10-Q 1 wfc-06302017x10q.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 June 30, 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
 
 
July 26, 2017
Common stock, $1-2/3 par value
 
4,963,944,641
          




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
 
 
Jun 30, 2017 from
 
 
Six months ended
 
 
  

($ in millions, except per share amounts)
Jun 30,
2017

 
Mar 31,
2017

 
Jun 30,
2016

 
Mar 31,
2017

 
Jun 30,
2016

 
Jun 30,
2017


Jun 30,
2016

 
%
Change

For the Period
 
 
 
 
 
 
 
 
 
 
  
 
  
 
  
Wells Fargo net income
$
5,810

 
5,457

 
5,558

 
6
 %
 
5

 
$
11,267

 
11,020

 
2
 %
Wells Fargo net income applicable to common stock
5,404

 
5,056

 
5,173

 
7

 
4

 
10,460

 
10,258

 
2

Diluted earnings per common share
1.07

 
1.00

 
1.01

 
7

 
6

 
2.07

 
2.00

 
4

Profitability ratios (annualized):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Wells Fargo net income to average assets (ROA)
1.21
%
 
1.15

 
1.20

 
5

 
1

 
1.18
%
 
1.20

 
(2
)
Wells Fargo net income applicable to common stock to average Wells Fargo common stockholders' equity (ROE)
11.95

 
11.54

 
11.70

 
4

 
2

 
11.75

 
11.72

 

Return on average tangible common equity (ROTCE) (1)
14.26

 
13.85

 
14.15

 
3

 
1

 
14.06

 
14.15

 
(1
)
Efficiency ratio (2)
61.1

 
62.7

 
58.1

 
(3
)
 
5

 
61.9

 
58.4

 
6

Total revenue
$
22,169

 
22,002

 
22,162

 
1

 

 
$
44,171

 
44,357

 

Pre-tax pre-provision profit (PTPP) (3)
8,628

 
8,210

 
9,296

 
5

 
(7
)
 
16,838

 
18,463

 
(9
)
Dividends declared per common share
0.380

 
0.380

 
0.380

 

 

 
0.760

 
0.755

 
1

Average common shares outstanding
4,989.9

 
5,008.6

 
5,066.9

 

 
(2
)
 
4,999.2

 
5,071.3

 
(1
)
Diluted average common shares outstanding
5,037.7

 
5,070.4

 
5,118.1

 
(1
)
 
(2
)
 
5,054.8

 
5,129.8

 
(1
)
Average loans
$
956,879

 
963,645

 
950,751

 
(1
)
 
1

 
$
960,243

 
938,986

 
2

Average assets
1,927,079

 
1,931,041

 
1,862,084

 

 
3

 
1,929,049

 
1,840,980

 
5

Average total deposits
1,301,195

 
1,299,191

 
1,236,658

 

 
5

 
1,300,198

 
1,228,044

 
6

Average consumer and small business banking deposits (4)
760,149

 
758,754

 
726,359

 

 
5

 
759,455

 
720,598

 
5

Net interest margin
2.90
%
 
2.87

 
2.86

 
1

 
1

 
2.89
%
 
2.88

 

At Period End
 
 
 
 
 
 
 
 
 
 
  
 
  
 
  
Investment securities
$
409,594

 
407,560

 
353,426

 

 
16

 
$
409,594

 
353,426

 
16

Loans
957,423

 
958,405

 
957,157

 

 

 
957,423

 
957,157

 

Allowance for loan losses
11,073

 
11,168

 
11,664

 
(1
)
 
(5
)
 
11,073

 
11,664

 
(5
)
Goodwill
26,573

 
26,666

 
26,963

 

 
(1
)
 
26,573

 
26,963

 
(1
)
Assets
1,930,871

 
1,951,564

 
1,889,235

 
(1
)
 
2

 
1,930,871

 
1,889,235

 
2

Deposits
1,305,830

 
1,325,444

 
1,245,473

 
(1
)
 
5

 
1,305,830

 
1,245,473

 
5

Common stockholders' equity
181,428

 
178,388

 
178,633

 
2

 
2

 
181,428

 
178,633

 
2

Wells Fargo stockholders' equity
205,230

 
201,500

 
201,745

 
2

 
2

 
205,230

 
201,745

 
2

Total equity
206,145

 
202,489

 
202,661

 
2

 
2

 
206,145

 
202,661

 
2

Tangible common equity (1)
152,064

 
148,850

 
148,110

 
2

 
3

 
152,064

 
148,110

 
3

Capital ratios (5)(6):
 
 
 
 
 
 
 
 
 
 
  
 
  
 
  
Total equity to assets
10.68
%
 
10.38

 
10.73

 
3

 

 
10.68
%
 
10.73

 

Risk-based capital:
 
 
 
 
 
 
 
 


 
  
 
  
 


Common Equity Tier 1
11.87

 
11.52

 
10.82

 
3

 
10

 
11.87

 
10.82

 
10

Tier 1 capital
13.68

 
13.27

 
12.50

 
3

 
9

 
13.68

 
12.50

 
9

Total capital
16.91

 
16.41

 
15.14

 
3

 
12

 
16.91

 
15.14

 
12

Tier 1 leverage
9.28

 
9.07

 
9.25

 
2

 

 
9.28

 
9.25

 

Common shares outstanding
4,966.8

 
4,996.7

 
5,048.5

 
(1
)
 
(2
)
 
4,966.8

 
5,048.5

 
(2
)
Book value per common share (7)
$
36.53

 
35.70

 
35.38

 
2

 
3

 
$
36.53

 
35.38

 
3

Tangible book value per common share (1) (7)
30.62

 
29.79

 
29.34

 
3

 
4

 
30.62

 
29.34
 
4

Common stock price:
 
 
 
 
 
 
 
 
 
 
  
 
  
 
  
High
56.60

 
59.99

 
51.41

 
(6
)
 
10

 
59.99

 
53.27

 
13

Low
50.84

 
53.35

 
44.50

 
(5
)
 
14

 
50.84

 
44.50

 
14

Period end
55.41

 
55.66

 
47.33

 

 
17

 
55.41

 
47.33

 
17

Team members (active, full-time equivalent)
270,600

 
272,800

 
267,900

 
(1
)
 
1

 
270,600

 
267,900

 
1

(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 and held-for-sale assets, 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 $1.93 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 271,000 active, full-time equivalent team members, we serve one in three households in the United States and ranked No. 25 on Fortune’s 2017 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 June 30, 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 understanding their needs and delivering the most relevant products, services, advice, and guidance.
We have five primary values, which are based on our vision and 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.

Over the past several months, our Board of Directors (Board) has undertaken a series of significant actions to enhance Board oversight and governance. The actions the Board has taken to date, many of which reflect the feedback we received from our investors and other stakeholders, include separating the roles of Chairman of the Board and Chief Executive Officer, amending Wells Fargo’s By-Laws to require that the Chairman be an independent director, adding two new independent directors in February 2017, and amending Board committee charters to enhance oversight of conduct risk. The Board recognizes that there is still work to be done and, in response to feedback received at our annual stockholders meeting in April 2017, the Board is engaging in an ongoing comprehensive review of its structure, composition and practices. This review is expected to result in actions in third quarter 2017, which will be publicly announced at that time. As has been our practice, we will continue our engagement efforts with our investors and other stakeholders.

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, and entered into consent orders with the CFPB and the OCC, in connection with allegations that some of our retail customers received products and services they did not request. As a result, it remains our top priority to rebuild trust through a comprehensive action plan that includes making things right for our customers, team members, and other stakeholders, and to build a better Company for the future.
The job of rebuilding trust in Wells Fargo is a long-term effort – one requiring our commitment and perseverance. As we move forward, Wells Fargo has a specific action plan in place focused on reaching out to stakeholders who may have been affected by improper retail banking sales practices, including our

3


communities, our customers, our regulators, our team members, and our investors.
Our priority of rebuilding trust has included the following additional actions, which have been focused on identifying potential financial harm and customer remediation:
Identifying Potential Financial Harm
In the fall of 2016, the Board and management undertook an enterprise-wide review of sales practices issues. This review is ongoing.
A third-party consulting firm performed an initial review of accounts opened from May 2011 to mid-2015 to identify financial harm stemming from potentially unauthorized accounts.
We expanded the time periods of this review to cover the entire consent order period of January 2011 through September 2016, and to perform a voluntary review of accounts from 2009 to 2010. We expect to complete this expanded review process and commence remaining remediation for these additional periods by the end of third quarter 2017.
As part of this expanded review process, we also expect to complete the review and validation of the number of potentially unauthorized accounts previously identified by the third-party consulting firm, including refinements to the practices and methodologies previously used to determine such number and to remediate sales practices related matters. We expect that our review of the expanded time periods, which adds over three years to the initial review period of approximately four years (May 2011 to mid-2015), and our review and validation efforts for the initial review period, may lead to a significant increase in the identified number of potentially unauthorized accounts. However, we do not expect any incremental customer remediation costs as a result of these efforts to have a significant financial impact on the Company.
Customer Remediation
We refunded $3.26 million to customers under the stipulated judgment with the Los Angeles City Attorney and under the CFPB and OCC consent orders, covering the period from May 2011 to mid-2015.
As of May 31, 2017, we had paid $1.8 million in additional payments to customers nationwide through our ongoing complaints process and free mediation services that were put in place in connection with the sales practices matters.
On July 9, 2017, we announced updates to the settlement agreement for a class-action lawsuit concerning improper retail sales practices. With the court’s preliminary approval of the settlement agreement, Wells Fargo and the plaintiffs are preparing to issue notices that will provide information about the process for making claims. We expect this settlement to resolve substantially all claims in other similar pending class actions that allege unauthorized accounts were opened in customers’ names or that customers were enrolled in certain products or services without their consent. The settlement class covers the period from May 1, 2002 to April 20, 2017, and includes funds to ensure that each customer who was affected by improper retail sales practices has an opportunity for remediation.
We are working to complete the requirements of our regulatory consent orders, which include a review by an independent consultant to determine the “root cause” of the sales practices issues and the implementation of an action plan that addresses the findings of the independent review. The independent consultant's report, which is regulatory
 
supervisory information that cannot be publicly disclosed, is expected to be completed in third quarter 2017.
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.
 
Additional Efforts to Rebuild Trust
Our priority of rebuilding trust has also included an effort to identify other areas or instances where customers may have experienced financial harm. We are working with our regulatory agencies in this effort. As part of this effort, we are focused on the following key areas:
Practices concerning the origination, servicing, and/or collection of indirect consumer auto loans, including related insurance products. For example:
The Company recently announced a plan to remediate customers who may have been financially harmed due to issues related to automobile collateral protection insurance (CPI) policies purchased through a third-party vendor on their behalf (based on an understanding by the vendor that the borrowers’ insurance had lapsed). The plan currently consists of approximately $64 million in cash remediation and $16 million in account adjustments. The Company discontinued the CPI placement program in September 2016.
The Company has identified certain issues related to the unused portion of guaranteed automobile protection waiver or insurance agreements between the dealer and, by assignment, the lender, which may result in refunds to customers in certain states.
Policies and procedures regarding the circumstances in which the Company required customers to pay fees for the extension of interest rate lock periods for residential mortgages.
Practices related to certain consumer “add-on” products (e.g., identity theft and debt protection), including those products that are subject to an OCC consent order entered into in May 2015.
Procedures regarding the freezing (and, in many cases, closing) of consumer deposit accounts after the Company detected suspected fraudulent activity (by third-parties or account holders) that affected those accounts.

For more information, see the “Risk Factors” section in our 2016 Form 10-K and Note 11 (Legal Actions) to Financial Statements in this Report.
       This effort to identify similar instances in which customers may have experienced harm is ongoing, and it is possible that we may identify other areas of potential concern.

Financial Performance
Wells Fargo net income was $5.8 billion in second quarter 2017 with diluted earnings per common share (EPS) of $1.07, compared with $5.6 billion and $1.01, respectively, a year ago. We have now generated quarterly earnings of more than $5 billion for 19 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.

4

Overview (continued)

Compared with a year ago:
revenue was $22.2 billion, stable compared with a year ago, with record net interest income in second quarter 2017, up 6% from a year ago;
average loans of $956.9 billion increased $6.1 billion, or 1%;
total deposits were $1.3 trillion, up $60.4 billion, or 5%;
our credit results improved with a net charge-off rate of 0.27% (annualized) of average loans and we had a $100 million release from the allowance for credit losses; and
we returned $3.4 billion to shareholders through common stock dividends and net share repurchases, which was the eighth consecutive quarter of returning more than $3 billion.

Balance Sheet and Liquidity
Our balance sheet remained strong during second quarter 2017 with high levels of liquidity and capital. Our total assets were $1.93 trillion at June 30, 2017. Investment securities reached $409.6 billion, with approximately $37 billion of gross purchases during second quarter 2017, largely offset by runoff and the sale of approximately $15 billion of lower-yielding short-duration securities. Loans were down $10.2 billion, or 1%, from December 31, 2016, largely due to a decline in junior lien mortgage and automobile loans.
Average deposits in second quarter 2017 reached a record $1.30 trillion, up $64.5 billion, or 5%, from second quarter 2016. Our average deposit cost in second quarter 2017 was 21 basis points, up 10 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 0.7% (May 2017 compared with May 2016).

Credit Quality
Solid overall credit results continued in second quarter 2017 as losses remained low and we continued to originate high quality loans, reflecting our long-term risk focus. Net charge-offs were $655 million, or 0.27% (annualized) of average loans, in second quarter 2017, compared with $924 million a year ago (0.39%). The decrease in net charge-offs in second 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 of $48.3 billion, which includes unfunded commitments and loans outstanding, was down 14% from a year ago.
Our commercial portfolio net charge-offs were $75 million, or 6 basis points of average commercial loans, in second quarter 2017, compared with net charge-offs of $357 million, or 29 basis points, a year ago. Net consumer credit losses increased to 51 basis points of average consumer loans in second quarter 2017 from 49 basis points in second quarter 2016. Our commercial real estate portfolios were in a net recovery position for the 18th consecutive quarter, reflecting our conservative risk discipline and improved market conditions. Losses on our consumer real estate portfolios declined $96 million, or 126%, 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 76% of the consumer first mortgage portfolio outstanding at June 30, 2017, was originated after 2008, when more stringent underwriting standards were implemented.
 
The allowance for credit losses as of June 30, 2017, decreased $603 million compared with a year ago and decreased $394 million from December 31, 2016. The allowance coverage for total loans was 1.27% at June 30, 2017, compared with 1.33% a year ago and 1.30% at December 31, 2016. The allowance covered 4.6 times annualized second quarter net charge-offs, compared with 3.4 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 $555 million in second quarter 2017, down from $1.1 billion a year ago, primarily reflecting improvement in the oil and gas portfolio.
Nonperforming assets decreased $827 million, or 8%, from March 31, 2017, with improvement across our consumer and commercial portfolios and lower foreclosed assets. Nonperforming assets were only 1.03% of total loans, the lowest level since the merger with Wachovia in 2008. Nonaccrual loans decreased $703 million from the prior quarter partially due to a $321 million decrease in commercial nonaccruals. In addition, foreclosed assets were down $124 million from the prior quarter.

Capital
Our financial performance in second quarter 2017 resulted in strong capital generation, which increased total equity to a record $206.1 billion at June 30, 2017, up $5.6 billion from December 31, 2016. We returned $3.4 billion to shareholders in second 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 63%, up from 61% in the prior quarter, and within our targeted range of 55-75%. We continued to reduce our common shares outstanding through the repurchase of 43.0 million common shares in the quarter. We also entered into a $1 billion forward repurchase contract with an unrelated third party in July 2017 that is expected to settle in fourth quarter 2017 for approximately 19 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 11.59% at June 30, 2017. Likewise, our other regulatory capital ratios remained strong. We also received a non-objection to our 2017 Capital Plan submission from the Federal Reserve. 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 second quarter 2017 was $5.8 billion ($1.07 diluted earnings per common share), compared with $5.6 billion ($1.01 diluted per share) for second quarter 2016. Net income for the first half of 2017 was $11.3 billion ($2.07), compared with $11.0 billion ($2.00) for the same period a year ago. We generated revenue growth across many of our businesses. Our financial performance in the first half of 2017, compared with the same period a year ago, benefited from a $1.4 billion increase in net interest income and a $1.0 billion decrease in our provision for credit losses, offset by a $1.6 billion decrease in noninterest income and a $1.4 billion increase in noninterest expense. In the first half of 2017, net interest income represented 56% of revenue, compared with 53% for the same period in 2016. Noninterest income was $19.4 billion in the first half of 2017, representing 44% of revenue, compared with $21.0 billion (47%) in the first half of 2016.
Revenue, the sum of net interest income and noninterest income, was $22.2 billion in the second quarter of both 2017 and 2016. Revenue for the first half of 2017 was $44.2 billion, compared with $44.4 billion for the first half of 2016. The decrease in revenue for the first half of 2017, compared with the same period in 2016, was due to a decline in noninterest income, partially offset by an increase in interest income from loans and investment securities.


6

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 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 $12.8 billion and $25.4 billion in the second quarter and first half of 2017, respectively, compared with $12.0 billion and $24.0 billion for the same periods a year ago. The net interest margin was 2.90% and 2.89% for the second quarter and first half of 2017, respectively, up from 2.86% and 2.88% for the same periods a year ago. The increase in net interest income in the second quarter and first half of 2017 from the same periods 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 balance growth in earning assets and the benefit of higher interest rates, offset by lower variable income. Interest expense on funding sources increased in the second quarter and first half of 2017, compared with the same periods a year ago, with a significant portion 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 increase in net interest margin in the second quarter and first half of 2017, compared with the same periods a year ago, was primarily due to repricing benefits of earning assets from higher interest rates exceeding the repricing costs of deposits and market based funding sources.
Average earning assets increased $82.4 billion and $101.9 billion in the second quarter and first half of 2017, respectively, compared with the same periods a year ago, as average loans increased $6.1 billion in the second quarter and $21.3 billion in the first half of 2017, average investment securities increased $67.5 billion in second quarter 2017 and $68.6 billion in the first half of 2017, and average trading assets increased $16.7 billion in the second quarter and $15.0 billion in the first half of 2017, compared with the same periods a year ago. In addition, average federal funds sold and other short-term investments decreased $12.2 billion and $6.6 billion in the second quarter and first half of 2017, respectively, compared with the same periods 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 in both the second quarter and first half of 2017, increased compared with $1.24 trillion and $1.23 trillion for the same periods a year ago, and represented 136% of average loans in second quarter 2017 (135% in the first half of 2017), compared with 130% in second quarter 2016 (131% in the first half of 2016). Average deposits remained stable at 74% and 73% of average earning assets in the second quarter and first half of 2017, respectively, compared with 73% and 74% for the same periods a year ago.

7


Table 1: Average Balances, Yields and Rates Paid (Taxable-Equivalent Basis) (1)(2)
  
Quarter ended June 30,
 
 
 
 
 
 
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
$
281,619

 
0.99
%
 
$
698

 
293,783

 
0.49
%
 
$
359

Trading assets
98,086

 
2.95

 
722

 
81,380

 
2.86

 
582

Investment securities (3): 
 
 
 
 
 
 
 
 
 
 
 
Available-for-sale securities:
 
 
 
 
 
 
 
 
 
 
 
Securities of U.S. Treasury and federal agencies
18,099

 
1.53

 
69

 
31,525

 
1.56

 
123

Securities of U.S. states and political subdivisions
53,492

 
4.03

 
540

 
52,201

 
4.24

 
553

Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
Federal agencies
132,032

 
2.63

 
868

 
92,010

 
2.53

 
583

Residential and commercial
12,586

 
5.55

 
175

 
19,571

 
5.44

 
266

Total mortgage-backed securities
144,618

 
2.89

 
1,043

 
111,581

 
3.04

 
849

Other debt and equity securities
48,962

 
3.87

 
472

 
53,301

 
3.48

 
461

Total available-for-sale securities
265,171

 
3.21

 
2,124

 
248,608

 
3.20

 
1,986

Held-to-maturity securities:
 
 
 
 
 
 
 
 
 
 
 
Securities of U.S. Treasury and federal agencies
44,701

 
2.19

 
244

 
44,671

 
2.19

 
243

Securities of U.S. states and political subdivisions
6,270

 
5.29

 
83

 
2,155

 
5.41

 
29

Federal agency and other mortgage-backed securities
83,116

 
2.44

 
507

 
35,057

 
1.90

 
166

Other debt securities
2,798

 
2.34

 
16

 
4,077

 
1.92

 
20

Total held-to-maturity securities
136,885

 
2.49

 
850

 
85,960

 
2.14

 
458

Total investment securities
402,056

 
2.96

 
2,974

 
334,568

 
2.93

 
2,444

Mortgages held for sale (4)
19,758

 
3.94

 
195

 
20,140

 
3.60

 
181

Loans held for sale (4)
210

 
6.95

 
4

 
239

 
4.83

 
3

Loans:
 
 
 
 
 
 
 
 
 
 
 
Commercial:
 
 
 
 
 
 
 
 
 
 
 
Commercial and industrial – U.S.
273,073

 
3.70

 
2,521

 
270,862

 
3.45

 
2,328

Commercial and industrial – Non U.S.
56,426

 
2.86

 
402

 
51,201

 
2.35

 
300

Real estate mortgage
131,293

 
3.68

 
1,206

 
126,126

 
3.41

 
1,069

Real estate construction
25,271

 
4.10

 
259

 
23,115

 
3.49

 
200

Lease financing
19,058

 
4.82

 
230

 
18,930

 
5.12

 
242

Total commercial
505,121

 
3.67

 
4,618

 
490,234

 
3.39

 
4,139

Consumer:
 
 
 
 
 
 
 
 
 
 
 
Real estate 1-4 family first mortgage
275,108

 
4.08

 
2,805

 
275,854

 
4.01

 
2,765

Real estate 1-4 family junior lien mortgage
43,602

 
4.78

 
521

 
50,609

 
4.37

 
551

Credit card
34,868

 
12.18

 
1,059

 
33,368

 
11.52

 
956

Automobile
59,112

 
5.43

 
800

 
61,149

 
5.66

 
860

Other revolving credit and installment
39,068

 
6.13

 
596

 
39,537

 
5.91

 
581

Total consumer
451,758

 
5.13

 
5,781

 
460,517

 
4.98

 
5,713

Total loans (4)
956,879

 
4.36

 
10,399

 
950,751

 
4.16

 
9,852

Other
10,713

 
2.00

 
54

 
6,014

 
2.30

 
35

Total earning assets
$
1,769,321

 
3.41
%
 
$
15,046

 
1,686,875

 
3.20
%
 
$
13,456

Funding sources
 
 
 
 
 
 
 
 
 
 
 
Deposits:
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing checking
$
48,465

 
0.41
%
 
$
50

 
39,772

 
0.13
%
 
$
13

Market rate and other savings
683,014

 
0.13

 
214

 
658,944

 
0.07

 
110

Savings certificates
22,599

 
0.30

 
17

 
26,246

 
0.35

 
23

Other time deposits
57,158

 
1.43

 
203

 
61,170

 
0.85

 
129

Deposits in foreign offices
123,684

 
0.65

 
199

 
97,525

 
0.23

 
57

Total interest-bearing deposits
934,920

 
0.29

 
683

 
883,657

 
0.15

 
332

Short-term borrowings
95,763

 
0.69

 
164

 
111,848

 
0.28

 
78

Long-term debt
249,518

 
2.05

 
1,278

 
236,156

 
1.56

 
921

Other liabilities
20,981

 
2.05

 
108

 
16,336

 
2.06

 
83

Total interest-bearing liabilities
1,301,182

 
0.69

 
2,233

 
1,247,997

 
0.45

 
1,414

Portion of noninterest-bearing funding sources
468,139

 

 

 
438,878

 


 

Total funding sources
$
1,769,321

 
0.51

 
2,233

 
1,686,875

 
0.34

 
1,414

Net interest margin and net interest income on a taxable-equivalent basis (5)
 
 
2.90
%
 
$
12,813

 
 
 
2.86
%
 
$
12,042

Noninterest-earning assets
 
 
 
 
 
 
 
 
 
 
 
Cash and due from banks
$
18,171

 
  
 
  
 
18,818

 
  
 
  
Goodwill
26,664

 
  
 
  
 
27,037

 
  
 
  
Other
112,923

 
 
 
 
 
129,354

 
 
 
 
Total noninterest-earning assets
$
157,758

 
 
 
 
 
175,209

 
 
 
 
Noninterest-bearing funding sources
 
 
 
 
 
 
  
 
 
 
 
Deposits
$
366,275

 
 
 
 
 
353,001

 
 
 
 
Other liabilities
53,654

 
 
 
 
 
60,083

 
 
 
 
Total equity
205,968

 
 
 
 
 
201,003

 
 
 
 
Noninterest-bearing funding sources used to fund earning assets
(468,139
)
 
 
 
 
 
(438,878
)
 
 
 
 
Net noninterest-bearing funding sources
$
157,758

 
 
 
 
 
175,209

 
 
 
 
Total assets
$
1,927,079

 
 
 
 
 
1,862,084

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1)
Our average prime rate was 4.05% and 3.50% for the quarters ended June 30, 2017 and 2016, respectively, and 3.92% and 3.50% for the first half of 2017 and 2016, respectively. The average three-month London Interbank Offered Rate (LIBOR) was 1.21% and 0.64% for the quarters ended June 30, 2017 and 2016, respectively, and 1.14% and 0.63% for the first half of 2017 and 2016, 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 $330 million and $309 million for the quarters ended June 30, 2017 and 2016, respectively, and $648 million and $599 million for the first half of 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.

8




 
Six months ended June 30,
 
 
  
 
  
 
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
$
282,687

 
0.88
%
 
$
1,230

 
289,240

 
0.49
%
 
$
703

Trading assets
95,937

 
2.87

 
1,377

 
80,922

 
2.94

 
1,187

Investment securities (3):
 
 
 
 
 
 
 
 
 
 
 
Available-for-sale securities: 
 
 
 
 
 
 
 
 
 
 
 
Securities of U.S. Treasury and federal agencies
21,547

 
1.53

 
164

 
33,000

 
1.58

 
259

Securities of U.S. states and political subdivisions
52,873

 
4.03

 
1,066

 
51,357

 
4.24

 
1,088

Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
Federal agencies
144,257

 
2.61

 
1,879

 
94,216

 
2.67

 
1,258

Residential and commercial
13,514

 
5.43

 
367

 
20,199

 
5.32

 
537

Total mortgage-backed securities
157,771

 
2.85

 
2,246

 
114,415

 
3.14

 
1,795

Other debt and equity securities
49,787

 
3.73

 
924

 
53,430

 
3.34

 
890

Total available-for-sale securities
281,978

 
3.13

 
4,400

 
252,202

 
3.20

 
4,032

Held-to-maturity securities:
 
 
 
 
 
 
 
 
 
 
 
Securities of U.S. Treasury and federal agencies
44,697

 
2.20

 
487

 
44,667

 
2.19

 
487

Securities of U.S. states and political subdivisions
6,271

 
5.30

 
166

 
2,155

 
5.41

 
58

Federal agency and other mortgage-backed securities
67,538

 
2.46

 
831

 
31,586

 
2.16

 
341

Other debt securities
3,062

 
2.34

 
35

 
4,338

 
1.92

 
42

Total held-to-maturity securities
121,568

 
2.51

 
1,519

 
82,746

 
2.25

 
928

Total investment securities
403,546

 
2.94

 
5,919

 
334,948

 
2.97

 
4,960

Mortgages held for sale (4)
19,825

 
3.82

 
379

 
19,005

 
3.60

 
342

Loans held for sale (4)
161

 
6.08

 
5

 
260

 
3.97

 
5

Loans:
  
 
 
 
  
 
  
 
 
 
  
Commercial:
  
 
 
 
  
 
  
 
 
 
  
Commercial and industrial – U.S.
273,905

 
3.65

 
4,957

 
264,295

 
3.42

 
4,505

Commercial and industrial – Non U.S.
55,890

 
2.80

 
775

 
50,354

 
2.23

 
558

Real estate mortgage
131,868

 
3.62

 
2,370

 
124,432

 
3.41

 
2,109

Real estate construction
24,933

 
3.91

 
484

 
22,859

 
3.55

 
403

Lease financing
19,064

 
4.88

 
465

 
16,989

 
4.95

 
420

Total commercial
505,660

 
3.61

 
9,051

 
478,929

 
3.35

 
7,995

Consumer:
 
 
 
 
 
 
 
 
 
 
 
Real estate 1-4 family first mortgage
275,293

 
4.05

 
5,571

 
275,288

 
4.03

 
5,547

Real estate 1-4 family junior lien mortgage
44,439

 
4.69

 
1,036

 
51,423

 
4.38

 
1,122

Credit card
35,151

 
12.07

 
2,105

 
33,367

 
11.56

 
1,919

Automobile
60,304

 
5.45

 
1,628

 
60,631

 
5.66

 
1,708

Other revolving credit and installment
39,396

 
6.07

 
1,186

 
39,348

 
5.95

 
1,165

Total consumer
454,583

 
5.09

 
11,526

 
460,057

 
5.00

 
11,461

Total loans (4)
960,243

 
4.31

 
20,577

 
938,986

 
4.16

 
19,456

Other
8,801

 
2.37

 
104

 
5,910

 
2.18

 
65

Total earning assets
$
1,771,200

 
3.36
%
 
$
29,591

 
1,669,271

 
3.21
%
 
$
26,718

Funding sources
 
 
 
 
 
 
 
 
 
 
 
Deposits:
  
 
 
 
  
 
  
 
 
 
  
Interest-bearing checking
$
49,569

 
0.35
%
 
$
87

 
39,242

 
0.12
%
 
$
24

Market rate and other savings
683,591

 
0.11

 
371

 
655,247

 
0.07

 
217

Savings certificates
23,030

 
0.29

 
34

 
27,063

 
0.40

 
54

Other time deposits
56,043

 
1.37

 
381

 
59,688

 
0.80

 
236

Deposits in foreign offices
122,946

 
0.57

 
347

 
97,604

 
0.22

 
108

Total interest-bearing deposits
935,179

 
0.26

 
1,220

 
878,844

 
0.15

 
639

Short-term borrowings
97,149

 
0.58

 
279

 
109,853

 
0.27

 
145

Long-term debt
254,627

 
1.94

 
2,461

 
226,519

 
1.56

 
1,763

Other liabilities
18,905

 
2.12

 
200

 
16,414

 
2.10

 
172

Total interest-bearing liabilities
1,305,860

 
0.64

 
4,160

 
1,231,630

 
0.44

 
2,719

Portion of noninterest-bearing funding sources
465,340

 
 
 

 
437,641

 

 

Total funding sources
$
1,771,200

 
0.47

 
4,160

 
1,669,271

 
0.33

 
2,719

Net interest margin and net interest income on a taxable-equivalent basis (5)
  
 
2.89
%
 
$
25,431

 
  
 
2.88
%
 
$
23,999

Noninterest-earning assets
  
 
  
 
  
 
  
 
  
 
  
Cash and due from banks
$
18,437

 
 
 
 
 
18,407

 
 
 
 
Goodwill
26,668

 
 
 
 
 
26,553

 
 
 
 
Other
112,744

 
 
 
 
 
126,749

 
 
 
 
Total noninterest-earning assets
$
157,849

 
 
 
 
 
171,709

 
 
 
 
Noninterest-bearing funding sources
  
 
 
 
 
 
  
 
 
 
 
Deposits
$
365,019

 
 
 
 
 
349,200

 
 
 
 
Other liabilities
54,291

 
 
 
 
 
61,355

 
 
 
 
Total equity
203,879

 
 
 
 
 
198,795

 
 
 
 
Noninterest-bearing funding sources used to fund earning assets
(465,340
)
 
 
 
 
 
(437,641
)
 
 
 
 
Net noninterest-bearing funding sources
$
157,849

 
 
 
 
 
171,709

 
 
 
 
Total assets
$
1,929,049

 
 
 
 
 
1,840,980

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



9


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

 
Six months ended June 30,
 
 
%

(in millions)
2017

 
2016

 
Change

 
2017

 
2016

 
Change

Service charges on deposit accounts
$
1,276

 
1,336

 
(4
)%
 
$
2,589

 
2,645

 
(2
)%
Trust and investment fees:
 
 
 
 
 
 
 
 
 
 
 
Brokerage advisory, commissions and other fees
2,329

 
2,291

 
2

 
4,653

 
4,530

 
3

Trust and investment management
837

 
835

 

 
1,666

 
1,650

 
1

Investment banking
463

 
421

 
10

 
880

 
752

 
17

Total trust and investment fees
3,629

 
3,547

 
2

 
7,199

 
6,932

 
4

Card fees
1,019

 
997

 
2

 
1,964

 
1,938

 
1

Other fees:
 
 
 
 
 
 
 
 
 
 

Charges and fees on loans
325

 
317

 
3

 
632

 
630

 

Cash network fees
134

 
138

 
(3
)
 
260

 
269

 
(3
)
Commercial real estate brokerage commissions
102

 
86

 
19

 
183

 
203

 
(10
)
Letters of credit fees
76

 
83

 
(8
)
 
150

 
161

 
(7
)
Wire transfer and other remittance fees
112

 
101

 
11

 
219

 
193

 
13

All other fees
153

 
181

 
(15
)
 
323

 
383

 
(16
)
Total other fees
902

 
906

 

 
1,767


1,839

 
(4
)
Mortgage banking:
 
 
 
 
 
 
 
 
 
 

Servicing income, net
400

 
360

 
11

 
856

 
1,210

 
(29
)
Net gains on mortgage loan origination/sales activities
748

 
1,054

 
(29
)
 
1,520

 
1,802

 
(16
)
Total mortgage banking
1,148

 
1,414

 
(19
)
 
2,376


3,012

 
(21
)
Insurance
280

 
286

 
(2
)
 
557

 
713

 
(22
)
Net gains from trading activities
237

 
328

 
(28
)
 
676

 
528

 
28

Net gains on debt securities
120

 
447

 
(73
)
 
156

 
691

 
(77
)
Net gains from equity investments
188

 
189

 
(1
)
 
591

 
433

 
36

Lease income
493

 
497

 
(1
)
 
974

 
870

 
12

Life insurance investment income
145

 
149

 
(3
)
 
289

 
303