Edgar Filing: WELLS FARGO & COMPANY/MN

Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2018

Commission file number 001-2979

WELLS FARGO & COMPANY

(Exact name of registrant as specified in its charter)



Delaware		No. 41-0449260
(State of incorporation)		(I.R.S. Employer Identification No.)

420 Montgomery Street, San Francisco, California 94163

(Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area code: 1-866-249-3302

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.



Yes þ		No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).



Yes þ		No o

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



	Large accelerated filer þ		Accelerated filer o

	Non-accelerated filer o (Do not check if a smaller reporting company)		Smaller reporting company o
			Emerging growth company o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

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



Yes o		No þ

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.



		Shares Outstanding
		April 25, 2018
Common stock, $1-2/3 par value		4,872,873,834



FORM 10-Q
CROSS-REFERENCE INDEX
PART I	Financial Information
Item 1.	Financial Statements			Page
	Consolidated Statement of Income			63
	Consolidated Statement of Comprehensive Income			64
	Consolidated Balance Sheet			65
	Consolidated Statement of Changes in Equity			66
	Consolidated Statement of Cash Flows			68
	Notes to Financial Statements
	1	—	Summary of Significant Accounting Policies	69
	2	—	Business Combinations	72
	3	—	Cash, Loan and Dividend Restrictions	73
	4	—	Trading Activities	74
	5	—	Available-for-Sale and Held-to-Maturity Debt Securities	76
	6	—	Loans and Allowance for Credit Losses	83
	7	—	Equity Securities	99
	8	—	Other Assets	101
	9	—	Securitizations and Variable Interest Entities	102
	10	—	Mortgage Banking Activities	109
	11	—	Intangible Assets	112
	12	—	Guarantees, Pledged Assets and Collateral, and Other Commitments	114
	13	—	Legal Actions	118
	14	—	Derivatives	122
	15	—	Fair Values of Assets and Liabilities	131
	16	—	Preferred Stock	148
	17	—	Revenue from Contracts with Customers	151
	18	—	Employee Benefits	154
	19	—	Earnings Per Common Share	155
	20	—	Other Comprehensive Income	156
	21	—	Operating Segments	158
	22	—	Regulatory and Agency Capital Requirements	159
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations (Financial Review)
	Summary Financial Data			2
	Overview			3
	Earnings Performance			6
	Balance Sheet Analysis			19
	Off-Balance Sheet Arrangements			22
	Risk Management			23
	Capital Management			49
	Regulatory Matters			56
	Critical Accounting Policies			57
	Current Accounting Developments			58
	Forward-Looking Statements			59
	Risk Factors			61
	Glossary of Acronyms			160
Item 3.	Quantitative and Qualitative Disclosures About Market Risk			43
Item 4.	Controls and Procedures			62

PART II	Other Information
Item 1.	Legal Proceedings			161
Item 1A.	Risk Factors			161
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds			161
Item 6.	Exhibits			162

Signature				163

PART I - FINANCIAL INFORMATION

FINANCIAL REVIEW



Summary Financial Data
						% Change
	Quarter ended					Mar 31, 2018 from
($ in millions, except per share amounts)	Mar 31, 2018			Dec 31, 2017	Mar 31, 2017	Dec 31, 2017		Mar 31, 2017
For the Period
Wells Fargo net income	$	5,136		6,151	5,634	(17	)%	(9	)
Wells Fargo net income applicable to common stock	4,733			5,740	5,233	(18	)	(10	)
Diluted earnings per common share	0.96			1.16	1.03	(17	)	(7	)
Profitability ratios (annualized):
Wells Fargo net income to average assets (ROA)	1.09		%	1.26	1.18	(13	)	(8	)
Wells Fargo net income applicable to common stock to average Wells Fargo common stockholders' equity (ROE)	10.58			12.47	11.96	(15	)	(12	)
Return on average tangible common equity (ROTCE) (1)	12.62			14.85	14.35	(15	)	(12	)
Efficiency ratio (2)	68.6			76.2	62.0	(10	)	11
Total revenue	$	21,934		22,050	22,255	(1	)	(1	)
Pre-tax pre-provision profit (PTPP) (3)	6,892			5,250	8,463	31		(19	)
Dividends declared per common share	0.39			0.39	0.38	—		3
Average common shares outstanding	4,885.7			4,912.5	5,008.6	(1	)	(2	)
Diluted average common shares outstanding	4,930.7			4,963.1	5,070.4	(1	)	(3	)
Average loans	$	951,024		951,822	963,645	—		(1	)
Average assets	1,915,896			1,935,318	1,931,040	(1	)	(1	)
Average total deposits	1,297,178			1,311,592	1,299,191	(1	)	—
Average consumer and small business banking deposits (4)	755,483			757,541	758,754	—		—
Net interest margin	2.84		%	2.84	2.87	—		(1	)
At Period End
Debt securities (5)	$	472,968		473,366	456,969	—		4
Loans	947,308			956,770	958,405	(1	)	(1	)
Allowance for loan losses	10,373			11,004	11,168	(6	)	(7	)
Goodwill	26,445			26,587	26,666	(1	)	(1	)
Equity securities (5)	58,935			62,497	56,991	(6	)	3
Assets	1,915,388			1,951,757	1,951,501	(2	)	(2	)
Deposits	1,303,689			1,335,991	1,325,444	(2	)	(2	)
Common stockholders' equity	181,150			183,134	178,209	(1	)	2
Wells Fargo stockholders' equity	204,952			206,936	201,321	(1	)	2
Total equity	205,910			208,079	202,310	(1	)	2
Tangible common equity (1)	151,878			153,730	148,671	(1	)	2
Capital ratios (6)(7):
Total equity to assets	10.75		%	10.66	10.37	1		4
Risk-based capital:
Common Equity Tier 1	11.92			12.28	11.52	(3	)	3
Tier 1 capital	13.76			14.14	13.27	(3	)	4
Total capital	16.92			17.46	16.41	(3	)	3
Tier 1 leverage	9.32			9.35	9.07	—		3
Common shares outstanding	4,873.9			4,891.6	4,996.7	—		(2	)
Book value per common share (8)	$	37.17		37.44	35.67	(1	)	4
Tangible book value per common share (1)(8)	31.16			31.43	29.75	(1	)	5
Common stock price:
High	66.31			62.24	59.99	7		11
Low	50.70			52.84	53.35	(4	)	(5	)
Period end	52.41			60.67	55.66	(14	)	(6	)
Team members (active, full-time equivalent)	265,700			262,700	272,800	1		(3	)

(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 securities, but excluding mortgage servicing rights), net of applicable deferred taxes. The methodology of determining tangible common equity may differ among companies. Management believes that return on average tangible common equity and tangible book value per common share, which utilize tangible common equity, are useful financial measures because they enable investors and others to assess the Company's use of equity. For additional information, including a corresponding reconciliation to GAAP financial measures, see the “Capital Management – Tangible Common Equity” section in this Report.


(2)	The efficiency ratio is noninterest expense divided by total revenue (net interest income and noninterest income).


(3)	Pre-tax pre-provision profit (PTPP) is total revenue less noninterest expense. Management believes that PTPP is a useful financial measure because it enables investors and others to assess the Company's ability to generate capital to cover credit losses through a credit cycle.


(4)	Consumer and small business banking deposits are total deposits excluding mortgage escrow and wholesale deposits.

(5)

Financial information for prior quarters has been revised to reflect the impact of the adoption of Accounting Standards Update (ASU) 2016-01 – Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, which amends the presentation and accounting for certain financial instruments, including equity securities. See Note 1 (Summary of Significant Accounting Policies) to Financial Statements in this Report for more information.

(6)

The risk-based capital ratios were calculated under the lower of Standardized or Advanced Approach determined pursuant to Basel III with Transition Requirements. For March 31, 2018 and December 31, 2017, the risk-based capital ratios were all lower under the Standardized Approach. The total capital ratio was lower under the Advanced Approach and the other ratios were lower under the Standardized Approach, for March 31, 2017.


(7)	See the “Capital Management” section and Note 22 (Regulatory and Agency Capital Requirements) to Financial Statements in this Report for additional information.


(8)	Book value per common share is common stockholders' equity divided by common shares outstanding. Tangible book value per common share is tangible common equity divided by common shares outstanding.

Overview (continued)

This Quarterly Report, including the Financial Review and the Financial Statements and related Notes, contains forward-looking statements, which may include forecasts of our financial results and condition, expectations for our operations and business, and our assumptions for those forecasts and expectations. Do not unduly rely on forward-looking statements. Actual results may differ materially from our forward-looking statements due to several factors. Factors that could cause our actual results to differ materially from our forward-looking statements are described in this Report, including in the “Forward-Looking Statements” section, and the “Risk Factors” and “Regulation and Supervision” sections of our Annual Report on Form 10-K for the year ended December 31, 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. See the Glossary of Acronyms for terms used throughout this Report.

Financial Review¹

Overview

Wells Fargo & Company is a diversified, community-based financial services company with $1.92 trillion in assets. Founded in 1852 and headquartered in San Francisco, we provide banking, investments, mortgage, and consumer and commercial finance through 8,200 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 265,000 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 fourth in assets and third in the market value of our common stock among all U.S. banks at March 31, 2018.

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.


¹	Prior period financial information has been revised to reflect our adoption of Accounting Standards Update (ASU) 2016-01 Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. See Note 1 (Summary of Significant Accounting Policies) to Financial Statements in this Report for more information.

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.


•	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.

•

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 and four more retiring at our 2018 annual meeting of shareholders. At the 2018 annual meeting, shareholders elected the 12 director nominees named in the Company’s proxy statement.

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). As required by the consent order, the Board submitted to the FRB a plan to further enhance the Board’s governance and oversight of the Company, and the Company submitted to the FRB a plan to further improve the Company’s compliance and operational risk management program. As part of the review and approval process contemplated by the consent order, the Company will respond to any feedback provided by the FRB regarding the plans, including by making any necessary changes to the plans. The consent order also requires the Company, following the FRB’s acceptance and approval of the plans and the Company’s adoption and implementation of the plans, to complete by September 30, 2018, third-party reviews of the enhancements and improvements provided for in the plans. 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. During first quarter 2018 our average assets were below our level of total assets as of December 31, 2017.

Consent Orders with the Consumer Financial Protection Bureau (CFPB) and Office of the Comptroller of the Currency (OCC) Regarding Compliance Risk Management Program, Automobile Collateral Protection Insurance Policies, and Mortgage Interest Rate Lock Extensions

On April 20, 2018 we entered into consent orders with the CFPB and OCC to pay an aggregate of $1 billion in civil money penalties to resolve matters regarding our compliance risk management program and past practices involving certain automobile collateral protection insurance policies and certain mortgage interest rate lock extensions. The consent orders require that the Company submit to the CFPB and OCC, within 60 days of the date of the consent orders, an acceptable enterprise-wide compliance risk management plan and a plan to enhance the Company's internal audit program with respect to federal consumer financial law and the terms of the consent orders. The consent orders also require the Company to submit for non-objection, within 120 days of the date of the consent orders, plans for a remediation program regarding ongoing compliance with federal consumer financial law and, within 60 days of the date of the consent orders, plans to remediate customers affected by the automobile collateral protection insurance and mortgage interest rate lock matters.

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.

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 have provided customer remediation based on the expanded account analysis.

For additional information regarding sales practices matters, including related legal matters, see the “Risk Factors” section in our 2017 Form 10-K and Note 13 (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 $158 million in cash remediation and $29 million in account adjustments under the plan. The amount of remediation may be affected by the requirements of the consent orders entered into with the CFPB and OCC described above.


◦	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,

Overview (continued)

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. A total of approximately $98 million in rate lock extension fees was assessed on approximately 110,000 accounts during the period in question. Although the Company believes a substantial number of these fees were appropriately charged under its policy, we estimate refunds will be issued to a majority of our customers who paid rate lock extension fees during this time period due to our customer-oriented remediation approach.


•	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. An ongoing review of “add-on” products across the Company is occurring, and we have begun remediation efforts where we have identified impacted customers.


•	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 ongoing.

•

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. These reviews are ongoing and, as a result of its reviews to date, the Company has suspended fees on some assets and accounts, has notified the affected customers, and is continuing its analysis of those assets and accounts. As these reviews continue, the Company will consider suspending fees on additional assets and accounts, while continuing the process of analyzing those assets and accounts.


•	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 in our 2017 Form 10-K and Note 13 (Legal Actions) to Financial Statements in this Report.

Financial Performance

Wells Fargo net income was $5.1 billion in first quarter 2018 with diluted earnings per common share (EPS) of $0.96, compared with $5.6 billion and $1.03, respectively, a year ago. First quarter 2018 results reflected an $800 million discrete litigation accrual in connection with entering into the consent orders with the CFPB and OCC on April 20, 2018, and also included:


•	revenue was $21.9 billion, down $321 million compared with a year ago, with net interest income down 1% and noninterest income down 2% from a year ago;


•	average loans were $951.0 billion, down $12.6 billion, or 1%, from a year ago;


•	total deposits were $1.3 trillion, down $21.8 billion, or 2%, from a year ago;


•	return on assets (ROA) of 1.09% and return on equity (ROE) of 10.58%, down from 1.18% and 11.96%, respectively, compared with a year ago;


•	our credit results improved with a net charge-off rate of 0.32% (annualized) of average loans in first quarter 2018, compared with 0.34% a year ago;


•	nonaccrual loans of $7.7 billion, down $2.0 billion, or 21%, from a year ago; and


•	we returned $4.0 billion to shareholders through common stock dividends and net share repurchases, which was the 11th consecutive quarter of returning more than $3 billion.

Balance Sheet and Liquidity

Despite the asset cap placed on us from the consent order with the FRB, our balance sheet remained strong during first quarter 2018 with strong credit quality and solid levels of liquidity and capital. Our total assets were $1.92 trillion at March 31, 2018. Cash and other short-term investments decreased $20.0 billion from December 31, 2017, reflecting lower deposit balances. Debt securities were $473.0 billion at March 31, 2018, with approximately $13 billion of gross purchases during first quarter 2018, more than offset by run-off and sales. Loans were down $9.5 billion, or 1%, from December 31, 2017, primarily due to a decline in automobile and junior lien mortgage loans.

Average deposits in first quarter 2018 were $1.30 trillion, down $2.0 billion from first quarter 2017 as lower commercial deposits from financial institutions were partially offset by higher interest-bearing checking deposits. Our average deposit cost in first quarter 2018 was 34 basis points, up 17 basis points from a year ago, primarily driven by an increase in commercial and Wealth and Investment Management deposit rates.

Credit Quality

Solid overall credit results continued in first quarter 2018 as losses remained low and we continued to originate high quality loans, reflecting our long-term risk focus. Net charge-offs were $741 million, or 0.32% (annualized) of average loans, in first quarter 2018, compared with $805 million a year ago (0.34%). The decrease in net charge-offs in first quarter 2018, compared with a year ago, was driven by lower losses in the commercial and industrial loan portfolio, including in the oil and gas portfolio.

Our commercial portfolio net charge-offs were $78 million, or 6 basis points of average commercial loans, in first quarter 2018, compared with net charge-offs of $143 million, or 11 basis points, a year ago. Net consumer credit losses increased to 60 basis points (annualized) of average consumer loans in first quarter 2018 from 59 basis points (annualized) in first quarter

2017. Our commercial real estate portfolios were in a net recovery position for the 21st consecutive quarter, reflecting our conservative risk discipline and improved market conditions. Net losses on our consumer real estate portfolios improved by $56 million, or 187%, to a net recovery of $26 million from a year ago, reflecting the benefit of the continued improvement in the housing market and our continued focus on originating high quality loans. Approximately 80% of the consumer first mortgage loan portfolio outstanding at March 31, 2018, was originated after 2008, when more stringent underwriting standards were implemented.

The allowance for credit losses as of March 31, 2018, decreased $974 million compared with a year ago and decreased $647 million from December 31, 2017. We had a $550 million release in the allowance for credit losses in first quarter 2018, with approximately $400 million driven by an improvement in our outlook for 2017 hurricane-related losses. The allowance coverage for total loans was 1.19% at March 31, 2018, compared with 1.28% a year ago and 1.25% at December 31, 2017. The allowance covered 3.8 times annualized first quarter net charge-offs, compared with 3.8 times a year ago. Future allowance levels will be based on a variety of factors, including loan growth, portfolio performance and general economic conditions. Our provision for loan losses was $191 million in first quarter 2018, down from $605 million a year ago, primarily reflecting an improvement in our outlook for 2017 hurricane-related losses, as well as continued improvement in residential real estate and lower loan balances.

Nonperforming assets decreased $388 million, or 4%, from December 31, 2017, the eighth consecutive quarter of decreases, with improvement across our consumer and commercial portfolios and lower foreclosed assets. Nonperforming assets were 0.88% of total loans, the lowest level since the merger with Wachovia in 2008. Nonaccrual loans decreased $317 million from the prior quarter largely due to a decrease in commercial nonaccruals. In addition, foreclosed assets were down $71 million from the prior quarter.

Capital

Our financial performance in first quarter 2018 allowed us to maintain a solid capital position, with total equity of $205.9 billion at March 31, 2018, compared with $208.1 billion at December 31, 2017. We returned $4.0 billion to shareholders in first quarter 2018 through common stock dividends and net share repurchases, an increase of 30% from a year ago. 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 85%. We continued to reduce our common shares outstanding through the repurchase of 50.6 million common shares in the quarter. We entered into a $1 billion forward repurchase contract with an unrelated third party in April 2018 that is expected to settle in third quarter 2018 for approximately 20 million shares. We expect to reduce our common shares outstanding through share repurchases throughout the remainder of 2018.

We believe an important measure of our capital strength is the Common Equity Tier 1 (CET1) ratio under Basel III, fully phased-in, which was 11.92% at March 31, 2018, well above our internal target of 10%. The decline in our CET1 ratio from December 31, 2017, reflected other comprehensive income resulting from higher interest rates and capital distributions, partially offset by capital generation from earnings, lower risk-weighted assets (RWA) driven by lower loan balances and improved RWA efficiency. 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.

Earnings Performance

Wells Fargo net income for first quarter 2018 was $5.1 billion ($0.96), compared with $5.6 billion ($1.03) for the same period a year ago. Our financial performance in first quarter 2018, compared with the same period a year ago, benefited from a $414 million decrease in our provision for credit losses, offset by a $86 million decrease in net interest income, a $235 million decrease in noninterest income, and a $1.3 billion increase in noninterest expense. First quarter 2018 results also benefited from the lower income tax rate. Net interest income represented 56% of revenue, compared with 55% for the same period a year ago. Noninterest income was $9.7 billion in first quarter 2018, representing 44% of revenue, compared with $9.9 billion (45%) in first quarter 2017.

Revenue, the sum of net interest income and noninterest income, was $21.9 billion in first quarter 2018, compared with $22.3 billion for first quarter 2017. The decrease in revenue for first quarter 2018, compared with the same period in 2017, was due to a decline in both net interest income and in noninterest income.

Earnings Performance (continued)

Net Interest Income

Net interest income is the interest earned on debt securities, loans (including yield-related loan fees) and other interest-earning assets minus the interest paid on deposits, short-term borrowings and long-term debt. The net interest margin is the average yield on earning assets minus the average interest rate paid for deposits and our other sources of funding. Net interest income and the net interest margin are presented on a taxable-equivalent basis in Table 1 to reflect income from taxable and tax-exempt loans and debt and equity securities based on a 21% and 35% federal statutory tax rate for first quarter 2018 and first quarter 2017, respectively.

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 on a taxable-equivalent basis was $12.4 billion in first quarter 2018, compared with $12.6 billion for the same period a year ago. The net interest margin was 2.84% for first quarter 2018, down from 2.87% for the same period a year ago. The decrease in net interest income and net interest margin in first quarter 2018, compared with the same period a year ago, was driven by lower loan swap income due to unwinding the receive-fixed loan swap portfolio, unfavorable hedge ineffectiveness accounting, lower tax-equivalent net interest income from updated tax-equivalent factors, lower loan balances, and higher premium amortization, partially offset by the net repricing benefit of higher interest rates, growth in interest income from debt and equity securities, lower long-term debt balances, and higher variable income.

Average earning assets decreased $15.9 billion in first quarter 2018, compared with the same period a year ago. Compared with the same period a year ago:


•	average loans decreased $12.6 billion;


•	average interest-earning deposits decreased $36.2 billion;


•	average federal funds sold and securities purchased under resale agreements increased $2.9 billion;


•	average debt securities increased $19.3 billion;


•	average equity securities increased $5.8 billion; and


•	other earning assets increased $6.0 billion.

Deposits are an important low-cost source of funding and affect both net interest income and the net interest margin. Deposits include noninterest-bearing deposits, interest-bearing checking, market rate and other savings, savings certificates, other time deposits, and deposits in foreign offices. Average deposits of $1.30 trillion in first quarter 2018 were relatively stable compared with the same period a year ago, and represented 136% of average loans in first quarter 2018, compared with 135% in first quarter 2017. Average deposits were 74% of average earning assets in first quarter 2018, compared with 73% in first quarter 2017. The average deposit cost for first quarter 2018 was 34 basis points, up 17 basis points from a year ago, primarily driven by an increase in commercial and Wealth and Investment Management deposit rates.

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



	Quarter ended March 31,
						2018						2017
(in millions)	Average balance			Yields/ rates		Interest income/ expense		Average balance		Yields/ rates		Interest income/ expense
Earning assets
Interest-earning deposits with banks (3)	$	172,291		1.49	%	$	632	208,486		0.79	%	$	405
Federal funds sold and securities purchased under resale agreements (3)	78,135			1.40		271		75,281		0.68		127
Debt securities (4):
Trading debt securities	78,715			3.24		637		69,120		3.03		523
Available-for-sale debt securities:
Securities of U.S. Treasury and federal agencies	6,426			1.66		26		25,034		1.54		95
Securities of U.S. states and political subdivisions (7)	49,956			3.37		421		52,248		3.93		513
Mortgage-backed securities:
Federal agencies	158,472			2.72		1,076		156,617		2.58		1,011
Residential and commercial (7)	8,871			4.12		91		14,452		5.34		193
Total mortgage-backed securities (7)	167,343			2.79		1,167		171,069		2.81		1,204
Other debt securities (7)	48,094			3.73		444		50,149		3.61		447
Total available-for-sale debt securities (7)	271,819			3.04		2,058		298,500		3.04		2,259
Held-to-maturity debt securities:
Securities of U.S. Treasury and federal agencies	44,723			2.20		243		44,693		2.20		243
Securities of U.S. states and political subdivisions	6,259			4.34		68		6,273		5.30		83
Federal agency and other mortgage-backed securities	90,789			2.38		541		51,786		2.51		324
Other debt securities	695			3.23		5		3,329		2.34		19
Total held-to-maturity debt securities	142,466			2.42		857		106,081		2.54		669
Total debt securities (7)	493,000			2.89		3,552		473,701		2.92		3,451
Mortgages held for sale (5)(7)	18,406			3.89		179		19,893		3.67		182
Loans held for sale (5)	2,011			4.92		24		1,600		2.50		10
Commercial loans:
Commercial and industrial – U.S.	272,040			3.85		2,584		274,749		3.59		2,436
Commercial and industrial – Non U.S.	60,216			3.23		479		55,347		2.73		373
Real estate mortgage	126,200			4.05		1,262		132,449		3.56		1,164
Real estate construction	24,449			4.54		274		24,591		3.72		225
Lease financing	19,265			5.30		255		19,070		4.94		235
Total commercial loans	502,170			3.91		4,854		506,206		3.54		4,433
Consumer loans:
Real estate 1-4 family first mortgage	284,207			4.02		2,852		275,480		4.02		2,766
Real estate 1-4 family junior lien mortgage	38,844			5.13		493		45,285		4.60		515
Credit card	36,468			12.75		1,147		35,437		11.97		1,046
Automobile	51,469			5.16		655		61,510		5.46		828
Other revolving credit and installment	37,866			6.46		604		39,727		6.02		590
Total consumer loans	448,854			5.16		5,751		457,439		5.06		5,745
Total loans (5)	951,024			4.50		10,605		963,645		4.26		10,178
Equity securities	39,754			2.35		233		33,926		2.11		179
Other	6,015			1.21		19		—		—		—
Total earning assets (7)	$	1,760,636		3.55	%	$	15,515	1,776,532		3.30	%	$	14,532
Funding sources
Deposits:
Interest-bearing checking	$	67,774		0.77	%	$	129	50,686		0.29	%	$	37
Market rate and other savings	679,068			0.22		368		684,175		0.09		157
Savings certificates	20,018			0.34		17		23,466		0.29		17
Other time deposits (7)	76,589			1.84		347		54,915		1.30		177
Deposits in foreign offices	94,810			0.98		229		122,200		0.49		148
Total interest-bearing deposits (7)	938,259			0.47		1,090		935,442		0.23		536
Short-term borrowings	101,779			1.24		312		98,549		0.47		115
Long-term debt (7)	226,062			2.80		1,576		260,130		1.77		1,147
Other liabilities	27,927			1.92		132		16,806		2.22		92
Total interest-bearing liabilities (7)	1,294,027			0.97		3,110		1,310,927		0.58		1,890
Portion of noninterest-bearing funding sources (7)	466,609			—		—		465,605		—		—
Total funding sources (7)	$	1,760,636		0.71		3,110		1,776,532		0.43		1,890
Net interest margin and net interest income on a taxable-equivalent basis (6)(7)				2.84	%	$	12,405			2.87	%	$	12,642
Noninterest-earning assets
Cash and due from banks	$	18,853						18,706
Goodwill	26,516							26,673
Other (7)	109,891							109,129
Total noninterest-earning assets (7)	$	155,260						154,508
Noninterest-bearing funding sources
Deposits	$	358,919						363,749
Other liabilities (7)	56,770							54,805
Total equity (7)	206,180							201,559
Noninterest-bearing funding sources used to fund earning assets (7)	(466,609		)					(465,605	)
Net noninterest-bearing funding sources (7)	$	155,260						154,508
Total assets (7)	$	1,915,896						1,931,040


(1)	Our average prime rate was 4.52% and 3.80% for the quarters ended March 31, 2018 and 2017, respectively. The average three-month London Interbank Offered Rate (LIBOR) was 1.93% and 1.07% for the quarters ended March 31, 2018 and 2017, respectively.


(2)	Yields/rates and amounts include the effects of hedge and risk management activities associated with the respective asset and liability categories.


(3)	Financial information has been revised to reflect the impact of the adoption of Accounting Standards Update (ASU) 2016-18 – Statement of Cash Flows (Topic 230): Restricted Cash in which we changed the presentation of our cash and cash equivalents to include both cash and due from banks as well as interest-earning deposits with banks, which are inclusive of any restricted cash.


(4)	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.


(5)	Nonaccrual loans and related income are included in their respective loan categories.


(6)	Includes taxable-equivalent adjustments of $167 million and $318 million for the quarters ended March 31, 2018 and 2017, respectively, predominantly related to tax-exempt income on certain loans and securities. The federal statutory tax rate utilized was 21% and 35% for quarters ended March 31, 2018 and 2017, respectively.


(7)	Financial information for the prior quarter has been revised to reflect the impact of the adoption in fourth quarter 2017 of ASU 2017-12 – Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities.

Earnings Performance (continued)

Noninterest Income

Table 2: Noninterest Income



	Quarter ended March 31,			%
(in millions)	2018		2017	Change
Service charges on deposit accounts	$	1,173	1,313	(11	)%
Trust and investment fees:
Brokerage advisory, commissions and other fees	2,403		2,324	3
Trust and investment management	850		829	3
Investment banking	430		417	3
Total trust and investment fees	3,683		3,570	3
Card fees	908		945	(4	)
Other fees:
Charges and fees on loans	301		307	(2	)
Cash network fees	126		126	—
Commercial real estate brokerage commissions	85		81	5
Letters of credit fees	79		74	7
Wire transfer and other remittance fees	116		107	8
All other fees	93		170	(45	)
Total other fees	800		865	(8	)
Mortgage banking:
Servicing income, net	468		456	3
Net gains on mortgage loan origination/sales activities	466		772	(40	)
Total mortgage banking	934		1,228	(24	)
Insurance	114		277	(59	)
Net gains from trading activities	243		272	(11	)
Net gains on debt securities	1		36	(97	)
Net gains from equity securities	783		570	37
Lease income	455		481	(5	)
Life insurance investment income	164		144	14
All other	438		230	90
Total	$	9,696	9,931	(2	)

Noninterest income was $9.7 billion for first quarter 2018, compared with $9.9 billion for the same period a year ago. This income represented 44% of revenue for first quarter 2018, compared with 45% for the same period a year ago. The decline in noninterest income in first quarter 2018, compared with the same period a year ago, was predominantly due to lower mortgage banking income, lower insurance income due to the sale of Wells Fargo Insurance Services in fourth quarter 2017, and lower service charges on deposit accounts. These decreases were partially offset by growth in trust and investment fees, higher net gains from equity securities, and higher all other income. For more information on our performance obligations and the nature of services performed for certain of our revenues discussed below, see Note 17 (Revenue from Contracts with Customers) to Financial Statements in this Report.

Service charges on deposit accounts were $1.2 billion in first quarter 2018, compared with $1.3 billion for the same period a year ago. The decrease in first quarter 2018, compared with the same period a year ago, was due to lower overdraft fees driven by customer-friendly changes including the first full quarter impact of Overdraft Rewind^SM, and the impact of a higher earnings credit rate applied to commercial accounts due to increased interest rates.

Brokerage advisory, commissions and other fees increased to $2.4 billion in first quarter 2018, compared with $2.3 billion for the same period in 2017. The increase in first quarter 2018, compared with the same period in 2017, was due to higher asset-

based fees, partially offset by lower transactional commission revenue. Retail brokerage client assets totaled $1.6 trillion at both March 31, 2018 and 2017, with all retail brokerage services provided by our Wealth and Investment Management (WIM) operating segment. For additional information on retail brokerage client assets, see the discussion and Tables 4d and 4e in the “Operating Segment Results – Wealth and Investment Management – Retail Brokerage Client Assets” section in this Report.

Trust and investment management fee income is largely from client assets under management (AUM) for which fees are based on a tiered scale relative to market value of the assets, and client assets under administration (AUA), for which fees are generally based on the extent of services to administer the assets. Trust and investment management fees modestly increased to $850 million in first quarter 2018, from $829 million in first quarter 2017, largely due to growth in management fees for investment advice on mutual funds. Our AUM totaled $680.4 billion at March 31, 2018, compared with $654.9 billion at March 31, 2017, with substantially all of our AUM managed by our WIM operating segment. Additional information regarding our WIM operating segment AUM is provided in Table 4f and the related discussion in the “Operating Segment Results – Wealth and Investment Management – Trust and Investment Client Assets Under Management” section in this Report. Our AUA totaled $1.7 trillion at March 31, 2018, compared with $1.6 trillion at March 31, 2017.

Investment banking fees increased to $430 million in first quarter 2018, from $417 million for the same period in 2017, reflecting the impact of the new accounting standard for revenue recognition, which increased investment banking fees and increased noninterest expense by an equal amount due to the underwriting expenses of our broker-dealer business that were previously netted against revenue are now included in noninterest expense. The increase in fees was partially offset by lower advisory fees and equity originations.

Card fees were $908 million in first quarter 2018, down from $945 million in first quarter 2017, reflecting higher rewards costs and the impact of the new accounting standard for revenue recognition, which lowered card fees and reduced noninterest expense by an equal amount due to the netting of card payment network charges against related interchange and network revenues in card fees. These decreases were partially offset by an increase in interchange fees due to higher purchase activity.

Other fees decreased to $800 million in first quarter 2018, from $865 million for the same period in 2017, predominantly driven by lower all other fees. All other fees were $93 million in first quarter 2018, compared with $170 million for the same period in 2017, driven by lower other fees from discontinued products.

Mortgage banking noninterest income, consisting of net servicing income and net gains on mortgage loan origination/sales activities, totaled $934 million in first quarter 2018, compared with $1.2 billion for the same period a year ago.

In addition to servicing fees, net mortgage loan servicing income includes amortization of commercial mortgage servicing rights (MSRs), changes in the fair value of residential MSRs during the period, as well as changes in the value of derivatives (economic hedges) used to hedge the residential MSRs. Net servicing income of $468 million for first quarter 2018 included a $110 million net MSR valuation gain ($1.3 billion increase in the fair value of the MSRs and a $1.2 billion hedge loss). Net servicing income of $456 million for first quarter 2017 included a $102 million net MSR valuation gain ($174 million increase in the fair value of the MSRs and a $72 million hedge loss).

Our portfolio of mortgage loans serviced for others was $1.71 trillion at March 31, 2018, and $1.70 trillion at December 31, 2017. At March 31, 2018, the ratio of combined residential and commercial MSRs to related loans serviced for others was 0.96%, compared with 0.88% at December 31, 2017. See the “Risk Management – Asset/Liability Management – Mortgage Banking Interest Rate and Market Risk” section in this Report for additional information regarding our MSRs risks and hedging approach.

Net gains on mortgage loan origination/sales activities were $466 million in first quarter 2018, compared with $772 million for the same period a year ago. The decrease in first quarter 2018, compared with the same period a year ago, was largely due to lower production margins. Total mortgage loan originations were $43 billion for first quarter 2018, compared with $44 billion for the same period a year ago. The production margin on residential held-for-sale mortgage originations, which represents net gains on residential mortgage loan origination/sales activities divided by total residential held-for-sale mortgage originations, provides a measure of the profitability of our residential mortgage origination activity. Table 2a presents the information used in determining the production margin.

Table 2a: Selected Mortgage Production Data



		Quarter ended March 31,
		2018			2017
Net gains on mortgage loan origination/sales activities (in millions):
Residential	(A)	$	324		569
Commercial		76			101
Residential pipeline and unsold/repurchased loan management (1)		66			102
Total		$	466		772
Residential real estate originations (in billions):
Held-for-sale	(B)	$	34		34
Held-for-investment		9			10
Total		$	43		44
Production margin on residential held-for-sale mortgage originations	(A)/(B)	0.94		%	1.68


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

Earnings Performance (continued)

The production margin was 0.94% for first quarter 2018, compared with 1.68% for the same period in 2017. The decline in production margin in first quarter 2018 was attributable to lower margins in both our retail and correspondent production channels as well as a shift to more correspondent origination volume, which has a lower production margin. Mortgage applications were $58 billion for first quarter 2018, compared with $59 billion for the same period a year ago. The 1-4 family first mortgage unclosed pipeline was $24 billion at March 31, 2018, compared with $28 billion at March 31, 2017. For additional information about our mortgage banking activities and results, see the “Risk Management – Asset/Liability Management – Mortgage Banking Interest Rate and Market Risk” section and Note 10 (Mortgage Banking Activities) and Note 15 (Fair Values of Assets and Liabilities) to Financial Statements in this Report.

Net gains on mortgage loan origination/sales activities include adjustments to the mortgage repurchase liability. Mortgage loans are repurchased from third parties based on standard representations and warranties, and early payment default clauses in mortgage sale contracts. For additional information about mortgage loan repurchases, see the “Risk Management – Credit Risk Management – Liability for Mortgage Loan Repurchase Losses” section and Note 10 (Mortgage Banking Activities) to Financial Statements in this Report.

Insurance income was $114 million in first quarter 2018, compared with $277 million in the same period a year ago. The decrease in first quarter 2018, compared with the same period a year ago, was driven by the sale of Wells Fargo Insurance Services in fourth quarter 2017.

Net gains from trading activities, which reflect unrealized changes in fair value of our trading positions and realized gains and losses, were $243 million in first quarter 2018, compared with $272 million in the same period a year ago. The decrease in first quarter 2018, compared with the same period a year ago, was driven by lower customer accommodation trading activity within our capital markets trading business. Net gains from trading activities do not include interest and dividend income and expense on trading securities. Those amounts are reported within interest income from debt and equity securities and other interest expense. For additional information about trading activities, see the "Risk Management – Asset/Liability Management – Market Risk-Trading Activities” section and Note 4 (Trading Activities) to Financial Statements in this Report.

Net gains on debt and equity securities totaled $784 million in first quarter 2018, compared with $606 million in first quarter 2017, after other-than-temporary impairment (OTTI) write-downs of $30 million for first quarter 2018, compared with $128 million for the same period in 2017. The increase in net gains on debt and equity securities in first quarter 2018, compared with the same period a year ago, was driven by higher net gains from nonmarketable equity securities and $250 million of unrealized gains from the impact of the new accounting standard for financial instruments which requires any gain or loss associated with the fair value measurement of equity securities to be reflected in earnings. These increases were partially offset by lower net gains on debt securities and lower deferred compensation gains (offset in employee benefits expense).

Lease income was $455 million in first quarter 2018, compared with $481 million for the same period a year ago. The decrease in first quarter 2018, compared with the same period a year ago, was driven by lower rail and equipment lease income.

All other income was $438 million in first quarter 2018, compared with $230 million for the same period a year ago. All other income includes ineffectiveness recognized on derivatives that qualify for hedge accounting, the results of certain economic hedges, losses on low income housing tax credit investments, foreign currency adjustments, and income from investments accounted for under the equity method, any of which can cause decreases and net losses in other income. The increase in all other income in first quarter 2018, compared with the same period a year ago, was predominantly driven by a $643 million pre-tax gain from the sale of $1.6 billion of purchased credit-impaired Pick-a-Pay loans and a $202 million pre-tax gain from the sale of Wells Fargo Shareowner Services in first quarter 2018. These gains were partially offset by an unrealized loss of $(176) million for a lower of cost or market (LOCOM) adjustment related to the previously announced sale of certain assets and liabilities of Reliable Financial Services, Inc. (a subsidiary of Wells Fargo's automobile financing business), and lower income from equity method investments.

Noninterest Expense

Table 3: Noninterest Expense



	Quarter ended March 31,			%
(in millions)	2018		2017	Change
Salaries	$	4,363	4,261	2	%
Commission and incentive compensation	2,768		2,725	2
Employee benefits	1,598		1,686	(5	)
Equipment	617		577	7
Net occupancy	713		712	—
Core deposit and other intangibles	265		289	(8	)
FDIC and other deposit assessments	324		333	(3	)
Operating losses	1,468		282	421
Outside professional services	821		804	2
Contract services (1)	447		397	13
Operating leases	320		345	(7	)
Outside data processing	162		220	(26	)
Travel and entertainment	152		179	(15	)
Advertising and promotion	153		127	20
Postage, stationery and supplies	142		145	(2	)
Telecommunications	92		91	1
Foreclosed assets	38		86	(56	)
Insurance	26		24	8
All other (1)	573		509	13
Total	$	15,042	13,792	9


(1)	The prior period has been revised to conform with the current period presentation whereby temporary help is included in contract services rather than in all other noninterest expense.

Noninterest expense was $15.0 billion in first quarter 2018, up 9% from $13.8 billion a year ago, predominantly driven by higher operating losses.

Personnel expenses, which include salaries, commissions, incentive compensation, and employee benefits, were up $57 million, or 1%, in first quarter 2018 compared with the same period a year ago. The increase was due to annual salary increases, higher incentive compensation, and higher employee benefits expense, partially offset by lower deferred compensation costs (offset in net gains from equity securities) and the impact of the sale of Wells Fargo Insurance Services in fourth quarter 2017.

Outside professional and contract services expense was up $67 million, or 6%, in first quarter 2018, compared with the same period a year ago. The increase reflected higher project and technology spending on regulatory and compliance related initiatives, partially offset by lower legal expense.

Outside data processing was down $58 million in first quarter 2018, or 26%, compared with the same period a year ago, reflecting lower data processing expense related to the GE Capital business acquisitions and the impact of the new revenue recognition accounting standard, which reduced noninterest expense and lowered card fees by an equal amount due to the netting of card payment network charges against related interchange and network revenues in card fees.

Operating losses were up $1.2 billion, or 421%, in first quarter 2018, compared with the same period a year ago, predominantly driven by the $800 million discrete litigation accrual in connection with entering into the consent orders with the CFPB and OCC on April 20, 2018. See Note 1 (Summary of Significant Accounting Policies – Subsequent Events) for additional information.

Foreclosed assets expense was down $48 million, or 56%, in first quarter 2018, compared with the same period a year ago, due to lower foreclosed properties operating expenses and higher gains on sale of foreclosed properties.

All other noninterest expense was up $64 million, or 13%, in first quarter 2018, compared with the same period a year ago. The increase was primarily driven by higher donations expense.

Our efficiency ratio was 68.6% in first quarter 2018, compared with 62.0% in first quarter 2017.

Income Tax Expense

Our effective income tax rate was 21.1% and 27.4% for first quarter 2018 and 2017, respectively. The decrease in the effective income tax rate for first quarter 2018 reflected the reduced U.S federal tax rate as part of the Tax Cuts & Jobs Act (the Tax Act) that was enacted in 2017, partially offset by the non-tax deductible treatment of the $800 million discrete litigation accrual in connection with entering into the consent orders with the CFPB and OCC on April 20, 2018. We continue to collect and analyze data related to provisional tax estimates recorded in fourth quarter 2017 and monitor interpretations that emerge for various provisions of the Tax Act. We anticipate these items will be finalized upon completion of our U.S. tax filings in 2018.

Earnings Performance (continued)

Operating Segment Results

We are organized for management reporting purposes into three operating segments: Community Banking; Wholesale Banking; and WIM. These segments are defined by product type and customer segment and their results are based on our management accounting process, for which there is no comprehensive, authoritative financial accounting guidance equivalent to generally accepted accounting principles (GAAP). Effective first quarter 2018, assets and liabilities now receive a funding charge or credit that considers interest rate risk, liquidity risk, and other product characteristics on a more granular level. This methodology change affects results across all three of our

reportable operating segments and prior period operating segment results have been revised to reflect this methodology change. Our previously reported consolidated financial results were not impacted by the methodology change; however, in connection with the adoption of ASU 2016-01 in first quarter 2018, certain reclassifications have occurred within noninterest income. Table 4 and the following discussion present our results by operating segment. For additional description of our operating segments, including additional financial information and the underlying management accounting process, see Note 21 (Operating Segments) to Financial Statements in this Report.

Table 4: Operating Segment Results – Highlights



(income/expense in millions,	Community Banking			Wholesale Banking				Wealth and Investment Management				Other (1)				Consolidated Company
average balances in billions)	2018		2017	2018		2017		2018		2017		2018		2017		2018	2017
Quarter ended March 31,
Revenue	$	11,830	11,823	7,279		7,577		4,242		4,257		(1,417	)	(1,402	)	21,934	22,255
Provision (reversal of provision) for credit losses	218		646	(20	)	(43	)	(6	)	(4	)	(1	)	6		191	605
Noninterest expense	8,702		7,281	3,978		4,167		3,290		3,204		(928	)	(860	)	15,042	13,792
Net income (loss)	1,913		2,824	2,875		2,485		714		665		(366	)	(340	)	5,136	5,634
Average loans	$	470.5	480.7	465.1		468.3		73.9		70.7		(58.5	)	(56.1	)	951.0	963.6
Average deposits	747.5		717.8	446.0		465.3		177.9		197.5		(74.2	)	(81.4	)	1,297.2	1,299.2


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

Community Banking offers a complete line of diversified financial products and services for consumers and small businesses including checking and savings accounts, credit and debit cards, and automobile, student, mortgage, home equity and small business lending, as well as referrals to Wholesale Banking and WIM business partners. The Community Banking segment also includes the results of our Corporate Treasury activities net of allocations (including funds transfer pricing, capital, liquidity and certain corporate expenses) in support of other segments and

results of investments in our affiliated venture capital partnerships. We announced on November 28, 2017, that we will exit the personal insurance business, and we have begun winding down activities and ceased offering personal insurance products, effective February 1, 2018. Effective April 2, 2018, we sold the majority of our interests in our personal insurance business to a third party. Table 4a provides additional financial information for Community Banking.

Table 4a: Community Banking



	Quarter ended March 31,
(in millions, except average balances which are in billions)	2018			2017		% Change
Net interest income	$	7,195		7,132		1	%
Noninterest income:
Service charges on deposit accounts	639			742		(14	)
Trust and investment fees:
Brokerage advisory, commissions and other fees (1)	478			444		8
Trust and investment management (1)	233			218		7
Investment banking (2)	(10		)	(27	)	63
Total trust and investment fees	701			635		10
Card fees	821			865		(5	)
Other fees	327			395		(17	)
Mortgage banking	842			1,106		(24	)
Insurance	28			34		(18	)
Net losses from trading activities	(1		)	(52	)	98
Net gains on debt securities	—			102		(100	)
Net gains from equity securities (3)	684			468		46
Other income of the segment	594			396		50
Total noninterest income	4,635			4,691		(1	)

Total revenue	11,830			11,823		—

Provision for credit losses	218			646		(66	)
Noninterest expense:
Personnel expense	5,511			5,201		6
Equipment	596			551		8
Net occupancy	534			526		2
Core deposit and other intangibles	101			112		(10	)
FDIC and other deposit assessments	181			192		(6	)
Outside professional services	397			349		14
Operating losses	1,440			261		452
Other expense of the segment	(58		)	89		NM
Total noninterest expense	8,702			7,281		20
Income before income tax expense and noncontrolling interests	2,910			3,896		(25	)
Income tax expense	809			982		(18	)
Net income from noncontrolling interests (4)	188			90		109
Net income	$	1,913		2,824		(32	)
Average loans	$	470.5		480.7		(2	)
Average deposits	747.5			717.8		4

NM - Not meaningful


(1)	Represents income on products and services for WIM customers served through Community Banking distribution channels and is eliminated in consolidation.


(2)	Includes syndication and underwriting fees paid to Wells Fargo Securities which are offset in our Wholesale Banking segment.


(3)	Predominantly represents gains resulting from venture capital investments.


(4)	Reflects results attributable to noncontrolling interests predominantly associated with the Company’s consolidated venture capital investments.

Community Banking reported net income of $1.9 billion, down $911 million, or 32%, compared with the same period a year ago. Revenue was $11.8 billion for first quarter 2018, stable compared with the same period last year, as higher net interest income, a gain on the sale of Pick-a-Pay loans, higher market sensitive revenue, and higher trust and investment fees, were offset by lower mortgage banking revenue and lower service charges on deposit accounts. Average loans of $470.5 billion in first quarter 2018 decreased $10.2 billion, or 2%, from first quarter 2017. The decline in average loans was predominantly due to lower automobile loans and junior lien mortgages, partially offset by higher real estate 1-4 family first mortgages. Average deposits of $747.5 billion in first quarter 2018 increased $29.7 billion, or 4%, from first quarter 2017. Primary consumer checking customers (customers who actively use their checking account with transactions such as debit card purchases, online

bill payments, and direct deposit) as of February 2018 were up 0.9% from February 2017. Noninterest expense increased $1.4 billion, or 20%, from first quarter 2017. The increase in noninterest expense from first quarter 2017 was predominantly due to higher operating losses, including the $800 million discrete litigation accrual, and personnel expense. The provision for credit losses decreased $428 million from first quarter 2017 primarily reflecting an improvement in our outlook for 2017 hurricane-related losses, as well as continued improvement in residential real estate and lower loan balances.

Earnings Performance (continued)

Wholesale Banking provides financial solutions to businesses across the United States and globally with annual sales generally in excess of $5 million. Products and businesses include Business Banking, Commercial Real Estate, Corporate Banking, Financial Institutions Group, Government and Institutional Banking,

Middle Market Banking, Principal Investments, Treasury Management, Wells Fargo Commercial Capital, and Wells Fargo Securities. Table 4b provides additional financial information for Wholesale Banking.

Table 4b: Wholesale Banking



	Quarter ended March 31,
(in millions, except average balances which are in billions)	2018			2017		% Change
Net interest income	$	4,532		4,681		(3	)%
Noninterest income:
Service charges on deposit accounts	534			570		(6	)
Trust and investment fees:
Brokerage advisory, commissions and other fees	67			84		(20	)
Trust and investment management	113			129		(12	)
Investment banking	440			445		(1	)
Total trust and investment fees	620			658		(6	)
Card fees	87			80		9
Other fees	472			468		1
Mortgage banking	93			123		(24	)
Insurance	79			234		(66	)
Net gains from trading activities	225			290		(22	)
Net gains (losses) on debt securities	1			(66	)	102
Net gains from equity securities	93			36		158
Other income of the segment	543			503		8
Total noninterest income	2,747			2,896		(5	)

Total revenue	7,279			7,577		(4	)

Provision (reversal of provision) for credit losses	(20		)	(43	)	53
Noninterest expense:
Personnel expense	1,536			1,804		(15	)
Equipment	12			16		(25	)
Net occupancy	100			108		(7	)
Core deposit and other intangibles	95			105		(10	)
FDIC and other deposit assessments	122			118		3
Outside professional services	233			241		(3	)
Operating losses	8			6		33
Other expense of the segment	1,872			1,769		6
Total noninterest expense	3,978			4,167		(5	)
Income before income tax expense and noncontrolling interests	3,321			3,453		(4	)
Income tax expense	448			973		(54	)
Net loss from noncontrolling interests	(2		)	(5	)	60
Net income	$	2,875		2,485		16
Average loans	$	465.1		468.3		(1	)
Average deposits	446.0			465.3		(4	)

Wholesale Banking reported net income of $2.9 billion in first quarter 2018, up $390 million, or 16%, from the same period a year ago. First quarter 2018 results benefited from the reduced income tax rate. Revenue decreased $298 million, or 4%, from first quarter 2017 primarily due to the impact of the sale of Wells Fargo Insurance Services (WFIS) in fourth quarter 2017, as well as lower net interest income. Net interest income decreased $149 million, or 3%, from first quarter 2017 as lower average loan and deposit balances and lower income on tax advantaged products were partially offset by higher interest rates. Noninterest income decreased $149 million, or 5%, from first quarter 2017 as the impact of the sale of WFIS, lower mortgage banking fees, and lower operating lease income was partially offset by a gain on the sale of Wells Fargo Shareowner Services.

Average loans of $465.1 billion in first quarter 2018 decreased $3.2 billion, or 1%, from first quarter 2017 as lower commercial real estate was partially offset by growth in asset backed finance, capital finance, and commercial distribution finance. Average deposits of $446.0 billion decreased $19.3 billion, or 4%, from first quarter 2017 reflecting declines across many businesses as well as actions taken to comply with the asset cap included in the FRB consent order on February 2, 2018. Noninterest expense decreased $189 million, or 5%, from first quarter 2017, reflecting the sale of WFIS, partially offset by higher regulatory, risk, cyber and technology expenses. The provision for credit losses increased $23 million from first quarter 2017 driven by a lower allowance for loan losses release.

Wealth and Investment Management provides a full range of personalized wealth management, investment and retirement products and services to clients across U.S. based businesses including Wells Fargo Advisors, The Private Bank, Abbot Downing, Wells Fargo Institutional Retirement and Trust, and Wells Fargo Asset Management. We deliver financial planning, private banking, credit, investment management and fiduciary services to high-net worth and ultra-high-net worth individuals

and families. We also serve clients’ brokerage needs, supply retirement and trust services to institutional clients and provide investment management capabilities delivered to global institutional clients through separate accounts and the Wells Fargo Funds. Table 4c provides additional financial information for WIM.

Table 4c: Wealth and Investment Management



	Quarter ended March 31,
(in millions, except average balances which are in billions)	2018			2017		% Change
Net interest income	$	1,112		1,141		(3	)%
Noninterest income:
Service charges on deposit accounts	4			5		(20	)
Trust and investment fees:
Brokerage advisory, commissions and other fees	2,344			2,245		4
Trust and investment management	743			707		5
Investment banking (1)	—			(1	)	100
Total trust and investment fees	3,087			2,951		5
Card fees	1			1		—
Other fees	4			5		(20	)
Mortgage banking	(3		)	(2	)	(50	)
Insurance	18			20		(10	)
Net gains from trading activities	19			34		(44	)
Net gains on debt securities	—			—		NM
Net gains from equity securities	6