EX-13 6 wfc-12312017xex13.htm EXHIBIT 13 Exhibit
Exhibit 13



                                                                                                                                                                                                                                                        
 
 
 
 
Financial Review
 
 
 
 
 
 
 
 
 
Overview
 
 
4

 
Federal Funds Sold, Securities Purchased under Resale Agreements and Other Short-Term Investments
 
 
 
Earnings Performance
 
 
5

 
Investment Securities
 
 
 
Balance Sheet Analysis
 
 
6

 
Loans and Allowance for Credit Losses
 
 
 
Off-Balance Sheet Arrangements
 
 
7

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

 
Securitizations and Variable Interest Entities
 
 
 
Capital Management
 
 
9

 
Mortgage Banking Activities
 
 
 
Regulatory Matters
 
 
10

 
Intangible Assets
 
 
 
Critical Accounting Policies
 
 
11

 
Deposits
 
 
 
Current Accounting Developments
 
 
12

 
Short-Term Borrowings
 
 
 
Forward-Looking Statements
 
 
13

 
Long-Term Debt
 
 
 
Risk Factors
 
 
14

 
Guarantees, Pledged Assets and Collateral, and Other Commitments
 
 
 
 
 
 
 
15

 
Legal Actions
 
 
 
 
Controls and Procedures
 
 
16

 
Derivatives
 
 
 
Disclosure Controls and Procedures
 
 
17

 
Fair Values of Assets and Liabilities
 
 
 
Internal Control Over Financial Reporting
 
 
18

 
Preferred Stock
 
 
 
Management’s Report on Internal Control over Financial Reporting
 
 
19

 
Common Stock and Stock Plans
 
 
 
Report of Independent Registered Public Accounting Firm
 
 
20

 
Revenue from Contracts with Customers
 
 
 
 
 
 
 
21

 
Employee Benefits and Other Expenses
 
 
 
 
Financial Statements
 
 
22

 
Income Taxes
 
 
 
Consolidated Statement of Income
 
 
23

 
Earnings Per Common Share
 
 
 
Consolidated Statement of Comprehensive Income
 
 
24

 
Other Comprehensive Income
 
 
 
Consolidated Balance Sheet
 
 
25

 
Operating Segments
 
 
 
Consolidated Statement of Changes in Equity
 
 
26

 
Parent-Only Financial Statements
 
 
 
Consolidated Statement of Cash Flows
 
 
27

 
Regulatory and Agency Capital Requirements
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Notes to Financial Statements
 
 
 
 
 
 
 
1

 
Summary of Significant Accounting Policies
 
 
 
 
Report of Independent Registered Public Accounting Firm
 
2

 
Business Combinations
 
 
 
 
Quarterly Financial Data
 
3

 
Cash, Loan and Dividend Restrictions
 
 
 
 
Glossary of Acronyms


 
Wells Fargo & Company
37



Overview (continued)

This Annual Report, including the Financial Review and the Financial Statements and related Notes, contains forward-looking statements, which may include forecasts of our financial results and condition, expectations for our operations and business, and our assumptions for those forecasts and expectations. Do not unduly rely on forward-looking statements. Actual results may differ materially from our forward-looking statements due to several factors. Factors that could cause our actual results to differ materially from our forward-looking statements are described in this Report, including in the “Forward-Looking Statements” and “Risk Factors” sections, and in the “Regulation and Supervision” section of our Annual Report on Form 10-K for the year ended December 31, 2017 (2017 Form 10-K).
 
When we refer to “Wells Fargo,” “the Company,” “we,” “our,” or “us” in this Report, we mean Wells Fargo & Company and Subsidiaries (consolidated). When we refer to the “Parent,” we mean Wells Fargo & Company. When we refer to “legacy Wells Fargo,” we mean Wells Fargo excluding Wachovia Corporation (Wachovia). See the Glossary of Acronyms for terms used throughout this Report.
 
Financial Review
Overview
Wells Fargo & Company is a diversified, community-based financial services company with $2.0 trillion in assets. Founded in 1852 and headquartered in San Francisco, we provide banking, investments, mortgage, and consumer and commercial finance through more than 8,300 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 263,000 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 in the market value of our common stock among all U.S. banks at December 31, 2017
We use our Vision, Values and Goals to guide us toward growth and success. Our vision is to satisfy our customers’ financial needs and help them succeed financially. 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 guide the actions we take. First, we place customers at the center of everything we do. We want to exceed customer expectations and build relationships that last a lifetime. Second, we value and support our people as a competitive advantage and strive to attract, develop, motivate, and retain the best team members. Third, we strive for the highest ethical standards of integrity, transparency, and principled performance. Fourth, we value and promote diversity and inclusion in all aspects of business and at all levels. Fifth, we look to each of our team members to be a leader in establishing, sharing, and communicating our vision for our customers, communities, team members, and shareholders. 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 have six long-term goals for the Company, which entail becoming the financial services leader in the following areas:
 
Customer service and advice – provide exceptional service and guidance to our customers to help them succeed financially.
Team member engagement – be a company where people feel included, valued, and supported; everyone is respected; and we work as a team.
Innovation – create lasting value for our customers and increased efficiency for our operations through innovative thinking, industry-leading technology, and a willingness to test and learn.
Risk management – set the global standard in
managing all forms of risk.
Corporate citizenship – make a positive contribution to communities through philanthropy, advancing diversity and inclusion, creating economic opportunity, and promoting environmental sustainability.
Shareholder value – deliver long-term value for shareholders.

Over the past year and a half, our Board of Directors (Board) has taken, and continues to take, actions to enhance Board oversight and governance. These actions, many of which reflected results from the Board’s 2017 self-assessment, which was facilitated by a third party, and the feedback we received from our shareholders and other stakeholders, included:
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.
Electing Elizabeth A. “Betsy” Duke as our new independent Board Chair, effective January 1, 2018.
Electing six new independent directors, including directors with financial services, risk management, regulatory, technology, human capital management, social responsibility, and other relevant experience, with five directors retiring in 2017.
Making changes to the leadership and composition of key Board committees, including appointing new chairs of the Board’s Risk Committee and Governance and Nominating Committee.
Amending Board committee charters and working with management to improve reporting to the Board in order to enhance the Board's risk oversight.


38
Wells Fargo & Company
 


As previously announced, the Board’s refreshment process will continue with director retirements in 2018. As has been our practice, we will continue our engagement efforts with our shareholders and other stakeholders while the Board maintains its focus on enhancing oversight and governance.

Federal Reserve Board Consent Order Regarding Governance Oversight and Compliance and Operational Risk Management
On February 2, 2018, the Company entered into a consent order with the Board of Governors of the Federal Reserve System (FRB), which requires the Company to submit to the FRB within 60 days of the date of the consent order plans to further enhance the Board’s governance oversight and the Company’s compliance and operational risk management. The consent order also requires third-party reviews related to the adoption and implementation of such plans by September 30, 2018. Until these third-party reviews are complete and the plans are approved and implemented to the satisfaction of the FRB, the Company’s total consolidated assets will be limited to the level as of December 31, 2017. Compliance with this asset cap will be measured on a two-quarter daily average basis to allow for management of temporary fluctuations. Once the asset cap limitation is removed, a second third-party review must be conducted to assess the efficacy and sustainability of the improvements.
The Company may be subject to further actions, including the imposition of consent orders or similar regulatory agreements or civil money penalties, by other federal regulators regarding similar issues, including the Company’s risk management policies and procedures.

Sales Practices Matters
As we have previously reported, in September 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 building 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. We have in place a specific action plan focused on reaching out to stakeholders who may have been affected by improper retail banking sales practices, including our communities, our customers, our regulators, our team members, and our investors.
Our priority of rebuilding trust has included numerous actions focused on identifying potential financial harm and customer remediation. The Board and management are conducting company-wide reviews of sales practices issues. These reviews are ongoing. In August 2017, a third-party consulting firm completed an expanded data-driven review of retail banking accounts opened from January 2009 to September 2016 to identify financial harm stemming from potentially unauthorized accounts. We are providing customer remediation based on the expanded account analysis.
For additional information regarding sales practices matters, including related legal matters, see the “Risk Factors”
 
section and Note 15 (Legal Actions) to Financial Statements in this Report.

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:
Automobile Lending Business Practices concerning the origination, servicing, and/or collection of consumer automobile loans, including related insurance products. For example:
In July 2017, the Company 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. The practice of placing CPI was discontinued by the Company on September 30, 2016. Commencing in August 2017, the Company began sending refund checks and/or letters to affected customers through which they may claim or otherwise receive remediation compensation for policies placed between October 15, 2005, and September 30, 2016. The Company currently estimates that it will provide approximately $145 million in cash remediation and $37 million in account adjustments under the plan. The amount of remediation may be affected as the Company continues to work with its regulators on the remediation plan.
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.
Mortgage Interest Rate Lock Extensions In October 2017, the Company announced plans to reach out to all home lending customers who paid fees for mortgage rate lock extensions requested from September 16, 2013, through February 28, 2017, and to provide refunds, with interest, to customers who believe they should not have paid those fees. The plan to issue refunds follows an internal review that determined a rate lock extension policy implemented in September 2013 was, at times, not consistently applied, resulting in some borrowers being charged fees in cases where the Company was primarily responsible for the delays that made the extensions necessary. Effective March 1, 2017, the Company changed how it manages the mortgage rate lock extension process by establishing a centralized review team that reviews all rate lock extension requests for consistent application of the policy. Although a total of approximately $98 million in rate lock extension fees was assessed on approximately 110,000 accounts during the period in question, the Company believes that the amount ultimately refunded likely will be lower because a substantial number of those fees were appropriately charged under its policy, not all of the fees assessed were actually paid, and some fees already have been refunded.
Add-on Products Practices related to certain consumer “add-on” products, including identity theft and debt protection products that were subject to an OCC consent order entered into in June 2015. Based on our ongoing review of “add-on” products across the Company, we

 
Wells Fargo & Company
39



Overview (continued)

expect remediation will be required.
Consumer Deposit Account Freezing/Closing 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.
Review of Certain Activities Within Wealth and Investment Management A review of certain activities within Wealth and Investment Management (WIM) being conducted by the Board, in response to inquiries from federal government agencies, is assessing whether there have been inappropriate referrals or recommendations, including with respect to rollovers for 401(k) plan participants, certain alternative investments, or referrals of brokerage customers to the Company’s investment and fiduciary services business. The review is in its preliminary stages.
Fiduciary and Custody Account Fee Calculations The Company is reviewing fee calculations within certain fiduciary and custody accounts in its investment and fiduciary services business, which is part of the wealth management business in WIM. The Company has determined that there have been instances of incorrect fees being applied to certain assets and accounts, resulting in overcharges. These issues include the incorrect set-up and maintenance in the system of record of the values associated with certain assets. Systems, operations, and account-level reviews are underway to determine the extent of any assets and accounts affected, and root cause analyses are being performed with the assistance of third parties. The review is in its preliminary stages and is focused initially on assets that are not publicly traded.
Foreign Exchange Business The Company is reviewing policies, practices, and procedures in its foreign exchange (FX) business. The Company is also responding to inquiries from government agencies in connection with their reviews of certain aspects of our FX business.

To the extent issues are identified, we will continue to assess any customer harm and provide remediation as appropriate. This effort to identify other instances in which customers may have experienced harm is ongoing, and it is possible that we may identify other areas of potential concern. For more information, including related legal and regulatory risk, see the “Risk Factors” section and Note 15 (Legal Actions) to Financial Statements in this Report.

Financial Performance
In 2017, we generated $22.2 billion of net income and diluted earnings per common share (EPS) of $4.10, compared with $21.9 billion of net income and EPS of $3.99 for 2016. We grew average loans and deposits compared with 2016, increased our capital and liquidity levels, and rewarded our shareholders by increasing our dividend and continuing to repurchase shares of our common stock. Our achievements during 2017 continued to demonstrate the benefit of our diversified business model and our ability to perform well in a challenging environment. Noteworthy financial performance items for 2017 (compared with 2016) included: 
revenue of $88.4 billion, up from $88.3 billion, which included net interest income of $49.6 billion, up $1.8 billion, or 4%;
 
a $3.4 billion after-tax benefit, or $0.67 per share, to net income in 2017 from the impact of the Tax Cuts & Jobs Act (Tax Act) passed in December 2017. The impact included a tax benefit from the re-measurement of net deferred income tax liabilities, partially offset by the tax cost of a deemed repatriation of undistributed foreign earnings and the impact of adjustments related to leveraged leases, low income housing investments, and tax-advantaged renewable energy investments.
total loans of $956.8 billion, down 1%;
deposit growth, with total deposits of $1.3 trillion, up $29.9 billion, or 2%;
strong credit performance as our net charge-off ratio was 31 basis points of average loans down from 37 basis points;
nonaccrual loans of $8.0 billion, down $2.3 billion, or 23%; and
returning $14.5 billion in capital to our shareholders through increased common stock dividends and additional net share repurchases.

Table 1 presents a six year summary of selected financial data and Table 2 presents selected ratios and per common share data.

Balance Sheet and Liquidity
Our balance sheet grew 1% in 2017 to $2.0 trillion, as we increased our liquidity position, held more capital and continued to experience solid credit quality. Cash and other short-term investments increased $9.2 billion from December 31, 2016, reflecting lower loan balances and growth in deposits. Investment securities grew $8.5 billion, or 2%, from December 31, 2016. Our loan portfolio declined $10.8 billion from December 31, 2016. Growth in commercial and industrial and real estate 1-4 family first mortgage loans was more than offset by declines in commercial real estate mortgage, real estate 1-4 family junior lien mortgage and automobile loans.
Deposits at December 31, 2017, were up $29.9 billion, or 2%, from 2016. This increase reflected growth across our commercial, consumer and small business banking deposits. Our average deposit cost increased 12 basis points from a year ago driven by an increase in commercial and wealth and investment management deposit rates.
 
Credit Quality
Credit quality remained solid in 2017, driven by continued strong performance in the commercial and consumer real estate portfolios. Performance in several of our commercial and consumer loan portfolios remained near historically low loss levels and reflected our long-term risk focus. Net charge-offs of $2.9 billion were 0.31% of average loans, compared with $3.5 billion and 0.37%, respectively, from a year ago. Net losses in our commercial portfolio were $446 million, or 9 basis points of average loans, in 2017, compared with $1.1 billion, or 22 basis points, in 2016. Our commercial real estate portfolios were in a net recovery position for each quarter of the last five years, reflecting our conservative risk discipline and improved market conditions.
Net consumer losses increased to 55 basis points in 2017 from 53 basis points in 2016. Losses on our consumer real estate portfolios declined $343 million to a net recovery position from a year ago. The consumer loss levels reflected increased losses in our credit card, automobile, and other revolving and installment loan portfolios, partially offset by the benefit of the improving housing market and our continued focus on originating high quality loans. As of December 31, 2017, approximately 79% of

40
Wells Fargo & Company
 


our real estate 1-4 family first lien mortgage portfolio was originated after 2008, when new underwriting standards were implemented.
The allowance for credit losses of $12.0 billion at December 31, 2017, was down $580 million compared with the prior year. Our provision for credit losses in 2017 was $2.5 billion compared with $3.8 billion a year ago reflecting a release of $400 million in the allowance for credit losses, compared with a build of $250 million in 2016. The build in 2016 was primarily due to deterioration in the oil and gas portfolio, while the release in 2017 was due to strong underlying credit performance.
Nonperforming assets (NPAs) at the end of 2017 were down $2.7 billion, or 24%, from the end of 2016. Nonaccrual loans declined $2.3 billion from the prior year end while foreclosed assets were down $336 million from 2016.

Capital
Our capital levels remained strong in 2017 with total equity increasing to $208.1 billion at December 31, 2017, up $7.6 billion from the prior year. We returned $14.5 billion to shareholders in 2017 ($12.5 billion in 2016) 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 70%. During 2017 we increased our quarterly common stock dividend from $0.38 to $0.39 per share. Our common shares outstanding declined by 124.5 million shares as we continued to reduce our common share count through the repurchase of 196.5 million common shares during the year. We entered into a $1 billion forward repurchase contract with an unrelated third party in January 2018 that settled in February 2018 for 15.7 million shares. We also entered into a $600 million forward repurchase contract with an unrelated third party in February 2018 that is expected to settle in second quarter 2018 for approximately 11 million shares. We expect our share count to continue to decline in 2018 as a result of anticipated net share repurchases.
We believe an important measure of our capital strength is the Common Equity Tier 1 ratio on a fully phased-in basis, which was 11.98% as of December 31, 2017, compared with 10.77% a year ago. Likewise, our other regulatory capital ratios remained strong. See the “Capital Management” section in this Report for more information regarding our capital, including the calculation of our regulatory capital amounts.
Table 1: Six-Year Summary of Selected Financial Data
(in millions, except per share amounts)
2017

 
2016

 
2015

 
2014

 
2013

 
2012

 
%
Change
2017/
2016

 
Five-year
compound
growth
rate 

Income statement
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net interest income
$
49,557

 
47,754

 
45,301

 
43,527

 
42,800

 
43,230

 
4
 %
 
3

Noninterest income
38,832

 
40,513

 
40,756

 
40,820

 
40,980

 
42,856

 
(4
)
 
(2
)
Revenue
88,389

 
88,267


86,057


84,347


83,780


86,086

 

 
1

Provision for credit losses
2,528

 
3,770

 
2,442

 
1,395

 
2,309

 
7,217

 
(33
)
 
(19
)
Noninterest expense
58,484

 
52,377

 
49,974

 
49,037

 
48,842

 
50,398

 
12

 
3

Net income before noncontrolling interests
22,460

 
22,045

 
23,276

 
23,608

 
22,224

 
19,368

 
2

 
3

Less: Net income from noncontrolling interests
277

 
107

 
382

 
551

 
346

 
471

 
159

 
(10
)
Wells Fargo net income
22,183

 
21,938


22,894


23,057


21,878


18,897

 
1

 
3

Earnings per common share
4.14

 
4.03

 
4.18

 
4.17

 
3.95

 
3.40

 
3

 
4

Diluted earnings per common share
4.10

 
3.99

 
4.12

 
4.10

 
3.89

 
3.36

 
3

 
4

Dividends declared per common share
1.540

 
1.515

 
1.475

 
1.350

 
1.150

 
0.880

 
2

 
12

Balance sheet (at year end)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Investment securities
$
416,420

 
407,947

 
347,555

 
312,925

 
264,353

 
235,199

 
2
 %
 
12

Loans
956,770

 
967,604

 
916,559

 
862,551

 
822,286

 
798,351

 
(1
)
 
4

Allowance for loan losses
11,004

 
11,419

 
11,545

 
12,319

 
14,502

 
17,060

 
(4
)
 
(8
)
Goodwill
26,587

 
26,693

 
25,529

 
25,705

 
25,637

 
25,637

 

 
1

Assets
1,951,757

 
1,930,115

 
1,787,632

 
1,687,155

 
1,523,502

 
1,421,746

 
1

 
7

Deposits
1,335,991

 
1,306,079

 
1,223,312

 
1,168,310

 
1,079,177

 
1,002,835

 
2

 
6

Long-term debt
225,020

 
255,077

 
199,536

 
183,943

 
152,998

 
127,379

 
(12
)
 
12

Wells Fargo stockholders’ equity
206,936

 
199,581

 
192,998

 
184,394

 
170,142

 
157,554

 
4

 
6

Noncontrolling interests
1,143

 
916

 
893

 
868

 
866

 
1,357

 
25

 
(3
)
Total equity
208,079

 
200,497

 
193,891

 
185,262

 
171,008

 
158,911

 
4

 
6




 
Wells Fargo & Company
41



Overview (continued)

Table 2: Ratios and Per Common Share Data
 
Year ended December 31, 
 
 
2017

 
2016

 
2015

Profitability ratios
 
 
 
 
 
Wells Fargo net income to average assets (ROA)
1.15
%
 
1.16

 
1.31

Wells Fargo net income applicable to common stock to average Wells Fargo common stockholders’ equity (ROE)
11.35

 
11.49

 
12.60

Return on average tangible common equity (ROTCE) (1)
13.55

 
13.85

 
15.17

Efficiency ratio (2)
66.2

 
59.3

 
58.1

Capital ratios (3)
 
 
 
 
 
At year end:
 
 
 
 
 
Wells Fargo common stockholders’ equity to assets
9.38

 
9.14

 
9.62

Total equity to assets
10.66

 
10.39

 
10.85

Risk-based capital (4):
 
 
 
 
 
Common Equity Tier 1
12.28

 
11.13

 
11.07

Tier 1 capital
14.14

 
12.82

 
12.63

Total capital
17.46

 
16.04

 
15.45

Tier 1 leverage
9.35

 
8.95

 
9.37

Average balances:
 
 
 
 
 
Average Wells Fargo common stockholders’ equity to average assets
9.37

 
9.40

 
9.78

Average total equity to average assets
10.64

 
10.64

 
10.99

Per common share data
 
 
 
 
 
Dividend payout (5)
37.6

 
38.0

 
35.8

Book value (6)
$
37.44

 
35.18

 
33.78

Market price (7)
 
 
 
 
 
High
62.24

 
58.02

 
58.77

Low
49.28

 
43.55

 
47.75

Year end
60.67

 
55.11

 
54.36

(1)
Tangible common equity is a non-GAAP financial measure and represents total equity less preferred equity, noncontrolling interests, and goodwill and certain identifiable intangible assets (including goodwill and intangible assets associated with certain of our nonmarketable equity investments but excluding mortgage servicing rights), net of applicable deferred taxes. The methodology of determining tangible common equity may differ among companies. Management believes that return on average tangible common equity, which utilizes tangible common equity, is a useful financial measure because it enables investors and others to assess the Company's use of equity. For additional information, including a corresponding reconciliation to GAAP financial measures, see the “Capital Management – Tangible Common Equity” section in this Report.
(2)
The efficiency ratio is noninterest expense divided by total revenue (net interest income and noninterest income).
(3)
See the “Capital Management” section and Note 27 (Regulatory and Agency Capital Requirements) to Financial Statements in this Report for additional information.
(4)
The risk-based capital ratios presented at December 31, 2017, 2016, and 2015 were calculated under the lower of Standardized or Advanced Approach determined pursuant to Basel III with Transition Requirements. The risk-based capital ratios were all lower under the Standardized Approach at December 31, 2017. The total capital ratio was lower under the Advanced Approach and the other ratios were lower under the Standardized Approach at both December 31, 2016 and 2015.
(5)
Dividend payout ratio is dividends declared per common share as a percentage of diluted earnings per common share.
(6)
Book value per common share is common stockholders’ equity divided by common shares outstanding.
(7)
Based on daily prices reported on the New York Stock Exchange Composite Transaction Reporting System.

Earnings Performance
Wells Fargo net income for 2017 was $22.2 billion ($4.10 diluted earnings per common share), compared with $21.9 billion ($3.99 diluted per share) for 2016 and $22.9 billion ($4.12 diluted per share) for 2015. Our financial performance in 2017 benefited from a $1.8 billion increase in net interest income, a $1.2 billion decrease in our provision for credit losses, and a $5.2 billion decrease in income tax expense (of which $3.7 billion resulted from the net benefit of adjustments due to the Tax Act), partially offset by a $1.7 billion decrease in noninterest income and a $6.1 billion increase in noninterest expense.
Revenue, the sum of net interest income and noninterest income, was $88.4 billion in 2017, compared with $88.3 billion in 2016 and $86.1 billion in 2015. The increase in revenue for 2017 compared with 2016 was predominantly due to an increase in net interest income, reflecting increases in interest income from loans, trading assets and investment securities, partially offset by higher long-term debt and deposit interest expense. Our diversified sources of revenue generated by our businesses continued to be balanced between net interest income and
 
noninterest income. In 2017, net interest income of $49.6 billion represented 56% of revenue, compared with $47.8 billion (54%) in 2016 and $45.3 billion (53%) in 2015. Table 3 presents the components of revenue and noninterest expense as a percentage of revenue for year-over-year results.
See later in this section for discussions of net interest income, noninterest income and noninterest expense.


42
Wells Fargo & Company
 


Table 3: Net Interest Income, Noninterest Income and Noninterest Expense as a Percentage of Revenue
 
Year ended December 31, 
 
(in millions)
2017

 
% of revenue 

 
2016

 
% of revenue 

 
2015

 
% of revenue 

Interest income (on a taxable-equivalent basis)
 
 
 
 
 
 
 
 
 
 
 
Trading assets
$
2,982

 
3
 %
 
$
2,553

 
3
 %
 
$
2,010

 
2
 %
Investment securities
11,768

 
13

 
10,316

 
11
 %
 
9,906

 
12

Mortgages held for sale (MHFS)
786

 
1

 
784

 
1

 
785

 
1

Loans held for sale (LHFS)
12

 

 
9

 

 
19

 

Loans
41,551

 
47

 
39,630

 
45

 
36,663

 
43

Other interest income
3,134

 
4

 
1,614

 
2

 
990

 
1

Total interest income (on a taxable-equivalent basis)
60,233

 
68

 
54,906

 
62

 
50,373

 
59

Interest expense (on a taxable-equivalent basis)
 
 
 
 
 
 
 
 
 
 
 
Deposits
3,013

 
3

 
1,395

 
2

 
963

 
1

Short-term borrowings
761

 
1

 
333

 

 
64

 

Long-term debt
5,157

 
6

 
3,830

 
5

 
2,592

 
4

Other interest expense
424

 

 
354

 

 
357

 

Total interest expense (on a taxable-equivalent basis)
9,355

 
11

 
5,912

 
7

 
3,976

 
5

Net interest income (on a taxable-equivalent basis)
50,878

 
57

 
48,994

 
55

 
46,397

 
54

Taxable-equivalent adjustment
(1,321
)
 
(1
)
 
(1,240
)
 
(1
)
 
(1,096
)
 
(1
)
Net interest income (A) 
49,557

 
56

 
47,754

 
54

 
45,301

 
53

Noninterest income
 
 
 
 
 
 
 
 
 
 
 
Service charges on deposit accounts
5,111

 
6

 
5,372

 
6

 
5,168

 
6

Trust and investment fees (1)
14,495

 
16

 
14,243

 
16

 
14,468

 
16

Card fees
3,960

 
4

 
3,936

 
5

 
3,720

 
4

Other fees (1)
3,557

 
4

 
3,727

 
4

 
4,324

 
5

Mortgage banking (1)
4,350

 
5

 
6,096

 
7

 
6,501

 
7

Insurance
1,049

 
1

 
1,268

 
2

 
1,694

 
2

Net gains from trading activities
1,053

 
1

 
834

 
1

 
614

 
1

Net gains on debt securities
479

 
1

 
942

 
1

 
952

 
1

Net gains from equity investments
1,268

 
1

 
879

 
1

 
2,230

 
3

Lease income
1,907

 
2

 
1,927

 
2

 
621

 
1

Other
1,603

 
2

 
1,289

 
1

 
464

 
1

Total noninterest income (B)
38,832

 
44

 
40,513

 
46

 
40,756

 
47

Noninterest expense
 
 
 
 
 
 
 
 
 
 
 
Salaries
17,363

 
20

 
16,552

 
19

 
15,883

 
19

Commission and incentive compensation
10,442

 
12

 
10,247

 
12

 
10,352

 
12

Employee benefits
5,566

 
6

 
5,094

 
6

 
4,446

 
5

Equipment
2,237

 
3

 
2,154

 
2

 
2,063

 
2

Net occupancy
2,849

 
3

 
2,855

 
3

 
2,886

 
3

Core deposit and other intangibles
1,152

 
1

 
1,192

 
1

 
1,246

 
1

FDIC and other deposit assessments
1,287

 
1

 
1,168

 
1

 
973

 
1

Operating losses
5,492

 
6

 
1,608

 
2

 
1,871

 
2

Outside professional services
3,813

 
4

 
3,138

 
4

 
2,665

 
3

Other (2)
8,283

 
9

 
8,369

 
9

 
7,589

 
10

Total noninterest expense
58,484

 
66

 
52,377

 
59

 
49,974

 
58

Revenue (A) + (B)
$
88,389

 
 
 
$
88,267

 
 
 
$
86,057

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


 
Wells Fargo & Company
43



Earnings Performance (continued)

Net Interest Income
Net interest income is the interest earned on debt securities, loans (including yield-related loan fees) and other interest-earning assets minus the interest paid on deposits, short-term borrowings and long-term debt. The net interest margin is the average yield on earning assets minus the average interest rate paid for deposits and our other sources of funding. Net interest income and the net interest margin are presented on a taxable-equivalent basis in Table 5 to consistently reflect income from taxable and tax-exempt loans and securities based on a 35% federal statutory tax rate.
While the Company believes that it has the ability to increase net interest income over time, net interest income and the net interest margin in any one period can be significantly affected by a variety of factors including the mix and overall size of our earning assets portfolio and the cost of funding those assets. In addition, some variable sources of interest income, such as resolutions from purchased credit-impaired (PCI) loans, loan fees and collection of interest on nonaccrual loans, can vary from period to period. Net interest income and net interest margin growth has been challenged during the prolonged low interest rate environment as higher yielding loans and securities have run off and have been replaced with lower yielding assets.
Net interest income on a taxable-equivalent basis was $50.9 billion in 2017, compared with $49.0 billion in 2016, and $46.4 billion in 2015. The net interest margin was 2.87% in 2017, up 1 basis point from 2.86% in 2016, and down 9 basis points from 2.95% in 2015. The increase in net interest income for 2017, compared with 2016, was driven by growth in earning assets and the benefit of higher interest rates, partially offset by growth and repricing of long-term debt. Deposit interest expense was also higher, largely due to an increase in Wholesale and Wealth and Investment Management (WIM) deposit pricing resulting from higher interest rates.
 
The slight increase in net interest margin in 2017, compared with 2016, was due to repricing benefits of earning assets from higher interest rates exceeding the repricing costs of deposits and market based funding sources.
Table 4 presents the components of earning assets and funding sources as a percentage of earning assets to provide a more meaningful analysis of year-over-year changes that influenced net interest income.
Average earning assets increased $62.2 billion in 2017 from a year ago, as average loans increased $6.2 billion, average investment securities increased $50.4 billion, and average trading assets increased $13.3 billion in 2017, compared with a year ago. In addition, average federal funds sold and other short-term investments decreased $11.2 billion in 2017, compared with a year ago.
Deposits are an important low-cost source of funding and affect both net interest income and the net interest margin. Deposits include noninterest-bearing deposits, interest-bearing checking, market rate and other savings, savings certificates, other time deposits, and deposits in foreign offices. Average deposits increased to $1.30 trillion in 2017, compared with $1.25 trillion in 2016, and represented 136% of average loans compared with 132% a year ago. Average deposits were 74% of average earning assets in 2017, compared with 73% a year ago.
Table 5 presents the individual components of net interest income and the net interest margin. The effect on interest income and costs of earning asset and funding mix changes described above, combined with rate changes during 2017, are analyzed in Table 6.

44
Wells Fargo & Company
 


Table 4: Average Earning Assets and Funding Sources as a Percentage of Average Earning Assets
 
Year ended December 31,
 
 
2017
 
 
2016
 
(in millions)
Average
balance

 
% of
earning
assets

 
Average
balance

 
% of
earning
assets

Earning assets
 
 
 
 
 
 
 
Federal funds sold, securities purchased under resale agreements and other short-term investments
$
276,561

 
16
%
 
$
287,718

 
17
%
Trading assets
101,716

 
6

 
88,400

 
5

Investment securities:
 
 


 
 
 


Available-for-sale securities:
 
 


 
 
 


Securities of U.S. Treasury and federal agencies
15,966

 
1

 
29,418

 
2

Securities of U.S. states and political subdivisions
52,658

 
3

 
52,959

 
3

Mortgage-backed securities:
 
 


 
 
 


Federal agencies
145,310

 
8

 
110,637

 
7

Residential and commercial
11,839

 
1

 
18,725

 
1

Other debt and equity securities
49,193

 
3

 
53,433

 
3

Total available-for-sale securities
274,966

 
16

 
265,172

 
16

Held-to-maturity securities:
 
 
 
 
 
 
 
Securities of U.S. Treasury and federal agencies
44,705

 
3

 
44,675

 
3

Securities of U.S. states and political subdivisions
6,268

 

 
2,893

 

Federal agency mortgage-backed securities
78,330

 
4

 
39,330

 
2

Other debt securities
2,194

 

 
4,043

 

Held-to-maturity securities
131,497

 
7

 
90,941

 
5

Total investment securities
406,463

 
23

 
356,113

 
21

Mortgages held for sale (1)
20,780

 
1

 
22,412

 
1

Loans held for sale (1)
147

 

 
218

 

Loans:
 
 


 
 
 


Commercial:
 
 


 
 
 


Commercial and industrial – U.S.
272,034

 
15

 
268,182

 
16

Commercial and industrial – Non U.S.
57,198

 
3

 
51,601

 
3

Real estate mortgage
129,990

 
8

 
127,232

 
8

Real estate construction
24,813

 
1

 
23,197

 
1

Lease financing
19,128

 
1

 
17,950

 
1

Total commercial
503,163

 
28

 
488,162

 
29

Consumer:
 
 


 
 
 


Real estate 1-4 family first mortgage
277,751

 
16

 
276,712

 
16

Real estate 1-4 family junior lien mortgage
42,780

 
3

 
49,735

 
3

Credit card
35,600

 
2

 
34,178

 
2

Automobile
57,900

 
3

 
61,566

 
4

Other revolving credit and installment
38,935

 
2

 
39,607

 
2

Total consumer
452,966

 
26

 
461,798

 
27

Total loans (1)
956,129

 
54

 
949,960

 
56

Other
11,445

 

 
6,262

 

Total earning assets
$
1,773,241

 
100
%
 
$
1,711,083

 
100
%
Funding sources
 
 


 
 
 


Deposits:
 
 


 
 
 


Interest-bearing checking
$
49,474

 
3
%
 
$
42,379

 
2
%
Market rate and other savings
682,053

 
39

 
663,557

 
39

Savings certificates
22,190

 
1

 
25,912

 
2

Other time deposits
61,625

 
3

 
55,846

 
3

Deposits in foreign offices
123,816

 
7

 
103,206

 
6

Total interest-bearing deposits
939,158

 
53

 
890,900

 
52

Short-term borrowings
98,922

 
6

 
115,187

 
7

Long-term debt
246,195

 
14

 
239,471

 
14

Other liabilities
21,872

 
1

 
16,702

 
1

Total interest-bearing liabilities
1,306,147

 
74

 
1,262,260

 
74

Portion of noninterest-bearing funding sources
467,094

 
26

 
448,823

 
26

Total funding sources
$
1,773,241

 
100
%
 
$
1,711,083

 
100
%
Noninterest-earning assets
 
 
 
 
 
 
 
Cash and due from banks
$
18,622

 
 
 
18,617

 
 
Goodwill
26,629

 
 
 
26,700

 
 
Other
114,513

 
 
 
129,041

 
 
Total noninterest-earning assets
$
159,764

 
 
 
174,358

 
 
Noninterest-bearing funding sources
 
 
 
 
 
 
 
Deposits
$
365,464

 
 
 
359,666

 
 
Other liabilities
55,740

 
 
 
62,825

 
 
Total equity
205,654

 
 
 
200,690

 
 
Noninterest-bearing funding sources used to fund earning assets
(467,094
)
 
 
 
(448,823
)
 
 
Net noninterest-bearing funding sources
$
159,764

 
 
 
174,358

 
 
Total assets
$
1,933,005

 
 
 
1,885,441

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

 
Wells Fargo & Company
45



Earnings Performance (continued)

Table 5: Average Balances, Yields and Rates Paid (Taxable-Equivalent Basis) (1)(2)
 
 
 
 
 
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
$
276,561

 
1.05
%
 
$
2,897

 
287,718

 
0.51
%
 
$
1,457

Trading assets
101,716

 
2.93

 
2,982

 
88,400

 
2.89

 
2,553

Investment securities (3):
 
 
 
 
 
 
 
 
 
 
 
Available-for-sale securities:
 
 
 
 
 
 
 
 
 
 
 
Securities of U.S. Treasury and federal agencies
15,966

 
1.49

 
239

 
29,418

 
1.56

 
457

Securities of U.S. states and political subdivisions
52,658

 
3.95

 
2,082

 
52,959

 
4.20

 
2,225

Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
Federal agencies
145,310

 
2.60

 
3,782

 
110,637

 
2.50

 
2,764

Residential and commercial
11,839

 
5.33

 
631

 
18,725

 
5.49

 
1,029

Other debt and equity securities
49,193

 
3.73

 
1,834

 
53,433

 
3.44

 
1,841

Total available-for-sale securities
274,966

 
3.12

 
8,568

 
265,172

 
3.14

 
8,316

Held-to-maturity securities:
 
 
 
 
 
 
 
 
 
 
 
Securities of U.S. Treasury and federal agencies
44,705

 
2.19

 
979

 
44,675

 
2.19

 
979

Securities of U.S. states and political subdivisions
6,268

 
5.32

 
334

 
2,893

 
5.32

 
154

Federal agency and other mortgage-backed securities
78,330

 
2.34

 
1,832

 
39,330

 
2.00

 
786

Other debt securities
2,194

 
2.50

 
55

 
4,043

 
2.01

 
81

Held-to-maturity securities
131,497

 
2.43

 
3,200

 
90,941

 
2.20

 
2,000

Total investment securities
406,463

 
2.90

 
11,768

 
356,113

 
2.90

 
10,316

Mortgages held for sale (4)
20,780

 
3.78

 
786

 
22,412

 
3.50

 
784

Loans held for sale (4)
147

 
8.38

 
12

 
218

 
4.01

 
9

Loans:
 
 
 
 
 
 
 
 
 
 
 
Commercial:
 
 
 
 
 
 
 
 
 
 
 
Commercial and industrial – U.S.
272,034

 
3.75

 
10,196

 
268,182

 
3.45

 
9,243

Commercial and industrial – non U.S.
57,198

 
2.86

 
1,639

 
51,601

 
2.36

 
1,219

Real estate mortgage
129,990

 
3.74

 
4,859

 
127,232

 
3.44

 
4,371

Real estate construction
24,813

 
4.10

 
1,017

 
23,197

 
3.55

 
824

Lease financing
19,128

 
3.74

 
715

 
17,950

 
5.10

 
916

Total commercial
503,163

 
3.66

 
18,426

 
488,162

 
3.39

 
16,573

Consumer:
 
 
 
 
 
 
 
 
 
 
 
Real estate 1-4 family first mortgage
277,751

 
4.03

 
11,206

 
276,712

 
4.01

 
11,096

Real estate 1-4 family junior lien mortgage
42,780

 
4.82

 
2,062

 
49,735

 
4.39

 
2,183

Credit card
35,600

 
12.23

 
4,355

 
34,178

 
11.62

 
3,970

Automobile
57,900

 
5.34

 
3,094

 
61,566

 
5.62

 
3,458

Other revolving credit and installment
38,935

 
6.18

 
2,408

 
39,607

 
5.93

 
2,350

Total consumer
452,966

 
5.11

 
23,125

 
461,798

 
4.99

 
23,057

Total loans (4)
956,129

 
4.35

 
41,551

 
949,960

 
4.17

 
39,630

Other
11,445

 
2.06

 
237

 
6,262

 
2.51

 
157

Total earning assets
$
1,773,241

 
3.40
%
 
$
60,233

 
1,711,083

 
3.21
%
 
$
54,906

Funding sources
 
 
 
 
 
 
 
 
 
 
 
Deposits:
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing checking
$
49,474

 
0.49
%
 
$
242

 
42,379

 
0.14
%
 
$
60

Market rate and other savings
682,053

 
0.14

 
983

 
663,557

 
0.07

 
449

Savings certificates
22,190

 
0.30

 
67

 
25,912

 
0.35

 
91

Other time deposits
61,625

 
1.43

 
880

 
55,846

 
0.91

 
508

Deposits in foreign offices
123,816

 
0.68

 
841

 
103,206

 
0.28

 
287

Total interest-bearing deposits
939,158

 
0.32

 
3,013

 
890,900

 
0.16

 
1,395

Short-term borrowings
98,922

 
0.77

 
761

 
115,187

 
0.29

 
333

Long-term debt
246,195

 
2.09

 
5,157

 
239,471

 
1.60

 
3,830

Other liabilities
21,872

 
1.94

 
424

 
16,702

 
2.12

 
354

Total interest-bearing liabilities
1,306,147

 
0.72

 
9,355

 
1,262,260

 
0.47

 
5,912

Portion of noninterest-bearing funding sources
467,094

 

 

 
448,823

 

 

Total funding sources
$
1,773,241

 
0.53

 
9,355

 
1,711,083

 
0.35

 
5,912

Net interest margin and net interest income on a taxable-equivalent basis (5) 
 
 
2.87
%
 
$
50,878

 
 
 
2.86
%
 
$
48,994

Noninterest-earning assets
 
 
 
 
 
 
 
 
 
 
 
Cash and due from banks
$
18,622

 
 
 
 
 
18,617

 
 
 
 
Goodwill
26,629

 
 
 
 
 
26,700

 
 
 
 
Other
114,513

 
 
 
 
 
129,041

 
 
 
 
Total noninterest-earning assets
$
159,764

 
 
 
 
 
174,358

 
 
 
 
Noninterest-bearing funding sources
 
 
 
 
 
 
 
 
 
 
 
Deposits
$
365,464

 
 
 
 
 
359,666

 
 
 
 
Other liabilities
55,740

 
 
 
 
 
62,825

 
 
 
 
Total equity
205,654

 
 
 
 
 
200,690

 
 
 
 
Noninterest-bearing funding sources used to fund earning assets
(467,094
)
 
 
 
 
 
(448,823
)
 
 
 
 
Net noninterest-bearing funding sources
$
159,764

 
 
 
 
 
174,358

 
 
 
 
Total assets
$
1,933,005

 
 
 
 
 
1,885,441

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1)
Our average prime rate was 4.10% for the year ended December 31, 2017, 3.51% for the year ended December 31, 2016, 3.26% for the year ended December 31, 2015, and 3.25% for the years ended December 31, 2014, and 2013 . The average three-month London Interbank Offered Rate (LIBOR) was 1.26%, 0.74%, 0.32%, 0.23%, and 0.27% for the same years, respectively.
(2)
Yield/rates and amounts include the effects of hedge and risk management activities associated with the respective asset and liability categories.



46
Wells Fargo & Company
 



 
 
 
 
2015

 
 
 
 
 
2014

 
 
 
 
 
2013

Average 
balance 

 
Yields/ 
rates 

 
Interest 
income/ 
expense 

 
Average 
balance 

 
Yields/ 
rates 

 
Interest 
income/ 
expense 

 
Average 
balance 

 
Yields/ 
rates 

 
Interest 
income/ 
expense 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$
266,832

 
0.28
%
 
$
738

 
241,282

 
0.28
%
 
$
673

 
154,902

 
0.32
%
 
$
489

66,679

 
3.01

 
2,010

 
55,140

 
3.10

 
1,712

 
44,745

 
3.14

 
1,406

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
32,093

 
1.58

 
505

 
10,400

 
1.64

 
171

 
6,750

 
1.66

 
112

47,404

 
4.23

 
2,007

 
43,138

 
4.29

 
1,852

 
39,922

 
4.38

 
1,748

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
100,218

 
2.73

 
2,733

 
114,076

 
2.84

 
3,235

 
107,148

 
2.83

 
3,031

22,490

 
5.73

 
1,289

 
26,475

 
6.03

 
1,597

 
30,717

 
6.47

 
1,988

49,752

 
3.42

 
1,701

 
47,488

 
3.66

 
1,741

 
55,002