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 September 30, 2014

 

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 ¨ 

 

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 ¨ 

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non‑accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

        Large accelerated filer         þ                                                                                         Accelerated filer  ¨ 

        Non‑accelerated filer           ¨  (Do not check if a smaller reporting company)               Smaller reporting company  ¨ 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

Yes ¨             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

                                                                                                                                                          October 31, 2014

Common stock, $1-2/3 par value                                                                                         5,187,624,483              


 

 

FORM 10-Q

CROSS-REFERENCE INDEX

  

  

  

  

  

PART I

Financial Information

  

Item 1.

Financial Statements

Page

  

Consolidated Statement of Income.....................................................................................................................................................  

73

  

Consolidated Statement of Comprehensive Income..................................................................................................................................  

74

  

Consolidated Balance Sheet.............................................................................................................................................................  

75

  

Consolidated Statement of Changes in Equity........................................................................................................................................  

76

  

Consolidated Statement of Cash Flows................................................................................................................................................  

78

  

Notes to Financial Statements

  

  

1

-

Summary of Significant Accounting Policies.....................................................................................................................................  

79

  

2

-

Business Combinations..............................................................................................................................................................  

81

  

3

-

Federal Funds Sold, Securities Purchased under Resale Agreements and Other Short-Term Investments...............................................................  

81

  

4

-

Investment Securities................................................................................................................................................................  

82

  

5

-

Loans and Allowance for Credit Losses...........................................................................................................................................  

90

  

6

-

Other Assets..........................................................................................................................................................................  

108

  

7

-

Securitizations and Variable Interest Entities......................................................................................................................................  

109

  

8

-

Mortgage Banking Activities.......................................................................................................................................................  

117

  

9

-

Intangible Assets.....................................................................................................................................................................  

120

  

10

-

Guarantees, Pledged Assets and Collateral........................................................................................................................................  

121

  

11

-

Legal Actions.........................................................................................................................................................................  

124

  

12

-

Derivatives............................................................................................................................................................................  

126

  

13

-

Fair Values of Assets and Liabilities...............................................................................................................................................  

133

  

14

-

Preferred Stock.......................................................................................................................................................................  

154

  

15

-

Employee Benefits...................................................................................................................................................................  

157

  

16

-

Earnings Per Common Share.......................................................................................................................................................  

158

  

17

-

Other Comprehensive Income......................................................................................................................................................  

159

  

18

-

Operating Segments..................................................................................................................................................................  

161

  

19

-

Regulatory and Agency Capital Requirements....................................................................................................................................  

162

  

  

  

  

  

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations (Financial Review)

  

  

Summary Financial Data................................................................................................................................................................  

2

  

Overview..................................................................................................................................................................................  

3

  

Earnings Performance...................................................................................................................................................................  

4

  

Balance Sheet Analysis..................................................................................................................................................................  

14

  

Off-Balance Sheet Arrangements......................................................................................................................................................  

18

  

Risk Management........................................................................................................................................................................  

19

  

Capital Management.....................................................................................................................................................................  

60

  

Regulatory Reform.......................................................................................................................................................................  

66

  

Critical Accounting Policies.............................................................................................................................................................  

67

  

Current Accounting Developments....................................................................................................................................................  

68

  

Forward-Looking Statements...........................................................................................................................................................  

70

  

Risk Factors...............................................................................................................................................................................  

71

  

Glossary of Acronyms..................................................................................................................................................................  

163

  

  

  

  

  

Item 3.

Quantitative and Qualitative Disclosures About Market Risk......................................................................................................................  

45

  

  

  

  

  

Item 4.

Controls and Procedures................................................................................................................................................................  

72

  

  

  

  

  

PART II

Other Information

  

Item 1.

Legal Proceedings........................................................................................................................................................................  

164

  

  

  

  

  

Item 1A.

Risk Factors...............................................................................................................................................................................  

164

  

  

  

  

  

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds......................................................................................................................  

164

  

  

  

  

  

Item 6.

Exhibits....................................................................................................................................................................................  

165

  

  

  

  

  

Signature.........................................................................................................................................................................................  

165

  

  

  

  

  

Exhibit Index....................................................................................................................................................................................  

166

1

 


 

 

 

PART I - FINANCIAL INFORMATION

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

FINANCIAL REVIEW

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Summary Financial Data

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

% Change

  

  

  

  

  

  

  

  

  

  

  

  

  

Quarter ended

  

Sept. 30, 2014 from

  

Nine months ended

  

  

  

  

  

  

  

  

  

Sept. 30,

  

June 30,

  

Sept. 30,

  

June 30,

  

Sept. 30,

  

Sept. 30,

  

Sept. 30,

%

  

($ in millions, except per share amounts)

  

 2014 

  

 2014 

  

 2013 

  

 2014 

  

 2013 

  

 2014 

  

 2013 

Change

  

For the Period

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Wells Fargo net income

$

 5,729 

  

 5,726 

  

 5,578 

  

 - 

%

 3 

  

 17,348 

  

 16,268 

 7 

%

Wells Fargo net income

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

applicable to common stock

  

 5,408 

  

 5,424 

  

 5,317 

  

 - 

  

 2 

  

 16,439 

  

 15,520 

 6 

  

Diluted earnings per common share

  

 1.02 

  

 1.01 

  

 0.99 

  

 1 

  

 3 

  

 3.08 

  

 2.89 

 7 

  

Profitability ratios (annualized):

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Wells Fargo net income to

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

average assets (ROA) (1)

  

 1.40 

%

 1.47 

  

 1.53 

  

 (5) 

  

 (8) 

  

 1.48 

  

 1.53 

 (3) 

  

  

Wells Fargo net income applicable

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

to common stock to average

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Wells Fargo common

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

stockholders' equity (ROE)

  

 13.10 

  

 13.40 

  

 14.07 

  

 (2) 

  

 (7) 

  

 13.60 

  

 13.92 

 (2) 

  

Efficiency ratio (2)

  

 57.7 

  

 57.9 

  

 59.1 

  

 - 

  

 (2) 

  

 57.9 

  

 58.2 

 (1) 

  

Total revenue

$

 21,213 

  

 21,066 

  

 20,478 

  

 1 

  

 4 

  

 62,904 

  

 63,115 

 - 

  

Pre-tax pre-provision profit (PTPP) (3)

  

 8,965 

  

 8,872 

  

 8,376 

  

 1 

  

 7 

  

 26,514 

  

 26,358 

 1 

  

Dividends declared per common share

  

 0.35 

  

 0.35 

  

 0.30 

  

 - 

  

 17 

  

 1.00 

  

 0.85 

 18 

  

Average common shares outstanding

  

 5,225.9 

  

 5,268.4 

  

 5,295.3 

  

 (1) 

  

 (1) 

  

 5,252.2 

  

 5,293.0 

 (1) 

  

Diluted average common shares outstanding

  

 5,310.4 

  

 5,350.8 

  

 5,381.7 

  

 (1) 

  

 (1) 

  

 5,339.2 

  

 5,374.7 

 (1) 

  

Average loans (1)

$

 833,199 

  

 831,043 

  

 802,134 

  

 - 

  

 4 

  

 829,378 

  

 799,080 

 4 

  

Average assets (1)

  

 1,617,942 

  

 1,564,003 

  

 1,446,965 

  

 3 

  

 12 

  

 1,569,621 

  

 1,425,836 

 10 

  

Average core deposits (4)

  

 1,012,219 

  

 991,727 

  

 940,279 

  

 2 

  

 8 

  

 992,723 

  

 934,131 

 6 

  

Average retail core deposits (5)

  

 703,062 

  

 698,763 

  

 670,335 

  

 1 

  

 5 

  

 697,535 

  

 666,393 

 5 

  

Net interest margin (1)

  

 3.06 

%

 3.15 

  

 3.39 

  

 (3) 

  

 (10) 

  

 3.13 

  

 3.45 

 (9) 

  

At Period End

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Investment securities

$

 289,009 

  

 279,069 

  

 259,399 

  

 4 

  

 11 

  

 289,009 

  

 259,399 

 11 

  

Loans (1)

  

 838,883 

  

 828,942 

  

 809,135 

  

 1 

  

 4 

  

 838,883 

  

 809,135 

 4 

  

Allowance for loan losses

  

 12,681 

  

 13,101 

  

 15,159 

  

 (3) 

  

 (16) 

  

 12,681 

  

 15,159 

 (16) 

  

Goodwill

  

 25,705 

  

 25,705 

  

 25,637 

  

 - 

  

 - 

  

 25,705 

  

 25,637 

 - 

  

Assets (1)

  

 1,636,855 

  

 1,598,874 

  

 1,484,865 

  

 2 

  

 10 

  

 1,636,855 

  

 1,484,865 

 10 

  

Core deposits (4)

  

 1,016,478 

  

 1,007,485 

  

 947,805 

  

 1 

  

 7 

  

 1,016,478 

  

 947,805 

 7 

  

Wells Fargo stockholders' equity

  

 182,481 

  

 180,859 

  

 167,165 

  

 1 

  

 9 

  

 182,481 

  

 167,165 

 9 

  

Total equity

  

 182,990 

  

 181,549 

  

 168,813 

  

 1 

  

 8 

  

 182,990 

  

 168,813 

 8 

  

Tier 1 capital (6)

  

 153,437 

  

 151,679 

  

 137,468 

  

 1 

  

 12 

  

 153,437 

  

 137,468 

 12 

  

Total capital (6)

  

 190,525 

  

 189,480 

  

 171,329 

  

 1 

  

 11 

  

 190,525 

  

 171,329 

 11 

  

Capital ratios:

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Total equity to assets (1)

  

 11.18 

%

 11.35 

  

 11.37 

  

 (2) 

  

 (2) 

  

 11.18 

  

 11.37 

 (2) 

  

  

Risk-based capital (6):

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Tier 1 capital

  

 12.55 

  

 12.72 

  

 12.11 

  

 (1) 

  

 4 

  

 12.55 

  

 12.11 

 4 

  

  

  

Total capital

  

 15.58 

  

 15.89 

  

 15.09 

  

 (2) 

  

 3 

  

 15.58 

  

 15.09 

 3 

  

  

Tier 1 leverage (6)

  

 9.64 

  

 9.86 

  

 9.76 

  

 (2) 

  

 (1) 

  

 9.64 

  

 9.76 

 (1) 

  

  

Common Equity Tier 1 (7)

  

 11.11 

  

 11.31 

  

 10.60 

  

 (2) 

  

 5 

  

 11.11 

  

 10.60 

 5 

  

Common shares outstanding

  

 5,215.0 

  

 5,249.9 

  

 5,273.7 

  

 (1) 

  

 (1) 

  

 5,215.0 

  

 5,273.7 

 (1) 

  

Book value per common share

$

 31.55 

  

 31.18 

  

 28.98 

  

 1 

  

 9 

  

 31.55 

  

 28.98 

 9 

  

Common stock price:

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

High

  

  

 53.80 

  

 53.05 

  

 44.79 

  

 1 

  

 20 

  

 53.80 

  

 44.79 

 20 

  

  

Low

  

  

 49.47 

  

 46.72 

  

 40.79 

  

 6 

  

 21 

  

 44.17 

  

 34.43 

 28 

  

  

Period end

  

  

 51.87 

  

 52.56 

  

 41.32 

  

 (1) 

  

 26 

  

 51.87 

  

 41.32 

 26 

  

Team members (active, full-time equivalent)

  

 263,900 

  

 263,500 

  

 270,600 

  

 - 

  

 (2) 

  

 263,900 

  

 270,600 

 (2) 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

(1)

Financial information for certain periods prior to 2014 was revised to reflect our determination that certain factoring arrangements did not qualify as loans. Accordingly, we revised our commercial loan balances for year-end 2012 and each of the quarters in 2013 in order to present the Company’s lending trends on a comparable basis over this period. This revision, which resulted in a reduction to total commercial loans and a corresponding decrease to other liabilities, did not impact the Company’s consolidated net income or total cash flows. We reduced our commercial loans by $3.5 billion, $3.2 billion, $2.1 billion, $1.6 billion and $1.2 billion at December 31, September 30, June 30, and March 31, 2013, and December 31, 2012, respectively, which represented less than 1% of total commercial loans and less than 0.5% of our total loan portfolio. Other affected financial information, including financial guarantees and financial ratios, has been appropriately revised to reflect this revision. See Note 1 (Summary of Significant Accounting Policies) to Financial Statements in this Report for more information.

  

(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)

Core deposits are noninterest-bearing deposits, interest-bearing checking, savings certificates, certain market rate and other savings, and certain foreign deposits (Eurodollar sweep balances).

  

(5)

Retail core deposits are total core deposits excluding Wholesale Banking core deposits and retail mortgage escrow deposits.

  

  

(6)

See Note 19 (Regulatory and Agency Capital Requirements) to Financial Statements in this Report for additional information.

  

  

(7)

See the “Capital Management” section in this Report for additional information.

  

  

2

 


 

 

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, 2013 (2013 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[1] 

 

Overview

Wells Fargo & Company is a nationwide, diversified, community-based financial services company with $1.6 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 8,700 locations, 12,500 ATMs and the internet (wellsfargo.com), and we have offices in 36 countries to support customers who conduct business in the global economy. With approximately 265,000 active, full-time equivalent team members, we serve one in three households in the United States and rank No. 29 on Fortune’s  2014 rankings of America’s largest corporations. We ranked fourth in assets and first in the market value of our common stock among all U.S. banks at September 30, 2014.  

We use our Vision and Values to guide us toward growth and success. Our vision is to satisfy all our customers’ financial needs, help them succeed financially, be recognized as the premier financial services company in our markets and be one of America’s great companies. Important to our strategy to achieve this vision is to increase the number of our products our customers utilize and to offer them all of the financial products that fulfill their financial needs. Our cross-sell strategy, diversified business model and the breadth of our geographic reach facilitate growth in both strong and weak economic cycles. We can grow by expanding the number of products our current customers have with us, gain new customers in our extended markets, and increase market share in many businesses.

We have six primary values, which are based on our vision and provide the foundation for everything we do. First, we value and support our people as a competitive advantage and strive to attract, develop, retain and motivate the most talented people we can find. Second, we strive for the highest ethical standards with our team members, our customers, our communities and our shareholders. Third, with respect to our customers, we strive to base our decisions and actions on what is right for them in everything we do. Fourth, for team members we strive to build and sustain a diverse and inclusive culture – one where they feel valued and respected for who they are as well as for the skills and experiences they bring to our company. Fifth, we also look to each of our team members to be leaders in establishing, sharing and communicating our vision. Sixth, we strive to make risk management a competitive advantage by working hard to ensure that appropriate controls are in place to reduce risks to our customers, maintain and increase our competitive market position, and protect Wells Fargo’s long-term safety, soundness and reputation.

 

Financial Performance

Wells Fargo net income was $5.7 billion in third quarter 2014 with diluted earnings per share (EPS) of $1.02, both up 3% from a year ago, reflecting the benefit of our diversified business model, which has enabled us to produce strong and consistent results over a variety of economic and interest rate environments. We continued our focus on meeting customers’ financial needs and creating long-term value for shareholders. Compared with a year ago:

·         revenue grew 4% as a result of increases in both net interest income and noninterest income;

·         pre-tax pre-provision profit increased 7%;

·         our loans increased $29.7 billion, or 4%,  even with the planned runoff in our non-strategic/liquidating portfolios, and our core loan portfolio grew by $50.8 billion, or 7%; 

·         our liquidating portfolio declined $21.0 billion and was only 8% of our total loans, down from 10% a year ago;

·         our deposit franchise continued to generate strong customer and balance growth, with total deposits up $88.8 billion, or 9%;

·         our credit performance continued to improve with total net charge-offs down $307 million, or 31%, and represented only 32 basis points (annualized) of average loans;

·         our efficiency ratio improved to 57.7%, compared with 59.1%; and

·         we continued to maintain our solid customer relationships across our company, with Retail Banking cross-sell of 6.15 products per household (August 2014); Wholesale Banking cross-sell of 7.2 products (June 2014); and Wealth, Brokerage and Retirement cross-sell of 10.44 products (August 2014).

 

Balance Sheet and Liquidity

Our balance sheet continued to strengthen in third quarter 2014 as we increased our liquidity position, improved the quality of our assets and held more capital. We have been able to grow our loans on a year-over-year basis for 13 consecutive quarters (for the past 10 quarters year-over-year loan growth has been 3% or greater) despite the planned runoff from our non-strategic/liquidating portfolios. Our non-strategic/liquidating loan portfolios decreased $2.3 billion during the quarter and our core loan portfolio increased $12.2 billion. Our investment securities increased by $9.9 billion during the quarter, driven primarily by our purchases of U.S. Treasuries. We issued $16.3 billion of liquidity-related long-term debt as well as some additional liquidity-related short-term funding during third quarter 2014.


[1] Financial information for certain periods prior to 2014 was revised to reflect our determination that certain factoring arrangements did not qualify as loans. See Note 1 (Summary of Significant Accounting Policies) to Financial Statements in this Report for more information.

3

 


 

    

Deposit growth remained strong with period-end deposits up $51.4 billion, or 5%, from December 31, 2013. This increase reflected solid growth across both our commercial and consumer businesses. We grew our primary consumer checking customers by a net 4.9% and primary business checking customers by a net 5.6% from a year ago (August 2014 compared with August 2013). Our ability to grow primary customers is important to our results because these customers have more interactions with us, have higher cross-sell and are more than twice as profitable as non-primary customers.

 

Credit Quality

Credit quality continued to improve in third quarter 2014 as losses remained at historically low levels, nonperforming assets (NPAs) continued to decrease and we continued to originate high quality loans, reflecting our long-term risk focus and the benefit from the improved housing market. Net charge-offs were $668 million, or 0.32% (annualized) of average loans, in third quarter 2014, compared with $975 million a year ago (0.48%), a 31% year-over-year decrease in losses. Our commercial portfolio produced net recoveries of $24 million, or 2 basis points of average commercial loans. Net consumer losses declined to 62 basis points in third quarter 2014 from 86 basis points in third quarter 2013. Our commercial real estate portfolios were in a net recovery position for the seventh consecutive quarter, reflecting our conservative risk discipline and improved market conditions. Losses on our consumer real estate portfolios declined $263 million from a year ago, down 51%, which included an $80 million decline in losses in our core 1-4 family first mortgage portfolio. The consumer loss levels reflected the benefit of the improving economy and our continued focus on originating high quality loans. Approximately 57% of the consumer first mortgage portfolio was originated after 2008, when new underwriting standards were implemented.

Our provision for credit losses reflected a release from the allowance for credit losses of $300 million in third quarter 2014, which was $600 million less than what we released a year ago. We continue to expect future allowance releases absent a significant deterioration in the economy, but expect a lower level of future releases as the rate of credit improvement slows and the loan portfolio continues to grow.

In addition to lower net charge-offs and provision expense, NPAs also improved and were down $406 million, or 2%, from June 30, 2014, the eighth consecutive quarter of decline. Nonaccrual loans declined $607 million from the prior quarter while foreclosed assets were up $201 million.

 

Capital

We continued to maintain strong capital levels while returning more capital to shareholders, increasing total equity to $183.0 billion at September 30, 2014, up $1.4 billion from the prior quarter. In third quarter 2014, our common shares outstanding declined by 34.9 million shares, the largest decline in over six years. We continued to reduce our common share count through the repurchase of 48.7 million common shares in the quarter. We entered into a $1.0 billion forward repurchase contract with an unrelated third party that settled in October 2014 for 19.8 million shares. In addition, we entered into a $750 million forward repurchase contract with an unrelated third party in October 2014 that is expected to settle in first quarter 2015 for approximately 15.1 million shares. We expect our share count to continue to decline in 2014 as a result of anticipated net share repurchases. Our net payout ratio (which is the ratio of (i) common stock dividends ($0.35 per share in third quarter 2014) and share repurchases less issuances and stock compensation-related items, divided by (ii) net income applicable to common stock) in third quarter 2014 was 66%, in line with our recent guidance of 55-75%.  

We believe an important measure of our capital strength is the estimated Common Equity Tier 1 ratio under Basel III, using the Advanced Approach, fully phased-in, which increased to 10.48% in third quarter 2014

Our regulatory capital ratios under Basel III (General Approach) remained strong with a total risk-based capital ratio of 15.58%, Tier 1 risk-based capital ratio of 12.55% and Tier 1 leverage ratio of 9.64% at September 30, 2014, compared with 15.89%, 12.72% and 9.86%, respectively, at June 30, 2014. See the “Capital Management” section in this Report for more information regarding our capital, including the calculation of common equity for regulatory purposes.

 

Earnings Performance                                                                                                                                              

Wells Fargo net income for third quarter 2014 was $5.7 billion ($1.02 diluted earnings per common share) compared with $5.6 billion ($0.99) for third quarter 2013. Net income for the first nine months of 2014 was $17.3 billion ($3.08) compared with $16.3 billion ($2.89) for the same period a year ago. Our  third quarter 2014  earnings reflected continued execution of our business strategy and growth in many of our businesses. The key drivers of our financial performance in the third quarter and first nine months of 2014 were balanced net interest and fee income, diversified sources of fee income, a diversified loan portfolio and strong underlying credit performance.  

Revenue, the sum of net interest income and noninterest income, was $21.2 billion in third quarter 2014, compared with $20.5 billion in third quarter 2013. Revenue for the first nine months of 2014 was $62.9 billion, down from $63.1 billion for the first nine months of 2013. The increase in revenue for third quarter 2014 was due to an increase in net interest income, fee income (including trust and investment fees) and market sensitive revenue (net gains from trading activities, debt securities and equity investments). The decline in revenue for the first nine months of 2014 was predominantly due to a decline in mortgage banking revenue, partially offset by an increase in trust and investment fees, and market sensitive revenue. Noninterest income represented 48% and 49% of revenue for the third quarter 2014 and first nine months of 2014, respectively, compared with 48% and 49% for the same periods a year ago. The drivers of our fee income can differ depending on the interest rate and economic environment. For example, net gains on mortgage loan origination/sales activities were 9% of our fee income in third quarter 2014, down from 11% in the same period a year ago when the refinance market was stronger. Other businesses, such as equity investments, brokerage, and mortgage servicing, contributed more to fee income this quarter, demonstrating the benefit of our diversified business model.

 

Net Interest Income

4

 


 

Earnings Performance  (continued) 

Net interest income is the interest earned on debt securities, loans (including yield-related loan fees) and other interest-earning assets minus the interest paid on deposits, short-term borrowings and long-term debt. The net interest margin is the average yield on earning assets minus the average interest rate paid for deposits and our other sources of funding. Net interest income and the net interest margin are presented on a taxable-equivalent basis in Table 1 to consistently reflect income from taxable and tax-exempt loans and securities based on a 35% federal statutory tax rate.

While the Company believes that it has the ability to increase net interest income over time, net interest income and the net interest margin in any one period can be significantly affected by a variety of factors including the mix and overall size of our earning assets portfolio and the cost of funding those assets. In addition, some sources of interest income, such as resolutions from purchased credit-impaired (PCI) loans, loan prepayment fees and collection of interest on nonaccrual loans, can vary from period to period. Net interest income growth has been challenged during the prolonged low interest rate environment as higher yielding loans and securities runoff have been replaced with lower yielding assets. The pace of this repricing has slowed in recent periods.  

Net interest income on a taxable-equivalent basis was $11.2 billion and $33.0 billion in the third quarter and first nine months of 2014, up from $10.9 billion and $32.6 billion, respectively, for the same periods a year ago. The net interest margin was 3.06% and 3.13% for the third quarter and first nine months of 2014, down from 3.39% and 3.45% in the same periods a year ago. The  increase in net interest income in the third quarter and first nine months of 2014 from the same periods a year ago was largely driven by growth in earning assets, including larger trading balances, investment securities purchases and increased short-term investments, which offset the decrease in earning asset yields. Lower funding expense also contributed to higher net interest income due to reduced deposit costs and the maturing of higher yielding long-term debt. The decline in net interest margin in third quarter and first nine months of 2014,  compared with the same periods a year ago was primarily driven by higher funding balances, including customer-driven deposit growth and actions we have taken in response to increased regulatory liquidity expectations which raised long-term debt and term deposits. This growth in funding increased cash and federal funds sold and other short-term investments which are dilutive to net interest margin although essentially neutral to net interest income.

Average earning assets increased $166.7 billion in the third quarter and $145.5 billion in  the first nine months of 2014  from the same periods a year ago, as average federal funds sold and other short-term investments increased $97.3 billion in the third quarter and $94.3 billion in the first nine months of 2014 from the same periods a year ago, and average investment securities increased $27.7 billion in the third quarter and $29.5 billion in the first nine months of 2014 from the same periods a year ago. In addition, an increase in commercial and industrial loans contributed to $31.1 billion and $30.3 billion higher average loans in the third quarter and first nine months of 2014, respectively, compared with the same periods a year ago.

Core deposits are an important low-cost source of funding and affect both net interest income and the net interest margin. Core deposits include noninterest-bearing deposits, interest-bearing checking, savings certificates, market rate and other savings, and certain foreign deposits (Eurodollar sweep balances). Average core deposits rose to $1.0 trillion in third quarter 2014 ($992.7 billion in the first nine months of 2014), compared with $940.3 billion in third quarter 2013 ($934.1 billion in the first nine months of 2013), and funded 121% of average loans in third quarter 2014 (120% for the first nine months of 2014), compared with 117% for the same periods a year ago. Average core deposits decreased to 70% of average earning assets in third quarter and 71% for the first nine months of 2014, compared with 73% in third quarter 2013 and 74% for the first nine months of 2013. The cost of these deposits declined from the prior year due to a sustained low interest rate environment and a shift in our deposit mix from higher cost certificates of deposit to lower yielding checking and savings products. About 96% of our average core deposits are in checking and savings deposits, one of the highest industry percentages.

5

 


 

      

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

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Quarter ended September 30,

  

  

  

  

  

  

  

  

  

  

  

  

  

 2014 

  

  

  

  

  

 2013 

  

  

  

  

  

  

  

  

  

  

  

  

  

Interest

  

  

  

  

  

Interest

  

  

  

  

  

  

  

  

  

Average

Yields/

  

  

income/

  

Average

Yields/

  

  

income/

(in millions)

  

balance

rates

  

  

expense

  

balance

rates

  

  

expense

Earning assets

  

  

  

  

  

  

  

  

  

  

  

  

Federal funds sold, securities purchased under

  

  

  

  

  

  

  

  

  

  

  

  

  

resale agreements and other short-term investments

$

 253,231 

 0.28 

%

$

 180 

  

 155,888 

 0.31 

%

$

 121 

Trading assets

  

 57,439 

 3.00 

  

  

 432 

  

 44,809 

 3.02 

  

  

 339 

Investment securities (3): 

  

  

  

  

  

  

  

  

  

  

  

  

  

Available-for-sale securities:

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Securities of U.S. Treasury and federal agencies

  

 8,816 

 1.69 

  

  

 38 

  

 6,633 

 1.69 

  

  

 28 

  

  

Securities of U.S. states and political subdivisions

  

 43,324 

 4.24 

  

  

 459 

  

 40,754 

 4.35 

  

  

 444 

  

  

Mortgage-backed securities:

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Federal agencies

  

 113,022 

 2.76 

  

  

 780 

  

 112,997 

 2.83 

  

  

 800 

  

  

  

Residential and commercial

  

 25,946 

 5.98 

  

  

 388 

  

 30,216 

 6.56 

  

  

 496 

  

  

  

  

Total mortgage-backed securities

  

 138,968 

 3.36 

  

  

 1,168 

  

 143,213 

 3.62 

  

  

 1,296 

  

  

Other debt and equity securities

  

 47,131 

 3.45 

  

  

 408 

  

 55,404 

 3.27 

  

  

 455 

  

  

  

  

  

Total available-for-sale securities

  

 238,239 

 3.48 

  

  

 2,073 

  

 246,004 

 3.61 

  

  

 2,223 

  

Held-to-maturity securities:

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Securities of U.S. Treasury and federal agencies

  

 23,672 

 2.22 

  

  

 133 

  

 - 

 -   

  

  

 - 

  

  

Securities of U.S. states and political subdivisions

  

 66 

 5.51 

  

  

 1 

  

 - 

 -   

  

  

 - 

  

  

Federal agency mortgage-backed securities

  

 5,854 

 2.23 

  

  

 32 

  

 - 

 -   

  

  

 - 

  

  

Other debt securities

  

 5,918 

 1.83 

  

  

 28 

  

 - 

 -   

  

  

 - 

  

  

  

  

  

Total held-to-maturity securities

  

 35,510 

 2.17 

  

  

 194 

  

 - 

 -   

  

  

 - 

  

  

  

  

  

  

Total investment securities

  

 273,749 

 3.31 

  

  

 2,267 

  

 246,004 

 3.61 

  

  

 2,223 

Mortgages held for sale (4)

  

 21,444 

 4.01 

  

  

 215 

  

 33,227 

 3.86 

  

  

 320 

Loans held for sale (4)

  

 9,533 

 2.10 

  

  

 50 

  

 197 

 7.25 

  

  

 3 

Loans:

  

  

  

  

  

  

  

  

  

  

  

  

  

Commercial:

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Commercial and industrial

  

 207,570 

 3.29 

  

  

 1,716 

  

 185,809 

 3.63 

  

  

 1,697 

  

  

Real estate mortgage

  

 107,769 

 3.52 

  

  

 957 

  

 104,637 

 4.12 

  

  

 1,086 

  

  

Real estate construction

  

 17,610 

 3.93 

  

  

 175 

  

 16,188 

 4.43 

  

  

 181 

  

  

Lease financing

  

 12,007 

 5.39 

  

  

 162 

  

 11,700 

 5.29 

  

  

 155 

  

  

Foreign

  

 48,217 

 2.69 

  

  

 327 

  

 44,799 

 2.09 

  

  

 236 

  

  

  

Total commercial

  

 393,173 

 3.37 

  

  

 3,337 

  

 363,133 

 3.67 

  

  

 3,355 

  

Consumer:

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Real estate 1-4 family first mortgage

  

 262,134 

 4.23 

  

  

 2,773 

  

 254,082 

 4.20 

  

  

 2,670 

  

  

Real estate 1-4 family junior lien mortgage

  

 61,575 

 4.30 

  

  

 665 

  

 68,785 

 4.30 

  

  

 743 

  

  

Credit card

  

 27,713 

 11.96 

  

  

 836 

  

 24,989 

 12.45 

  

  

 784 

  

  

Automobile

  

 54,638 

 6.19 

  

  

 852 

  

 49,134 

 6.85 

  

  

 848 

  

  

Other revolving credit and installment

  

 33,966 

 6.03 

  

  

 516 

  

 42,011 

 4.83 

  

  

 512 

  

  

  

Total consumer

  

 440,026 

 5.11 

  

  

 5,642 

  

 439,001 

 5.04 

  

  

 5,557 

  

  

  

  

Total loans (4)

  

 833,199 

 4.29 

  

  

 8,979 

  

 802,134 

 4.42 

  

  

 8,912 

Other

  

 4,674 

 5.41 

  

  

 64 

  

 4,279 

 5.62 

  

  

 61 

  

  

  

  

  

  

Total earning assets

$

 1,453,269 

 3.34 

%

$

 12,187 

  

 1,286,538 

 3.71 

%

$

 11,979 

Funding sources

  

  

  

  

  

  

  

  

  

  

  

  

Deposits:

  

  

  

  

  

  

  

  

  

  

  

  

  

Interest-bearing checking

$

 41,368 

 0.07 

%

$

 7 

  

 34,499 

 0.06 

%

$

 5 

  

Market rate and other savings

  

 586,353 

 0.07 

  

  

 98 

  

 553,062 

 0.08 

  

  

 107 

  

Savings certificates

  

 37,347 

 0.84 

  

  

 80 

  

 47,339 

 1.08 

  

  

 129 

  

Other time deposits

  

 55,128 

 0.39 

  

  

 54 

  

 30,423 

 0.62 

  

  

 47 

  

Deposits in foreign offices

  

 98,862 

 0.14 

  

  

 34 

  

 81,087 

 0.15 

  

  

 30 

  

  

Total interest-bearing deposits

  

 819,058 

 0.13 

  

  

 273 

  

 746,410 

 0.17 

  

  

 318 

Short-term borrowings

  

 62,285 

 0.10 

  

  

 16 

  

 53,403 

 0.08 

  

  

 11 

Long-term debt

  

 172,982 

 1.46 

  

  

 629 

  

 133,397 

 1.86 

  

  

 621 

Other liabilities

  

 15,536 

 2.73 

  

  

 106 

  

 12,128 

 2.64 

  

  

 80 

  

  

Total interest-bearing liabilities

  

 1,069,861 

 0.38 

  

  

 1,024 

  

 945,338 

 0.43 

  

  

 1,030 

Portion of noninterest-bearing funding sources

  

 383,408 

 -   

  

  

 - 

  

 341,200 

 -   

  

  

 - 

  

  

  

  

  

  

Total funding sources

$

 1,453,269 

 0.28 

  

  

 1,024 

  

 1,286,538 

 0.32 

  

  

 1,030 

Net interest margin and net interest income on

  

  

  

  

  

  

  

  

  

  

  

  

  

a taxable-equivalent basis (5)

  

  

 3.06 

%

$

 11,163 

  

  

 3.39 

%

$

 10,949 

Noninterest-earning assets

  

  

  

  

  

  

  

  

  

  

  

  

Cash and due from banks

$

 16,189 

  

  

  

  

  

 16,350 

  

  

  

  

Goodwill

  

 25,705 

  

  

  

  

  

 25,637 

  

  

  

  

Other

  

 122,779 

  

  

  

  

  

 118,440 

  

  

  

  

  

  

  

  

  

  

Total noninterest-earning assets

$

 164,673 

  

  

  

  

  

 160,427 

  

  

  

  

Noninterest-bearing funding sources

  

  

  

  

  

  

  

  

  

  

  

  

Deposits

$

 307,991 

  

  

  

  

  

 279,156 

  

  

  

  

Other liabilities

  

 57,979 

  

  

  

  

  

 57,324 

  

  

  

  

Total equity

  

 182,111 

  

  

  

  

  

 165,147 

  

  

  

  

Noninterest-bearing funding sources used to fund earning assets

  

 (383,408) 

  

  

  

  

  

 (341,200) 

  

  

  

  

  

  

  

  

  

  

Net noninterest-bearing funding sources

$

 164,673 

  

  

  

  

  

 160,427 

  

  

  

  

  

  

  

  

  

  

  

Total assets

$

 1,617,942 

  

  

  

  

  

 1,446,965 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

(1)

Our average prime rate was 3.25% for the quarters ended September 30, 2014 and 2013, and 3.25% for the first nine months of both 2014 and 2013. The average three-month London Interbank Offered Rate (LIBOR) was 0.23% and 0.26% for the quarters ended September 30, 2014 and 2013, respectively, and 0.23% and 0.28% for the first nine months of 2014 and 2013, respectively.

(2)

Yield/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 $222 million and $201 million for the quarters ended September 30, 2014 and 2013, respectively, and $664 million and $573 million for the first nine months of 2014 and 2013, respectively, primarily related to tax-exempt income on certain loans and securities. The federal statutory tax rate utilized was 35% for the periods presented.

 

6

 


 

Earnings Performance  (continued) 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Nine months ended September 30,

  

  

  

  

  

  

  

  

  

  

  

  

  

 2014 

  

  

  

  

  

 2013 

  

  

  

  

  

  

  

  

  

  

  

  

  

Interest

  

  

  

  

  

Interest

  

  

  

  

  

  

  

  

  

Average

Yields/

  

  

income/

  

Average

Yields/

  

  

income/

(in millions)

  

balance

rates

  

  

expense

  

balance

rates

  

  

expense

Earning assets

  

  

  

  

  

  

  

  

  

  

  

  

Federal funds sold, securities purchased under

  

  

  

  

  

  

  

  

  

  

  

  

  

resale agreements and other short-term investments

$

 232,241 

 0.28 

%

$

 485 

  

 137,926 

 0.33 

%

$

 342 

Trading assets

  

 53,373 

 3.07 

  

  

 1,227 

  

 44,530 

 3.05 

  

  

 1,020 

Investment securities (3):

  

  

  

  

  

  

  

  

  

  

  

  

  

Available-for-sale securities: 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Securities of U.S. Treasury and federal agencies

  

 7,331 

 1.72 

  

  

 95 

  

 6,797 

 1.66 

  

  

 85 

  

  

Securities of U.S. states and political subdivisions

  

 42,884 

 4.29 

  

  

 1,380 

  

 39,213 

 4.38 

  

  

 1,288 

  

  

Mortgage-backed securities:

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Federal agencies

  

 115,696 

 2.85 

  

  

 2,475 

  

 103,522 

 2.79 

  

  

 2,164 

  

  

  

Residential and commercial

  

 27,070 

 6.07 

  

  

 1,233 

  

 31,217 

 6.51 

  

  

 1,524 

  

  

  

  

Total mortgage-backed securities

  

 142,766 

 3.46 

  

  

 3,708 

  

 134,739 

 3.65 

  

  

 3,688 

  

  

Other debt and equity securities

  

 48,333 

 3.60 

  

  

 1,303 

  

 54,893 

 3.56 

  

  

 1,463 

  

  

  

  

  

Total available-for-sale securities

  

 241,314 

 3.58 

  

  

 6,486 

  

 235,642 

 3.69 

  

  

 6,524 

  

Held-to-maturity securities:

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Securities of U.S. Treasury and federal agencies

  

 11,951 

 2.22 

  

  

 198 

  

 - 

 -   

  

  

 - 

  

  

Securities of U.S. states and political subdivisions

  

 25 

 5.51 

  

  

 1 

  

 - 

 -   

  

  

 - 

  

  

Federal agency mortgage-backed securities

  

 6,034 

 2.70 

  

  

 122 

  

 - 

 -   

  

  

 - 

  

  

Other debt securities

  

 5,844 

 1.86 

  

  

 82 

  

 - 

 -   

  

  

 - 

  

  

  

  

  

Total held-to-maturity securities

  

 23,854 

 2.26 

  

  

 403 

  

 - 

 -   

  

  

 - 

  

  

  

  

  

  

Total investment securities

  

 265,168 

 3.47 

  

  

 6,889 

  

 235,642 

 3.69 

  

  

 6,524 

Mortgages held for sale (4)

  

 18,959 

 4.08 

  

  

 580 

  

 39,950 

 3.57 

  

  

 1,069 

Loans held for sale (4)

  

 3,302 

 2.15 

  

  

 53 

  

 172 

 7.88 

  

  

 10 

Loans:

  

  

  

  

  

  

  

  

  

  

  

  

  

Commercial:

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Commercial and industrial

  

 200,277 

 3.37 

  

  

 5,044 

  

 184,421 

 3.70 

  

  

 5,113 

  

  

Real estate mortgage

  

 107,746 

 3.53 

  

  

 2,849 

  

 105,367 

 3.96 

  

  

 3,121 

  

  

Real estate construction

  

 17,249 

 4.15 

  

  

 536 

  

 16,401 

 4.76 

  

  

 584 

  

  

Lease financing

  

 11,922 

 5.75 

  

  

 514 

  

 12,151 

 6.26 

  

  

 571 

  

  

Foreign

  

 48,315 

 2.43 

  

  

 879 

  

 42,326 

 2.16 

  

  

 683 

  

  

  

Total commercial

  

 385,509 

 3.41 

  

  

 9,822 

  

 360,666 

 3.73 

  

  

 10,072 

  

Consumer:

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Real estate 1-4 family first mortgage

  

 260,538 

 4.20 

  

  

 8,207 

  

 252,904 

 4.24 

  

  

 8,044 

  

  

Real estate 1-4 family junior lien mortgage

  

 63,264 

 4.30 

  

  

 2,037 

  

 71,390 

 4.29 

  

  

 2,292 

  

  

Credit card

  

 26,811 

 12.08 

  

  

 2,423 

  

 24,373 

 12.54 

  

  

 2,285 

  

  

Automobile

  

 53,314 

 6.34 

  

  

 2,528 

  

 47,890 

 7.03 

  

  

 2,516 

  

  

Other revolving credit and installment

  

 39,942 

 5.32 

  

  

 1,589 

  

 41,857 

 4.76 

  

  

 1,489 

  

  

  

Total consumer

  

 443,869 

 5.05 

  

  

 16,784 

  

 438,414 

 5.06 

  

  

 16,626 

  

  

  

  

Total loans (4)

  

 829,378 

 4.28 

  

  

 26,606 

  

 799,080 

 4.46 

  

  

 26,698 

Other

  

 4,622 

 5.62 

  

  

 195 

  

 4,229 

 5.45 

  

  

 172 

  

  

  

  

  

  

Total earning assets

$

 1,407,043 

 3.42 

%

$

 36,035 

  

 1,261,529 

 3.79 

%

$

 35,835 

Funding sources

  

  

  

  

  

  

  

  

  

  

  

  

Deposits:

  

  

  

  

  

  

  

  

  

  

  

  

  

Interest-bearing checking

$

 39,470 

 0.07 

%

$

 20 

  

 35,704 

 0.06 

%

$

 16 

  

Market rate and other savings

  

 583,128 

 0.07 

  

  

 304 

  

 544,208 

 0.08 

  

  

 341 

  

Savings certificates

  

 38,867 

 0.86 

  

  

 251 

  

 51,681 

 1.18 

  

  

 457 

  

Other time deposits

  

 49,855 

 0.41 

  

  

 152 

  

 24,177 

 0.81 

  

  

 146 

  

Deposits in foreign offices

  

 94,743 

 0.14 

  

  

 100 

  

 73,715 

 0.15 

  

  

 80 

  

  

Total interest-bearing deposits

  

 806,063 

 0.14 

  

  

 827 

  

 729,485 

 0.19 

  

  

 1,040 

Short-term borrowings

  

 58,573 

 0.10 

  

  

 43 

  

 55,535 

 0.13 

  

  

 55 

Long-term debt

  

 162,073 

 1.54 

  

  

 1,868 

  

 128,691 

 2.02 

  

  

 1,950 

Other liabilities

  

 14,005 

 2.73 

  

  

 286 

  

 12,352 

 2.37 

  

  

 220 

  

  

Total interest-bearing liabilities

  

 1,040,714 

 0.39 

  

  

 3,024 

  

 926,063 

 0.47 

  

  

 3,265 

Portion of noninterest-bearing funding sources

  

 366,329 

 -   

  

  

 - 

  

 335,466 

 -   

  

  

 - 

  

  

  

  

  

  

Total funding sources

$

 1,407,043 

 0.29 

  

  

 3,024 

  

 1,261,529 

 0.34 

  

  

 3,265 

Net interest margin and net interest income on

  

  

  

  

  

  

  

  

  

  

  

  

  

a taxable-equivalent basis (5)

  

  

 3.13 

%

$

 33,011 

  

  

 3.45 

%

$

 32,570 

Noninterest-earning assets

  </