains our current top priority. The job of rebuilding trust in Wells Fargo is 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 additional actions:
We added two new independent directors to help contribute to the Board's oversight of Wells Fargo and help ensure we continue to move in the right direction to restore trust and create value for our shareholders.
The Board released the findings of its independent investigation into the Company's retail banking sales practices and related matters in order to understand the root causes of improper sales practices in the Community Bank, identify remedial actions to ensure these issues won't be repeated, and help rebuild the trust customers place in the bank.
The Board took compensation actions, including clawing back approximately $69 million from former CEO John Stumpf and $67 million from former Community Bank head Carrie Tolstedt; total executive compensation actions taken by the Board now total over $180 million.
Terminated the employment of senior managers in the Community Bank for cause, with the result that they forfeited annual incentive and outstanding equity awards.
Made several important changes in our organizational structure to provide greater role clarity, increased coordination, and stronger oversight, including changing

3


reporting lines for control function groups such as human resources and risk.
Agreed in principle to a $142 million class action settlement, subject to court approval, that will go to remediating customer harm.

As we move forward Wells Fargo has a specific action plan in place focused on reaching out to everyone who has been affected by improper 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 in our 2016 Form 10-K and Note 11 (Legal Actions) to Financial Statements in this Report.
 
Financial Performance
Wells Fargo net income was $5.5 billion in first quarter 2017 with diluted earnings per common share (EPS) of $1.00, compared with $5.5 billion and $0.99, respectively, a year ago. We have now generated quarterly earnings of more than $5 billion for 18 consecutive quarters, which reflected the ability of our diversified business model and risk discipline to generate consistent financial performance during a period that included market volatility and economic uncertainty. We remain focused on meeting the financial needs of our customers and on investing in our businesses so we may continue to meet the evolving needs of our customers in the future.
Compared with a year ago:
revenue was $22.0 billion, down 1%, driven by a decline in mortgage banking income and lower other noninterest income (reflecting the accounting impact of net hedge ineffectiveness), which was partially offset by a 5% increase in net interest income;
average loans of $963.6 billion increased $36.4 billion, or 4%;
total deposits were a record $1.3 trillion, up $84.0 billion, or 7%;
our credit results improved with a net charge-off rate of 34 basis points (annualized) of average loans and we had a $200 million release from the allowance for credit losses;
we returned $3.1 billion to shareholders through common stock dividends and net share repurchases, which was the seventh consecutive quarter of returning more than $3 billion; and
we reduced our common shares outstanding to below 5 billion shares for the first time since 2009.

Balance Sheet and Liquidity
Our balance sheet remained strong during first quarter 2017 with high levels of liquidity and capital and record deposit balances. Our total assets reached a record $1.95 trillion at March 31, 2017. Cash, federal funds sold, securities purchased under resale agreements and other short-term investments reached an all-time high of $328.4 billion in first quarter 2017 driven by continued growth in deposits and a linked-quarter decline in our loan portfolio.
Investment securities of $407.6 billion declined less than 1% from December 31, 2016, with approximately $16 billion of gross purchases during first quarter 2017 more than offset by run-off and sales. We believe interest rates are in a transitional period and, accordingly, our decision to maintain a relatively stable investment portfolio was driven primarily by interest rate and other comprehensive income risk management.
Our funding sources continued to grow in first quarter 2017 with long-term debt up $1.4 billion from December 31, 2016, on
 
$12.8 billion of issuances during the quarter. Deposit growth also continued in first quarter 2017 with period-end deposits up $19.4 billion, or 1%, from December 31, 2016. Our average deposit cost in first quarter 2017 was 17 basis points, up 7 basis points from a year ago, which reflected an increase in commercial deposit rates. 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 1.6% (March 2017 compared with March 2016).

Credit Quality
Solid overall credit results continued in first quarter 2017 as losses remained low and we continued to originate high quality loans, reflecting our long-term risk focus. Net charge-offs were $805 million, or 0.34% (annualized) of average loans, in first quarter 2017, compared with $886 million a year ago (0.38%). The decrease in net charge-offs in first quarter 2017, compared with a year ago, was driven by lower losses in the oil and gas portfolio and increased recoveries in the commercial portfolio. Our total oil and gas loan exposure, which includes unfunded commitments and loans outstanding, was down 16% from a year ago.
Our commercial portfolio net charge-offs were $143 million, or 11 basis points of average commercial loans, in first quarter 2017, compared with net charge-offs of $237 million, or 20 basis points, a year ago. Net consumer credit losses increased to 59 basis points of average consumer loans in first quarter 2017 from 57 basis points in first quarter 2016. Our commercial real estate portfolios were in a net recovery position for the 17th consecutive quarter, reflecting our conservative risk discipline and improved market conditions. Losses on our consumer real estate portfolios declined $92 million, or 75%, from a year ago, reflecting the benefit of the continued improvement in the housing market and our continued focus on originating high quality loans. Approximately 74% of the consumer first mortgage portfolio outstanding at March 31, 2017, was originated after 2008, when more stringent underwriting standards were implemented.
The allowance for credit losses as of March 31, 2017, decreased $381 million compared with a year ago and decreased $253 million from December 31, 2016. The allowance coverage for total loans was 1.28% at March 31, 2017, compared with 1.34% a year ago and 1.30% at December 31, 2016. The allowance covered 3.8 times annualized first quarter net charge-offs, compared with 3.6 times a year ago. Future allowance levels will be based on a variety of factors, including loan growth, portfolio performance and general economic conditions. Our provision for loan losses was $605 million in first quarter 2017, down from $1.1 billion a year ago, primarily reflecting improvement in the oil and gas portfolio.
Nonperforming assets decreased $698 million, or 6%, from December 31, 2016, with improvement across our consumer and commercial portfolios and lower foreclosed assets. Nonperforming assets were only 1.11% of total loans, the lowest level since the merger with Wachovia in 2008. Nonaccrual loans decreased $625 million from the prior quarter primarily due to a $353 million decrease in commercial nonaccruals. In addition, foreclosed assets were down $73 million from the prior quarter.


4

Overview (continued)

Capital
Our financial performance in first quarter 2017 resulted in strong capital generation, which increased total equity to a record $202.5 billion at March 31, 2017, up $2.0 billion from December 31, 2016. We returned $3.1 billion to shareholders in first quarter 2017 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%, in line with the prior quarter, and within our targeted range of 55-75%. We continued to reduce our common shares outstanding through the repurchase of 53.1 million common shares in the quarter. We also entered into a $750 million forward repurchase contract with an unrelated third party in April 2017 that is expected to settle in third quarter 2017 for approximately 14 million shares. We expect to reduce our common shares outstanding through share repurchases throughout the remainder of 2017.
 
We believe an important measure of our capital strength is the Common Equity Tier 1 ratio under Basel III, fully phased-in, which was 11.23% at March 31, 2017. Likewise, our other regulatory capital ratios remained strong. See the “Capital Management” section in this Report for more information regarding our capital, including the calculation of our regulatory capital amounts.

5


Earnings Performance 
Wells Fargo net income for first quarter 2017 was $5.5 billion ($1.00 diluted earnings per common share), compared with $5.5 billion ($0.99 diluted per share) for first quarter 2016. We generated revenue growth across many of our businesses. Our financial performance in first quarter 2017, compared with the same period a year ago, benefited from a $633 million increase in net interest income and a $481 million decrease in our provision for credit losses, offset by a $826 million decrease in noninterest income and a $764 million increase in noninterest expense. In first quarter 2017, net interest income represented 56% of revenue, compared with 53% for the same period in 2016. Noninterest income was $9.7 billion in first quarter 2017, representing 44% of revenue, compared with $10.5 billion (47%) in first quarter 2016.
Revenue, the sum of net interest income and noninterest income, was $22.0 billion in first quarter 2017, compared with $22.2 billion in first quarter 2016. The decrease in revenue for first quarter 2017, compared with the same period in 2016, was largely due to a decline in mortgage banking income and lower other noninterest income predominantly due to the accounting impact of net hedge ineffectiveness and lower insurance income due to the divestiture of our crop insurance business in first quarter 2016. First quarter 2017 included a $193 million net hedge ineffectiveness accounting loss, resulting largely from foreign currency fluctuations, compared with a $379 million net hedge ineffectiveness accounting gain in first quarter 2016. The decline in revenue for first quarter 2017, compared with the same period a year ago, was partially offset by higher interest income from loans and investment securities.

Net Interest Income
Net interest income is the interest earned on debt securities, loans (including yield-related loan fees) and other interest-earning assets minus the interest paid on deposits, short-term borrowings and long-term debt. The net interest margin is the average yield on earning assets minus the average interest rate paid for deposits and our other sources of funding. Net interest income and the net interest margin are presented on a taxable-equivalent basis in Table 1 to consistently reflect income from taxable and tax-exempt loans and securities based on a 35% federal statutory tax rate.
While the Company believes that it has the ability to increase net interest income over time, net interest income and the net interest margin in any one period can be significantly affected by a variety of factors including the mix and overall size of our earning assets portfolio and the cost of funding those assets. In addition, some variable sources of interest income, such as resolutions from purchased credit-impaired (PCI) loans, loan fees and collection of interest on nonaccrual loans, can vary from period to period. Net interest income and net interest margin growth has been challenged during the prolonged low interest rate environment as higher yielding loans and securities have run off and been replaced with lower yielding assets.
 
Net interest income on a taxable-equivalent basis was $12.6 billion in first quarter 2017, compared with $12.0 billion for the same period a year ago. The net interest margin was 2.87% for first quarter 2017, down from 2.90% for first quarter 2016. The increase in net interest income in first quarter 2017 from the same period a year ago resulted from an increase in interest income, partially offset by an increase in interest expense on funding sources. The increase in interest income was driven by growth in commercial loans and investment securities, increased trading income and the benefit of higher interest rates. Interest expense on funding sources increased in first quarter 2017, compared with the same period a year ago, primarily due to growth and repricing of long-term debt. Deposit interest expense was also higher, predominantly due to an increase in wholesale pricing resulting from higher interest rates.
The decline in net interest margin in first quarter 2017, compared with the same period a year ago, was primarily due to deposit growth and higher long-term debt balances. This was partially offset by growth in loans, investments securities, and the benefit of higher short-term interest rates.
Average earning assets increased $121.4 billion in first quarter 2017, compared with the same period a year ago, as average loans increased $36.4 billion in first quarter 2017, average investment securities increased $69.7 billion in first quarter 2017 and average trading assets increased $13.3 billion in first quarter 2017, compared with the same period a year ago. In addition, average federal funds sold and other short-term investments decreased $930 million in first quarter 2017, compared with the same period a year ago.
Deposits are an important low-cost source of funding and affect both net interest income and the net interest margin. Deposits include noninterest-bearing deposits, interest-bearing checking, market rate and other savings, savings certificates, other time deposits, and deposits in foreign offices. Average deposits of $1.30 trillion increased in first quarter 2017, compared with $1.22 trillion in first quarter 2016, and represented 135% of average loans in first quarter 2017, compared with 132% for the same period a year ago. Average deposits decreased to 73% of average earning assets in first quarter 2017, compared with 74% for the same period a year ago as the growth in total loans outpaced deposit growth.

6

Earnings Performance (continued)




Table 1: Average Balances, Yields and Rates Paid (Taxable-Equivalent Basis) (1)(2)
  
Quarter ended March 31,
 
 
 
 
 
 
2017

 
 
 
 
 
2016

(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
$
283,767

 
0.76
%
 
$
532

 
284,697

 
0.49
%
 
$
344

Trading assets
93,765

 
2.80

 
655

 
80,464

 
3.01

 
605

Investment securities (3): 
 
 
 
 
 
 
 
 
 
 
 
Available-for-sale securities:
 
 
 
 
 
 
 
 
 
 
 
Securities of U.S. Treasury and federal agencies
25,034

 
1.54

 
95

 
34,474

 
1.59

 
136

Securities of U.S. states and political subdivisions
52,248

 
4.03

 
526

 
50,512

 
4.24

 
535

Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
Federal agencies
156,617

 
2.58

 
1,011

 
96,423

 
2.80

 
675

Residential and commercial
14,452

 
5.32

 
192

 
20,827

 
5.20

 
271

Total mortgage-backed securities
171,069

 
2.81

 
1,203

 
117,250

 
3.23

 
946

Other debt and equity securities
50,620

 
3.60

 
452

 
53,558

 
3.21

 
429

Total available-for-sale securities
298,971

 
3.05

 
2,276

 
255,794

 
3.20

 
2,046

Held-to-maturity securities:
 
 
 
 
 
 
 
 
 
 
 
Securities of U.S. Treasury and federal agencies
44,693

 
2.20

 
243

 
44,664

 
2.20

 
244

Securities of U.S. states and political subdivisions
6,273

 
5.30

 
83

 
2,156

 
5.41

 
29

Federal agency and other mortgage-backed securities
51,786

 
2.51

 
324

 
28,114

 
2.49

 
175

Other debt securities
3,329

 
2.34

 
19

 
4,598

 
1.92

 
22

Total held-to-maturity securities
106,081

 
2.54

 
669

 
79,532

 
2.37

 
470

Total investment securities
405,052

 
2.92

 
2,945

 
335,326

 
3.01

 
2,516

Mortgages held for sale (4)
19,893

 
3.70

 
184

 
17,870

 
3.59

 
161

Loans held for sale (4)
112

 
4.44

 
1

 
282

 
3.23

 
2

Loans:
 
 
 
 
 
 
 
 
 
 
 
Commercial:
 
 
 
 
 
 
 
 
 
 
 
Commercial and industrial – U.S.
274,749

 
3.59

 
2,436

 
257,727

 
3.39

 
2,177

Commercial and industrial – Non U.S.
55,347

 
2.73

 
373

 
49,508

 
2.10

 
258

Real estate mortgage
132,449

 
3.56

 
1,164

 
122,739

 
3.41

 
1,040

Real estate construction
24,591

 
3.72

 
225

 
22,603

 
3.61

 
203

Lease financing
19,070

 
4.94

 
235

 
15,047

 
4.74

 
178

Total commercial
506,206

 
3.54

 
4,433

 
467,624

 
3.31

 
3,856

Consumer:
 
 
 
 
 
 
 
 
 
 
 
Real estate 1-4 family first mortgage
275,480

 
4.02

 
2,766

 
274,722

 
4.05

 
2,782

Real estate 1-4 family junior lien mortgage
45,285

 
4.60

 
515

 
52,236

 
4.39

 
571

Credit card
35,437

 
11.97

 
1,046

 
33,366

 
11.61

 
963

Automobile
61,510

 
5.46

 
828

 
60,114

 
5.67

 
848

Other revolving credit and installment
39,727

 
6.02

 
590

 
39,158

 
5.99

 
584

Total consumer
457,439

 
5.06

 
5,745

 
459,596

 
5.02

 
5,748

Total loans (4)
963,645

 
4.26

 
10,178

 
927,220

 
4.16

 
9,604

Other
6,865

 
2.96

 
50

 
5,808

 
2.06

 
30

Total earning assets
$
1,773,099

 
3.31
%
 
$
14,545

 
1,651,667

 
3.22
%
 
$
13,262

Funding sources
 
 
 
 
 
 
 
 
 
 
 
Deposits:
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing checking
$
50,686

 
0.29
%
 
$
37

 
38,711

 
0.12
%
 
$
11

Market rate and other savings
684,175

 
0.09

 
157

 
651,551

 
0.07

 
107

Savings certificates
23,466

 
0.29

 
17

 
27,880

 
0.45

 
31

Other time deposits
54,915

 
1.31

 
178

 
58,206

 
0.74

 
107

Deposits in foreign offices
122,200

 
0.49

 
148

 
97,682

 
0.21

 
51

Total interest-bearing deposits
935,442

 
0.23

 
537

 
874,030

 
0.14

 
307

Short-term borrowings
98,549

 
0.47

 
115

 
107,857

 
0.25

 
67

Long-term debt
259,793

 
1.83

 
1,183

 
216,883

 
1.56

 
842

Other liabilities
16,806

 
2.22

 
92

 
16,492

 
2.14

 
89

Total interest-bearing liabilities
1,310,590

 
0.59

 
1,927

 
1,215,262

 
0.43

 
1,305

Portion of noninterest-bearing funding sources
462,509

 

 

 
436,405

 

 

Total funding sources
$
1,773,099

 
0.44

 
1,927

 
1,651,667

 
0.32

 
1,305

Net interest margin and net interest income on a taxable-equivalent basis (5)
 
 
2.87
%
 
$
12,618

 
 
 
2.90
%
 
$
11,957

Noninterest-earning assets
 
 
 
 
 
 
 
 
 
 
 
Cash and due from banks
$
18,706

 
  
 
  
 
17,995

 
  
 
  
Goodwill
26,673

 
  
 
  
 
26,069

 
  
 
  
Other
112,563

 
 
 
 
 
124,144

 
 
 
 
Total noninterest-earning assets
$
157,942

 
 
 
 
 
168,208

 
 
 
 
Noninterest-bearing funding sources
 
 
 
 
 
 
  
 
 
 
 
Deposits
$
363,749

 
 
 
 
 
345,400

 
 
 
 
Other liabilities
54,935

 
 
 
 
 
62,627

 
 
 
 
Total equity
201,767

 
 
 
 
 
196,586

 
 
 
 
Noninterest-bearing funding sources used to fund earning assets
(462,509
)
 
 
 
 
 
(436,405
)
 
 
 
 
Net noninterest-bearing funding sources
$
157,942

 
 
 
 
 
168,208

 
 
 
 
Total assets
$
1,931,041

 
 
 
 
 
1,819,875

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1)
Our average prime rate was 3.80% and 3.50% for the quarters ended March 31, 2017 and 2016, respectively. The average three-month London Interbank Offered Rate (LIBOR) was 1.07% and 0.62% for same quarters, 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 $318 million and $290 million for the quarters ended March 31, 2017 and 2016, respectively, predominantly related to tax-exempt income on certain loans and securities. The federal statutory tax rate utilized was 35% for the periods presented.

7


Noninterest Income
Table 2: Noninterest Income
 
Quarter ended March 31,
 
 
%

(in millions)
2017

 
2016

 
Change

Service charges on deposit accounts
$
1,313

 
1,309

 
 %
Trust and investment fees:
 
 
 
 
 
Brokerage advisory, commissions and other fees
2,324

 
2,239

 
4

Trust and investment management
829

 
815

 
2

Investment banking
417

 
331

 
26

Total trust and investment fees
3,570

 
3,385

 
5

Card fees
945

 
941

 

Other fees:
 
 
 
 
 
Charges and fees on loans
307

 
313

 
(2
)
Cash network fees
126

 
131

 
(4
)
Commercial real estate brokerage commissions
81

 
117

 
(31
)
Letters of credit fees
74

 
78

 
(5
)
Wire transfer and other remittance fees
107

 
92

 
16

All other fees
170

 
202

 
(16
)
Total other fees
865

 
933

 
(7
)
Mortgage banking:
 
 
 
 
 
Servicing income, net
456

 
850

 
(46
)
Net gains on mortgage loan origination/sales activities
772

 
748

 
3

Total mortgage banking
1,228

 
1,598

 
(23
)
Insurance
277

 
427

 
(35
)
Net gains from trading activities
439

 
200

 
120

Net gains on debt securities
36

 
244

 
(85
)
Net gains from equity investments
403

 
244

 
65

Lease income
481

 
373

 
29

Life insurance investment income
144

 
154

 
(6
)
All other
1

 
720

 
(100
)
Total
$
9,702

 
10,528

 
(8
)

Noninterest income of $9.7 billion represented 44% of revenue for first quarter 2017, compared with $10.5 billion, or 47% for first quarter 2016. The decline in noninterest income in first quarter 2017, compared with the same period a year ago, was predominantly driven by net hedge ineffectiveness, lower net gains on debt securities, lower insurance income due to the divestiture of our crop insurance business in first quarter 2016, and lower mortgage banking income. The decreases in noninterest income were partially offset by higher net gains from trading activities, trust and investment fees, net gains from equity investments due to strong equity markets, and lease income related to the GE Capital business acquisitions in 2016. Many of our businesses, including capital finance, retail brokerage, venture capital, capital markets, and corporate banking grew noninterest income in first quarter 2017.
Brokerage advisory, commissions and other fees are received for providing full-service and discount brokerage services predominantly to retail brokerage clients. Income from these brokerage-related activities include asset-based fees for advisory accounts, which are based on the market value of the client’s assets, and transactional commissions based on the number and size of transactions executed at the client’s direction. These fees increased to $2.3 billion in first quarter 2017 from $2.2 billion for the same period in 2016. The increase in first quarter 2017 was due to higher asset-based fees. Retail brokerage client assets totaled $1.6 trillion at March 31, 2017, compared with $1.4
 
trillion at March 31, 2016, with all retail brokerage services provided by our Wealth and Investment Management (WIM) operating segment. For additional information on retail brokerage client assets, see the discussion and Tables 4d and 4e in the "Operating Segment Results – Wealth and Investment Management – Retail Brokerage Client Assets" section in this Report.
We earn trust and investment management fees from managing and administering assets, including mutual funds, institutional separate accounts, corporate trust, personal trust, employee benefit trust and agency assets. Trust and investment management fee income is primarily from client assets under management (AUM) for which the fees are determined based on a tiered scale relative to the market value of the AUM. AUM consists of assets for which we have investment management discretion. Our AUM totaled $654.9 billion at March 31, 2017, compared with $645.7 billion at March 31, 2016, with substantially all of our AUM managed by our WIM operating segment. Additional information regarding our WIM operating segment AUM is provided in Table 4f and the related discussion in the "Operating Segment Results – Wealth and Investment Management – Trust and Investment Client Assets Under Management" section in this Report. In addition to AUM we have client assets under administration (AUA) that earn various administrative fees which are generally based on the extent of the services provided to administer the account. Our AUA totaled

8

Earnings Performance (continued)




$1.6 trillion at March 31, 2017, compared with $1.3 trillion at March 31, 2016. Trust and investment management fees increased $14 million to $829 million in first quarter 2017 from $815 million in first quarter 2016 due to growth in management fees for investment advice on mutual funds, business growth and a higher fee rate schedule.
We earn investment banking fees from underwriting debt and equity securities, arranging loan syndications, and performing other related advisory services. Investment banking fees increased to $417 million in first quarter 2017 from $331 million in first quarter 2016, due to an increase in advisory services, equity originations and loan syndications.
Card fees were $945 million in first quarter 2017, compared with $941 million in first quarter 2016, due to an increase in purchase activity.
Other fees decreased to $865 million in first quarter 2017, from $933 million for the same period in 2016, predominantly driven by lower commercial real estate brokerage commissions and all other fees. Commercial real estate brokerage commissions decreased to $81 million in first quarter 2017, compared with $117 million in first quarter 2016 driven by lower sales and other property-related activities including financing and advisory services. All other fees were $170 million in first quarter 2017, compared with $202 million for the same period in 2016, driven by lower hedge fund fees and lower merchant-related services and incentives.
Mortgage banking noninterest income, consisting of net servicing income and net gains on mortgage loan origination/sales activities, totaled $1.2 billion in first quarter 2017, compared with $1.6 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 of $456 million for first quarter 2017 included a $102 million net MSR valuation gain ($174 million increase in the fair value of the MSRs and a $72 million hedge loss). Net servicing income of $850 million for first quarter 2016 included a $498 million net MSR valuation gain ($957 million decrease in the fair value of the MSRs and a $1.5 billion hedge gain). The decrease in net MSR valuation gains in first quarter 2017, compared with the same period in 2016, was primarily attributable to MSR valuation adjustments in first quarter 2016 that reflected a reduction in forecasted prepayments in first quarter 2016 due to updated economic, customer data attributes, and mortgage market rate inputs.
Our portfolio of loans serviced for others was $1.68 trillion at both March 31, 2017 and December 31, 2016. At March 31, 2017, the ratio of combined residential and commercial MSRs to related loans serviced for others was 0.87%, compared with 0.85% at December 31, 2016. See the “Risk Management – Asset/Liability Management – Mortgage Banking Interest Rate and Market Risk” section in this Report for additional information regarding our MSRs risks and hedging approach.
Net gains on mortgage loan origination/sales activities was $772 million in first quarter 2017, compared with $748 million for the same period a year ago. The increase in first quarter 2017, compared with the same period a year ago, was due to a 10% increase in held for sale mortgage loan originations, which increased to $34 billion in first quarter 2017 from $31 billion in first quarter 2016. Total mortgage loan originations were $44 billion for both first quarter 2017 and 2016. The production margin on residential held-for-sale mortgage originations, which represents net gains on residential mortgage loan origination/
 
sales activities divided by total residential held-for-sale mortgage originations, provides a measure of the profitability of our residential mortgage origination activity. Table 2a presents the information used in determining the production margin.

Table 2a: Selected Mortgage Production Data
 
 
Quarter
ended Mar 31,
 
 
 
2017

2016

Net gains on mortgage loan origination/sales activities (in millions):
 
 
 
Residential
(A)
$
569

532

Commercial
 
101

71

Residential pipeline and unsold/repurchased loan management (1)
 
102

145

Total
 
$
772

748

Residential real estate originations (in billions):
 
 
 
Held-for-sale
(B)
$
34

31

Held-for-investment
 
10

13

Total
 
$
44

44

Production margin on residential held-for-sale mortgage originations
(A)/(B)
1.68
%
1.68

(1)
Primarily includes the results of GNMA loss mitigation activities, interest rate management activities and changes in estimate to the liability for mortgage loan repurchase losses.

The production margin was 1.68% for both first quarter 2017 and 2016. Mortgage applications were $59 billion for first quarter 2017, compared with $77 billion for the same period a year ago. The 1-4 family first mortgage unclosed pipeline was $28 billion at March 31, 2017, compared with $39 billion at March 31, 2016. For additional information about our mortgage banking activities and results, see the “Risk Management – Asset/Liability 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 first quarter 2017, we had no net release or build to the repurchase liability, compared with a net $12 million release for first quarter 2016. 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.
Insurance income was $277 million in first quarter 2017, compared with $427 million in the same period a year ago. The decrease was driven by the divestiture of our crop insurance business in first quarter 2016.
Net gains from trading activities, which reflect unrealized changes in fair value of our trading positions and realized gains and losses, were $439 million in first quarter 2017, compared with $200 million in first quarter 2016. The increase was primarily driven by higher deferred compensation plan investment results (offset in employee benefits expense) and higher customer accommodation trading activity. 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

9


expense from trading liabilities. For additional information about trading activities, see the “Risk Management – Asset/Liability Management – Market Risk – Trading Activities” section in this Report. 
Net gains on debt and equity securities totaled $439 million for first quarter 2017, and $488 million in first quarter 2016, after other-than-temporary impairment (OTTI) write-downs of $129 million for first quarter 2017, compared with $198 million for the same period in 2016. The decrease in net gains on debt and equity securities in first quarter 2017 reflected lower net gains from debt securities, partially offset by strong equity markets.
Lease income of $481 million in first quarter 2017, increased from $373 million for the same period a year ago, predominantly driven by the GE Capital business acquisitions, partially offset by lower gains on early leveraged lease terminations.
 
All other income was $1 million in first quarter 2017, compared with $720 million in first quarter 2016. All other income includes ineffectiveness recognized on derivatives that qualify for hedge accounting, the results of certain economic hedges, losses on low income housing tax credit investments, foreign currency adjustments, and income from investments accounted for under the equity method, any of which can cause decreases and net losses in other income. The decrease in other income for first quarter 2017, compared with the same period a year ago, was predominantly due to net hedge ineffectiveness, and the gain from the sale of our crop insurance business in first quarter 2016, partially offset by higher income from equity method investments. Hedge ineffectiveness was driven by an increase in ineffectiveness recognized on interest rate swaps used to hedge our exposure to interest rate risk on long-term debt and cross-currency swaps, cross-currency interest rate swaps and forward contracts used to hedge our exposure to foreign currency risk and interest rate risk involving non-U.S. dollar denominated long-term debt. The portion of the hedge ineffectiveness recognized was partially offset by the results of certain economic hedges and, accordingly, we recognized a net hedge loss of $193 million for first quarter 2017, compared with a net hedge benefit of $379 million in first quarter 2016. For additional information about derivatives used as part of our asset/liability management, see Note 12 (Derivatives) to Financial Statements in this Report.

10

Earnings Performance (continued)




Noninterest Expense
Table 3: Noninterest Expense
 
Quarter ended Mar 31,
 
 
%

(in millions)
2017

 
2016

 
Change

Salaries
$
4,261

 
4,036

 
6
 %
Commission and incentive compensation
2,725

 
2,645

 
3

Employee benefits
1,686

 
1,526

 
10

Equipment
577

 
528

 
9

Net occupancy
712

 
711

 

Core deposit and other intangibles
289

 
293

 
(1
)
FDIC and other deposit assessments
333

 
250

 
33

Outside professional services
804

 
583

 
38

Operating losses
282

 
454

 
(38
)
Operating leases
345

 
235

 
47

Contract services
325

 
282

 
15

Outside data processing
220

 
208

 
6

Travel and entertainment
179

 
172

 
4

Postage, stationery and supplies
145

 
163

 
(11
)
Advertising and promotion
127

 
134

 
(5
)
Telecommunications
91

 
92

 
(1
)
Foreclosed assets
86

 
78

 
10

Insurance
24

 
111

 
(78
)
All other
581

 
527

 
10

Total
$
13,792

 
13,028

 
6

NM - Not meaningful
Noninterest expense was $13.8 billion in first quarter 2017, up 6% from $13.0 billion in the same period a year ago, driven by higher personnel expenses, outside professional services, operating leases, FDIC expense, and other expense, partially offset by lower operating losses and insurance expense.
Personnel expenses, which include salaries, commissions, incentive compensation and employee benefits, were up $465 million, or 6%, in first quarter 2017 compared with the same quarter last year, due to annual salary increases and increased staffing in technology, risk management, virtual channels, and operations, higher deferred compensation costs (included in employee benefits expense and offset in trading revenue), and incentive compensation expense.
FDIC and other deposit assessments were up $83 million, or 33%, in first quarter 2017 compared with the same period a year ago, due to an increase in deposit assessments as a result of a temporary surcharge which became effective on July 1, 2016.
Outside professional and contract services expense was up $264 million, or 31%, in first quarter 2017 compared with the same period a year ago. The increase was largely driven by higher project and technology spending, as well as higher legal expense related to sales practices matters.
Operating losses were down $172 million, or 38%, in first quarter 2017 compared with the same period a year ago predominantly due to lower litigation accruals for various legal matters.
 
Operating lease expense was up $110 million, or 47%, in first quarter 2017 compared with the same period a year ago, predominantly due to the leases acquired from GE Capital.
Insurance expense was down $87 million, or 78%, in first quarter 2017 compared with the same period a year ago predominantly driven by the sale of our crop insurance business in first quarter 2016.
All other noninterest expense was up $54 million, or 10%, in first quarter 2017 compared with the same period a year ago predominantly driven by higher donations expense.
The efficiency ratio was 62.7% in first quarter 2017, compared with 58.7% in first quarter 2016. The Company expects the efficiency ratio to remain elevated.

Income Tax Expense
Our effective tax rate was 27.4% and 32.0% for first quarter 2017 and 2016, respectively. The effective tax rate for first quarter 2017 included discrete tax benefits totaling $197 million, of which $183 million resulted from the tax benefits associated with stock compensation activity during the quarter which was subject to ASU 2016-09 accounting guidance adopted in first quarter 2017. See Note 1 (Summary of Significant Accounting Policies) to Financial Statements in this Report for additional information about ASU 2016-09.


11


Operating Segment Results
We are organized for management reporting purposes into three operating segments: Community Banking; Wholesale Banking; and Wealth and Investment Management (WIM). These segments are defined by product type and customer segment and their results are based on our management accounting process, for which there is no comprehensive, authoritative financial accounting guidance equivalent to generally accepted accounting principles (GAAP). Commencing in second quarter 2016, operating segment results reflect a shift in expenses between the personnel and other expense categories as a result of the
 
movement of support staff from the Wholesale Banking and WIM segments into a consolidated organization within the Community Banking segment. Since then personnel expenses associated with the transferred support staff have been allocated from Community Banking back to the Wholesale Banking and WIM segments through other expense. Table 4 and the following discussion present our results by operating segment. For additional description of our operating segments, including additional financial information and the underlying management accounting process, see Note 18 (Operating Segments) to Financial Statements in this Report.
Table 4: Operating Segment Results – Highlights
(income/expense in millions,
 
Community Banking
 
 
Wholesale Banking
 
 
Wealth and Investment Management
 
 
Other (1)
 
 
Consolidated
Company
 
average balances in billions)
 
2017

 
2016

 
2017

 
2016

 
2017

 
2016

 
2017

 
2016

 
2017

 
2016

Quarter ended March 31,
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue
 
$
12,093

 
12,614

 
7,038

 
6,958

 
4,193

 
3,854

 
(1,322
)
 
(1,231
)
 
22,002

 
22,195

Provision (reversal of provision) for credit losses
 
646

 
720

 
(43
)
 
363

 
(4
)
 
(14
)
 
6

 
17

 
605

 
1,086

Noninterest expense
 
7,221

 
6,836

 
4,225

 
3,968

 
3,206

 
3,042

 
(860
)
 
(818
)
 
13,792

 
13,028

Net income (loss)
 
3,009

 
3,296

 
2,115

 
1,921

 
623

 
512

 
(290
)
 
(267
)
 
5,457

 
5,462

Average loans
 
$
482.7

 
484.3

 
466.3

 
429.8

 
70.7

 
64.1

 
(56.1
)
 
(51.0
)
 
963.6

 
927.2

Average deposits
 
717.2

 
683.0

 
466.0

 
428.0

 
195.6

 
184.5

 
(79.6
)
 
(76.1
)
 
1,299.2

 
1,219.4

(1)
Includes the elimination of certain items that are included in more than one business segment, substantially all of which represents products and services for WIM customers served through Community Banking distribution channels.


12

Earnings Performance (continued)




Community Banking offers a complete line of diversified financial products and services for consumers and small businesses including checking and savings accounts, credit and debit cards, and automobile, student, and small business lending. These products also include investment, insurance and trust services in 39 states and D.C., and mortgage and home equity loans in all 50 states and D.C. The Community Banking segment
 
also includes the results of our Corporate Treasury activities net of allocations in support of the other operating segments and results of investments in our affiliated venture capital partnerships. Table 4a provides additional financial information for Community Banking.
Table 4a: Community Banking
 
Quarter ended March 31,
 
 
 
(in millions, except average balances which are in billions)
2017

 
2016

 
% Change

Net interest income
$
7,627

 
7,468

 
2
 %
Noninterest income:
 
 
 
 
 
Service charges on deposit accounts
741

 
753

 
(2
)
Trust and investment fees:
 
 
 
 

Brokerage advisory, commissions and other fees (1)
444

 
450

 
(1
)
Trust and investment management (1)
218

 
205

 
6

Investment banking (2)
(27
)
 
(19
)
 
(42
)
Total trust and investment fees
635

 
636

 

Card fees
868

 
852

 
2

Other fees
395

 
372

 
6

Mortgage banking
1,105

 
1,508

 
(27
)
Insurance
12

 
2

 
500

Net gains (losses) from trading activities
50

 
(27
)
 
285

Net gains on debt securities
102

 
219

 
(53
)
Net gains from equity investments (3)
367

 
175

 
110

Other income of the segment
191

 
656

 
(71
)
Total noninterest income
4,466

 
5,146

 
(13
)
 
 
 
 
 

Total revenue
12,093

 
12,614

 
(4
)
 
 
 
 
 

Provision for credit losses
646

 
720

 
(10
)
Noninterest expense:
 
 
 
 

Personnel expense
5,181

 
4,618

 
12

Equipment
551

 
493

 
12

Net occupancy
524

 
510

 
3

Core deposit and other intangibles
112

 
128

 
(13
)
FDIC and other deposit assessments
191

 
146

 
31

Outside professional services
342

 
185

 
85

Operating losses
261

 
407

 
(36
)
Other expense of the segment
59

 
349

 
(83
)
Total noninterest expense
7,221

 
6,836

 
6

Income before income tax expense and noncontrolling interests
4,226

 
5,058

 
(16
)
Income tax expense
1,127

 
1,697

 
(34
)
Net income from noncontrolling interests (4)
90

 
65

 
38

Net income
$
3,009

 
3,296

 
(9
)
Average loans
$
482.7

 
484.3

 

Average deposits
717.2

 
683.0

 
5

(1)
Represents income on products and services for WIM customers served through Community Banking distribution channels and is eliminated in consolidation.
(2)
Includes syndication and underwriting fees paid to Wells Fargo Securities which are offset in our Wholesale Banking segment.
(3)
Predominantly represents gains resulting from venture capital investments.
(4)
Reflects results attributable to noncontrolling interests predominantly associated with the Company’s consolidated venture capital investments.
Community Banking reported net income of $3.0 billion in first quarter 2017, down $287 million, or 9%, from first quarter 2016. First quarter 2017 results included a discrete tax benefit in income tax expense of $195 million. Revenue of $12.1 billion decreased $521 million, or 4%, from a year ago primarily due to lower other income driven by negative hedge ineffectiveness related to our long term debt hedging results, lower mortgage banking revenue, and lower gains on sales of debt securities, partially offset by higher gains on equity investments, net interest income, and deferred compensation plan investments (offset in employee benefits expense). Average loans of $482.7 billion in first quarter 2017 were stable compared with first quarter 2016. Average deposits increased $34.2 billion, or 5%, from first quarter 2016. Primary consumer checking customers (customers who actively use their checking account with transactions such as debit card purchases, online bill payments, and direct deposit) as of March 2017 were up 1.6% from March 2016. Noninterest expense increased $385 million, or 6%, from first quarter 2016,
 
driven by higher personnel expenses including deferred compensation plan expense (offset in trading revenue), professional services, and equipment expense, partially offset by lower operating losses and other expense. The provision for credit losses decreased $74 million from a year ago primarily due to an improvement in the consumer real estate portfolio compared with first quarter 2016.


13


Wholesale Banking provides financial solutions to businesses across the United States and globally with annual sales generally in excess of $5 million. Products and businesses include Business Banking, Middle Market Commercial Banking, Government and Institutional Banking, Corporate Banking, Commercial Real Estate, Treasury Management, Wells Fargo Capital Finance,
 
Insurance, International, Real Estate Capital Markets, Commercial Mortgage Servicing, Corporate Trust, Equipment Finance, Wells Fargo Securities, Principal Investments, and Asset Backed Finance. Table 4b provides additional financial information for Wholesale Banking.
Table 4b: Wholesale Banking
 
Quarter ended March 31,
 
 
 
(in millions, except average balances which are in billions)
2017

 
2016

 
% Change

Net interest income
$
4,148

 
3,748

 
11
 %
Noninterest income:
 
 
 
 
 
Service charges on deposit accounts
571

 
555

 
3

Trust and investment fees:
 
 
 
 

Brokerage advisory, commissions and other fees
84

 
91

 
(8
)
Trust and investment management
129

 
111

 
16

Investment banking
445

 
350

 
27

Total trust and investment fees
658

 
552

 
19

Card fees
77

 
89

 
(13
)
Other fees
468

 
560

 
(16
)
Mortgage banking
123

 
91

 
35

Insurance
256

 
425

 
(40
)
Net gains from trading activities
290

 
207

 
40

Net gains (losses) on debt securities
(66
)
 
25

 
NM

Net gains from equity investments
36

 
66

 
(45
)
Other income of the segment
477

 
640

 
(25
)
Total noninterest income
2,890

 
3,210

 
(10
)
 
 
 
 
 

Total revenue
7,038

 
6,958

 
1

 
 
 
 
 

Provision (reversal of provision) for credit losses
(43
)
 
363

 
NM

Noninterest expense:
 
 
 
 

Personnel expense
1,823

 
1,974

 
(8
)
Equipment
16

 
21

 
(24
)
Net occupancy
110

 
118

 
(7
)
Core deposit and other intangibles
105

 
90

 
17

FDIC and other deposit assessments
118

 
86

 
37

Outside professional services
248

 
214

 
16

Operating losses
6

 
37

 
(84
)
Other expense of the segment
1,799

 
1,428

 
26

Total noninterest expense
4,225

 
3,968

 
6

Income before income tax expense and noncontrolling interests
2,856

 
2,627

 
9

Income tax expense
746

 
719

 
4

Net loss from noncontrolling interests
(5
)
 
(13
)
 
62

Net income
$
2,115

 
1,921

 
10

Average loans
$
466.3

 
429.8

 
8

Average deposits
466.0

 
428.0

 
9

NM – Not meaningful
Wholesale Banking reported net income of $2.1 billion in first quarter 2017, up $194 million, or 10%, from first quarter 2016. Revenue grew $80 million, or 1%, from first quarter 2016 as increased net interest income was partially offset by lower noninterest income. Net interest income increased $400 million, or 11%, driven by strong loan growth, which included the benefit from the GE Capital business acquisitions in 2016. Noninterest income decreased $320 million, or 10%, primarily due to the first quarter 2016 sale of our crop insurance business which resulted in lower insurance and gain on sale income, as well as lower gains on debt securities, which were partially offset by higher investment banking fees, customer accommodation trading, lease income related to the GE Capital business acquisitions and higher income on investments accounted for under the equity method. Average loans of $466.3 billion increased $36.5 billion, or 8%, from first quarter 2016, driven by the GE Capital business acquisitions and broad-based growth in asset backed finance, capital finance, commercial real estate, equipment finance, middle market banking and structured real estate. Average deposits of $466.0 billion increased $38.0 billion, or 9%, from
 
first quarter 2016 reflecting growth in corporate banking, corporate trust and international global financial institutions. Noninterest expense increased $257 million, or 6%, from first quarter 2016 substantially due to the GE Capital business acquisitions and higher expense related to growth initiatives, compliance and regulatory requirements. The provision for credit losses decreased $406 million from first quarter 2016 driven by improvement in the oil and gas portfolio.


14

Earnings Performance (continued)




Wealth and Investment Management provides a full range of personalized wealth management, investment and retirement products and services to clients across U.S. based businesses including Wells Fargo Advisors, The Private Bank, Abbot Downing, Wells Fargo Institutional Retirement and Trust, and Wells Fargo Asset Management. We deliver financial planning, private banking, credit, investment management and fiduciary services to high-net worth and ultra-high-net worth individuals
 
and families. We also serve clients’ brokerage needs, supply retirement and trust services to institutional clients and provide investment management capabilities delivered to global institutional clients through separate accounts and the Wells Fargo Funds. Table 4c provides additional financial information for WIM.
Table 4c: Wealth and Investment Management
 
Quarter ended March 31,
 
 
 
(in millions, except average balances which are in billions)
2017

 
2016

 
% Change

Net interest income
$
1,074

 
943

 
14
 %
Noninterest income:
 
 
 
 
 
Service charges on deposit accounts
5

 
5

 

Trust and investment fees:
 
 
 
 
 
Brokerage advisory, commissions and other fees
2,245

 
2,154

 
4

Trust and investment management
707

 
712

 
(1
)
Investment banking (1)
(1
)
 

 
NM

Total trust and investment fees
2,951

 
2,866

 
3

Card fees
1

 
1

 

Other fees
5

 
4

 
25

Mortgage banking
(2
)
 
(2
)
 

Insurance
20

 

 
NM

Net gains (losses) from trading activities
99

 
20

 
395

Net gains on debt securities

 

 
NM

Net gains (losses) from equity investments

 
3

 
NM

Other income of the segment
40

 
14

 
186

Total noninterest income
3,119

 
2,911

 
7

 
 
 
 
 
 
Total revenue
4,193

 
3,854

 
9

 
 
 
 
 
 
Reversal of provision for credit losses
(4
)
 
(14
)
 
71

Noninterest expense:
 
 
 
 
 
Personnel expense
2,105

 
2,025

 
4

Equipment
11

 
15

 
(27
)
Net occupancy
107

 
112

 
(4
)
Core deposit and other intangibles
72

 
75

 
(4
)
FDIC and other deposit assessments
40

 
31

 
29

Outside professional services
222

 
191

 
16

Operating losses
17

 
12

 
42

Other expense of the segment
632

 
581

 
9

Total noninterest expense
3,206

 
3,042

 
5

Income before income tax expense and noncontrolling interests
991

 
826

 
20

Income tax expense
362

 
314

 
15

Net income from noncontrolling interests
6

 

 
NM

Net income
$
623

 
512

 
22

Average loans
$
70.7

 
64.1

 
10

Average deposits
195.6