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, 2019  
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 every Interactive Data File required to be submitted 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 such files).                                Yes þ   No ¨
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  ¨ 
Non-accelerated filer  ¨                     Smaller reporting company  ¨
Emerging growth company  ¨
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.            ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes ¨   No þ    
 
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Trading Symbol
Name of Each Exchange
on Which Registered
Common Stock, par value $1-2/3
WFC
New York Stock Exchange (NYSE)
7.5% Non-Cumulative Perpetual Convertible Class A Preferred Stock, Series L
WFC.PRL
NYSE
Depositary Shares, each representing a 1/1000th interest in a share of Non-Cumulative Perpetual Class A Preferred Stock, Series N
WFC.PRN
NYSE
Depositary Shares, each representing a 1/1000th interest in a share of Non-Cumulative Perpetual Class A Preferred Stock, Series O
WFC.PRO
NYSE
Depositary Shares, each representing a 1/1000th interest in a share of Non-Cumulative Perpetual Class A Preferred Stock, Series P
WFC.PRP
NYSE
Depositary Shares, each representing a 1/1000th interest in a share of 5.85% Fixed-to-Floating Rate Non-Cumulative Perpetual Class A Preferred Stock, Series Q
WFC.PRQ
NYSE
Depositary Shares, each representing a 1/1000th interest in a share of 6.625% Fixed-to-Floating Rate Non-Cumulative Perpetual Class A Preferred Stock, Series R
WFC.PRR
NYSE
Depositary Shares, each representing a 1/1000th interest in a share of Non-Cumulative Perpetual Class A Preferred Stock, Series T
WFC.PRT
NYSE
Depositary Shares, each representing a 1/1000th interest in a share of Non-Cumulative Perpetual Class A Preferred Stock, Series V
WFC.PRV
NYSE
Depositary Shares, each representing a 1/1000th interest in a share of Non-Cumulative Perpetual Class A Preferred Stock, Series W
WFC.PRW
NYSE
Depositary Shares, each representing a 1/1000th interest in a share of Non-Cumulative Perpetual Class A Preferred Stock, Series X
WFC.PRX
NYSE
Depositary Shares, each representing a 1/1000th interest in a share of Non-Cumulative Perpetual Class A Preferred Stock, Series Y
WFC.PRY
NYSE
Guarantee of 5.80% Fixed-to-Floating Rate Normal Wachovia Income Trust Securities of Wachovia Capital Trust III
WBTP
NYSE
Guarantee of Medium-Term Notes, Series A, due October 30, 2028 of Wells Fargo Finance LLC
WFC/28A
NYSE

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 24, 2019
Common stock, $1-2/3 par value
 
4,494,342,882
          



FORM 10-Q
 
CROSS-REFERENCE INDEX
 
PART I
Financial Information
 
Item 1.
Financial Statements
Page
 
Consolidated Statement of Income
 
Consolidated Statement of Comprehensive Income
 
Consolidated Balance Sheet
 
Consolidated Statement of Changes in Equity
 
Consolidated Statement of Cash Flows
 
Notes to Financial Statements
  
 
1

—
Summary of Significant Accounting Policies  
 
2

—
Business Combinations
 
3

—
Cash, Loan and Dividend Restrictions
 
4

—
Trading Activities
 
5

—
Available-for-Sale and Held-to-Maturity Debt Securities
 
6

—
Loans and Allowance for Credit Losses
 
7

—
Leasing Activity
 
8

—
Equity Securities
 
9

—
Other Assets
 
10

—
Securitizations and Variable Interest Entities
 
11

—
Mortgage Banking Activities
 
12

—
Intangible Assets
 
13

—
Guarantees, Pledged Assets and Collateral, and Other Commitments
 
14

—
Legal Actions
 
15

—
Derivatives
 
16

—
Fair Values of Assets and Liabilities
 
17

—
Preferred Stock
 
18

—
Revenue from Contracts with Customers
 
19

—
Employee Benefits
 
20

—
Earnings Per Common Share
 
21

—
Other Comprehensive Income
 
22

—
Operating Segments
 
23

—
Regulatory and Agency Capital Requirements
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations (Financial Review)
 
 
Summary Financial Data  
 
Overview
 
Earnings Performance
 
Balance Sheet Analysis
 
Off-Balance Sheet Arrangements  
 
Risk Management
 
Capital Management
 
Regulatory Matters
 
Critical Accounting Policies  
 
Current Accounting Developments
 
Forward-Looking Statements  
 
Risk Factors 
 
Glossary of Acronyms
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
Item 4.
Controls and Procedures
 
 
 
PART II
Other Information
 
Item 1.
Legal Proceedings
Item 1A.
Risk Factors
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
Item 6.
Exhibits
 
 
 
 
 
Signature

1


PART I - FINANCIAL INFORMATION

FINANCIAL REVIEW
Summary Financial Data
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
% Change
 
 
Quarter ended
 
 
Mar 31, 2019 from
 
($ in millions, except per share amounts)
Mar 31,
2019

 
Dec 31,
2018

 
Mar 31,
2018

 
Dec 31,
2018

 
Mar 31,
2018

For the Period
 
 
 
 
 
 
 
 
 
Wells Fargo net income
$
5,860

 
6,064

 
5,136

 
(3
)%
 
14

Wells Fargo net income applicable to common stock
5,507

 
5,711

 
4,733

 
(4
)
 
16

Diluted earnings per common share
1.20

 
1.21

 
0.96

 
(1
)
 
25

Profitability ratios (annualized):
 
 
 
 
 
 
 
 
 
Wells Fargo net income to average assets (ROA)
1.26
%
 
1.28

 
1.09

 
(2
)
 
16

Wells Fargo net income applicable to common stock to average Wells Fargo common stockholders’ equity (ROE)
12.71

 
12.89

 
10.58

 
(1
)
 
20

Return on average tangible common equity (ROTCE) (1)
15.16

 
15.39

 
12.62

 
(1
)
 
20

Efficiency ratio (2)
64.4

 
63.6

 
68.6

 
1

 
(6
)
Total revenue
$
21,609

 
20,980

 
21,934

 
3

 
(1
)
Pre-tax pre-provision profit (PTPP) (3)
7,693

 
7,641

 
6,892

 
1

 
12

Dividends declared per common share
0.45

 
0.43

 
0.39

 
5

 
15

Average common shares outstanding
4,551.5

 
4,665.8

 
4,885.7

 
(2
)
 
(7
)
Diluted average common shares outstanding
4,584.0

 
4,700.8

 
4,930.7

 
(2
)
 
(7
)
Average loans
$
950,010

 
946,336

 
951,024

 
—

 
—

Average assets
1,883,091

 
1,879,047

 
1,915,896

 
—

 
(2
)
Average total deposits
1,262,062

 
1,268,948

 
1,297,178

 
(1
)
 
(3
)
Average consumer and small business banking deposits (4)
739,654

 
736,295

 
755,483

 
—

 
(2
)
Net interest margin
2.91
%
 
2.94

 
2.84

 
(1
)
 
2

At Period End
 
 
 
 
 
 
 
 
 
Debt securities
$
483,467

 
484,689

 
472,968

 
—

 
2

Loans
948,249

 
953,110

 
947,308

 
(1
)
 
—

Allowance for loan losses
9,900

 
9,775

 
10,373

 
1

 
(5
)
Goodwill
26,420

 
26,418

 
26,445

 
—

 
—

Equity securities
58,440

 
55,148

 
58,935

 
6

 
(1
)
Assets
1,887,792

 
1,895,883

 
1,915,388

 
—

 
(1
)
Deposits
1,264,013

 
1,286,170

 
1,303,689

 
(2
)
 
(3
)
Common stockholders’ equity
176,025

 
174,359

 
181,150

 
1

 
(3
)
Wells Fargo stockholders’ equity
197,832

 
196,166

 
204,952

 
1

 
(3
)
Total equity
198,733

 
197,066

 
205,910

 
1

 
(3
)
Tangible common equity (1)
147,723

 
145,980

 
151,878

 
1

 
(3
)
Capital ratios (5):
 
 
 
 
 
 
 
 
 
Total equity to assets
10.53
%
 
10.39

 
10.75

 
1

 
(2
)
Risk-based capital:
 
 
 
 
 
 
 
 


Common Equity Tier 1
11.92

 
11.74

 
11.92

 
2

 
—

Tier 1 capital
13.64

 
13.46

 
13.76

 
1

 
(1
)
Total capital
16.74

 
16.60

 
16.92

 
1

 
(1
)
Tier 1 leverage
9.15

 
9.07

 
9.32

 
1

 
(2
)
Common shares outstanding
4,511.9

 
4,581.3

 
4,873.9

 
(2
)
 
(7
)
Book value per common share (6)
$
39.01

 
38.06

 
37.17

 
2

 
5

Tangible book value per common share (1)(6)
32.74

 
31.86

 
31.16

 
3

 
5

Team members (active, full-time equivalent)
262,100

 
258,700

 
265,700

 
1

 
(1
)
(1)
Tangible common equity is a non-GAAP financial measure and represents total equity less preferred equity, noncontrolling interests, and goodwill and certain identifiable intangible assets (including goodwill and intangible assets associated with certain of our nonmarketable equity 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)
The risk-based capital ratios were calculated under the lower of Standardized or Advanced Approach determined pursuant to Basel III. Beginning January 1, 2018, the requirements for calculating common equity tier 1 and tier 1 capital, along with risk-weighted assets, became fully phased-in; accordingly, the information presented reflects fully phased-in common equity tier 1 capital, tier 1 capital and risk-weighted assets but reflects total capital still in accordance with Transition Requirements. See the “Capital Management” section and Note 23 (Regulatory and Agency Capital Requirements) to Financial Statements in this Report for additional information.
(6)
Book value per common share is common stockholders’ equity divided by common shares outstanding. Tangible book value per common share is tangible common equity divided by common shares outstanding.

2
Overview (continued)

This Quarterly Report, including the Financial Review and the Financial Statements and related Notes, contains forward-looking statements, which may include forecasts of our financial results and condition, expectations for our operations and business, and our assumptions for those forecasts and expectations. Do not unduly rely on forward-looking statements. Actual results may differ materially from our forward-looking statements due to several factors. Factors that could cause our actual results to differ materially from our forward-looking statements are described in this Report, including in the “Forward-Looking Statements” section, and in the “Risk Factors” and “Regulation and Supervision” sections of our Annual Report on Form 10-K for the year ended December 31, 2018 (2018 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 definitions of terms used throughout this Report.
 
Financial Review
 


Overview                                                        
Wells Fargo & Company is a diversified, community-based financial services company with $1.89 trillion in assets. Founded in 1852 and headquartered in San Francisco, we provide banking, investment and mortgage products and services, as well as consumer and commercial finance, through 7,700 locations, more than 13,000 ATMs, digital (online, mobile and social), and contact centers (phone, email and correspondence), and we have offices in 32 countries and territories to support customers who conduct business in the global economy. With approximately 262,000 active, full-time equivalent team members, we serve one in three households in the United States and ranked No. 26 on Fortune’s 2018 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, 2019.
We use our Vision, Values & Goals to guide us toward growth and success. Our vision is to satisfy our customers’ financial needs and help them succeed financially. We aspire to create deep and enduring relationships with our customers by providing them with an exceptional experience and by understanding their needs and delivering the most relevant products, services, advice, and guidance.
We have five primary values, which are based on our vision and guide the actions we take. First, we place customers at the center of everything we do. We want to exceed customer expectations and build relationships that last a lifetime. Second, we value and support our people as a competitive advantage and strive to attract, develop, motivate, and retain the best team members. Third, we strive for the highest ethical standards of integrity, transparency, and principled performance. Fourth, we value and promote diversity and inclusion in all aspects of business and at all levels. Fifth, we look to each of our team members to be a leader in establishing, sharing, and communicating our vision for our customers, communities, team members, and shareholders. In addition to our five primary values, one of our key day-to-day priorities is to make risk management a competitive advantage by working hard to ensure that appropriate controls are in place to reduce risks to our customers, maintain and increase our competitive market position, and protect Wells Fargo’s long-term safety, soundness, and reputation.
In keeping with our primary values and risk management priorities, we have six long-term goals for the Company, which entail becoming the financial services leader in the following areas:
•
Customer service and advice – provide exceptional service and guidance to our customers to help them succeed financially.
 
•
Team member engagement – be a company where people feel included, valued, and supported; everyone is respected; and we work as a team.
•
Innovation – create lasting value for our customers and increased efficiency for our operations through innovative thinking, industry-leading technology, and a willingness to test and learn.
•
Risk management – set the global standard in managing all forms of risk.
•
Corporate citizenship – make a positive contribution to communities through philanthropy, advancing diversity and inclusion, creating economic opportunity, and promoting environmental sustainability.
•
Shareholder value – deliver long-term value for shareholders.

On March 28, 2019, the Company announced that Timothy J. Sloan had informed the Company’s Board of Directors (Board) of his decision to retire from the Company, effective June 30, 2019, and to step down as the Company’s Chief Executive Officer and President and as a member of the Company’s Board effective March 28, 2019. The Board elected C. Allen Parker as interim CEO and President and as a member of the Board effective March 28, 2019. The Board is conducting an external search for a permanent CEO. During the search period, the Board will work closely with Mr. Parker and the Company’s leadership team to continue to move forward on Wells Fargo’s goals and commitments.

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. 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 an initial third-party review of the enhancements and improvements provided for in the plans. Until this third-party review is 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

3

management of temporary fluctuations. As of the end of first quarter 2019, our total consolidated assets, as calculated pursuant to the requirements of the consent order, were below our level of total assets as of December 31, 2017. Additionally, after removal of the asset cap, a second third-party review must also be conducted to assess the efficacy and sustainability of the enhancements and improvements.

Consent Orders with the Consumer Financial Protection Bureau and Office of the Comptroller of the Currency Regarding Compliance Risk Management Program, Automobile Collateral Protection Insurance Policies, and Mortgage Interest Rate Lock Extensions
On April 20, 2018, the Company entered into consent orders with the Consumer Financial Protection Bureau (CFPB) and the Office of the Comptroller of the Currency (OCC) to pay an aggregate of $1 billion in civil money penalties to resolve matters regarding the Company’s compliance risk management program and past practices involving certain automobile collateral protection insurance policies and certain mortgage interest rate lock extensions. As required by the consent orders, the Company submitted to the CFPB and OCC an 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. In addition, as required by the consent orders, the Company submitted for non-objection plans to remediate customers affected by the automobile collateral protection insurance and mortgage interest rate lock matters, as well as a plan for the management of remediation activities conducted by the Company.

Retail Sales Practices Matters
As we have previously reported, in September 2016 we announced settlements with the CFPB, the 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 completed financial remediation for the customers identified through the expanded account analysis. Additionally, customer outreach under the $142 million class-action lawsuit settlement concerning improper retail sales practices (Jabbari v. Wells Fargo Bank, N.A.) into which the Company entered to provide further remediation to customers, concluded in June 2018 and the period for customers to submit claims closed on July 7, 2018. The settlement administrator will pay claims following the calculation of compensatory damages and favorable resolution of pending appeals in the case.
For additional information regarding sales practices matters, including related legal matters, see the “Risk Factors” section in our 2018 Form 10-K and Note 14 (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, and we have accrued for the reasonably estimable remediation costs related to these matters, which amounts may change based on additional facts and information, as well as ongoing reviews and communications with our regulators. As part of this effort, we are focused on the following key areas:
•
Automobile Lending Business The Company is reviewing practices concerning the origination, servicing, and collection of consumer automobile loans, including matters related to certain insurance products. In July 2017, the Company announced it would remediate customers who may have been financially harmed due to issues related to automobile collateral protection insurance (CPI) policies purchased through a third-party vendor on their behalf (based on an understanding that the borrowers did not have physical damage insurance coverage on their automobiles as required during the term of their automobile loans). The Company is in the process of providing remediation to affected customers 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. In addition, the Company has identified certain issues related to the unused portion of guaranteed automobile protection waiver or insurance agreements between the customer and dealer and, by assignment, the lender, which will result in remediation to customers in certain states. The Company is in the process of providing remediation to affected customers. The Company has also identified certain issues related to its consumer automobile collections processes for customers in default, including legal notice practices in certain states and expenses charged in connection with certain repossessions. We expect remediation of affected customers will be required.
•
Add-on Products The Company is reviewing 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, as well as home and automobile warranty products, and memberships in discount programs. The products were sold to customers through a number of distribution channels and, in some cases, were acquired by the Company in connection with the purchase of loans. Sales of certain of these products have been discontinued over the past few years primarily due to decisions made by the Company in the normal course of business, and by mid-2017, the Company had ceased selling any of these products to consumers. We are in the process of providing remediation where we identify affected customers, and are also providing refunds to customers who purchased certain products. The review of the Company’s historical practices with respect to these products is ongoing, focusing on, among other topics, sales practices, adequacy of disclosures, customer servicing, and volume and type of customer complaints.
•
Consumer Deposit Account Freezing/Closing The Company is reviewing certain historical practices associated with 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. Based on our ongoing review, we expect remediation of affected customers will be required.

4
Overview (continued)

•
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 Board’s review is substantially completed and has not, to date, uncovered evidence of systemic or widespread issues in these businesses. Federal government agencies continue to review this matter.
•
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 both overcharges and undercharges to customers. These issues included 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 the charging of fees on some assets and accounts, has notified the affected customers, and is continuing its analysis of those assets and accounts. We have begun the process of providing remediation to affected customers and continue to review customer accounts to determine the extent of any necessary remediation, including with respect to additional accounts not yet reviewed, which may lead to additional accruals and fee suspensions.
•
Foreign Exchange Business The Company has completed an assessment, with the assistance of a third party, of its policies, practices, and procedures in its foreign exchange (FX) business. The FX business continues to revise and implement new policies, practices, and procedures, including those related to pricing. The Company has begun providing remediation to customers that may have received pricing inconsistent with commitments made to those customers, and rebates to customers where historic pricing, while consistent with contracts entered into with those customers, does not conform to recently implemented pricing review standards for prior periods. The Company’s review of affected customers is ongoing.
•
Mortgage Loan Modifications An internal review of the Company’s use of a mortgage loan modification underwriting tool identified a calculation error regarding foreclosure attorneys’ fees affecting certain accounts that were in the foreclosure process between April 13, 2010, and October 2, 2015, when the error was corrected. A subsequent expanded review identified related errors regarding the maximum allowable foreclosure attorneys’ fees permitted for certain accounts that were in the foreclosure process between March 15, 2010, and April 30, 2018, when new controls were implemented. Similar to the initial calculation error, these errors caused an overstatement of the attorneys’ fees that were included for purposes of determining whether a customer qualified for a mortgage loan modification or repayment plan pursuant to the requirements of government-sponsored enterprises (such as Fannie Mae and
 
Freddie Mac), the Federal Housing Administration (FHA), and the U.S. Department of Treasury’s Home Affordable Modification Program. Customers were not actually charged the incorrect attorneys’ fees. As previously disclosed, the Company has identified customers who, as a result of these errors, were incorrectly denied a loan modification or were not offered a loan modification or repayment plan in cases where they otherwise would have qualified, as well as instances where a foreclosure was completed after the loan modification was denied or the customer was deemed ineligible to be offered a loan modification or repayment plan. The number of previously disclosed customers affected by these errors may change as a result of ongoing validation, but is not expected to change materially upon completion of this validation. The Company has contacted substantially all of the identified customers affected by these errors and has provided remediation as well as the option to pursue no-cost mediation with an independent mediator. The Company’s review of its mortgage loan modification practices is ongoing, and we are providing remediation to the extent we identify additional affected customers as a result of this review.
•
Consumer Deposit Account Disclosures The Company is reviewing certain past disclosures to customers regarding the minimum qualifying debit card usage required to waive monthly service fees on certain consumer deposit accounts. Based on the possibility of confusion by some customers regarding the types of transactions that counted toward the waiver, we expect to refund certain monthly service and related fees to affected customers.

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 2018 Form 10-K and Note 14 (Legal Actions) to Financial Statements in this Report.

Financial Performance
Wells Fargo net income was $5.9 billion in first quarter 2019 with diluted earnings per common share (EPS) of $1.20, compared with $5.1 billion and $0.96, respectively, a year ago. In first quarter 2019:
•
revenue was $21.6 billion, down $325 million compared with a year ago, with net interest income up $73 million and noninterest income down $398 million;
•
average loans were $950.0 billion, down $1.0 billion from a year ago;
•
average deposits were $1.3 trillion, down $35.1 billion, or 3%, from a year ago;
•
return on assets (ROA) of 1.26% and return on equity (ROE) of 12.71%, were up from 1.09% and 10.58%, respectively, a year ago;
•
our credit results remained strong with a net charge-off rate of 0.30% (annualized) of average loans in first quarter 2019, compared with 0.32% (annualized) a year ago;
•
nonaccrual loans of $6.9 billion were down $434 million, or 6%, from a year ago; and
•
we returned $6.0 billion to shareholders through common stock dividends and net share repurchases, an increase of 49% from the $4.0 billion we returned in first quarter 2018 and the 15th consecutive quarter of returning more than $3 billion.

5

Balance Sheet and Liquidity
Our balance sheet remained strong during first quarter 2019 with strong credit quality and solid levels of liquidity and capital. Our total assets were $1.89 trillion at March 31, 2019. Cash and other short-term investments decreased $5.9 billion from December 31, 2018, reflecting lower deposit balances. Debt securities were $483.5 billion at March 31, 2019, a decrease of $1.2 billion from December 31, 2018, predominantly due to a decrease in available-for-sale debt securities. Loans were down $4.9 billion, or 1%, from December 31, 2018, driven by declines in real estate 1-4 family junior lien mortgage, commercial and industrial, and other revolving credit and installment loans, partially offset by an increase in commercial real estate mortgage loans.
Average deposits in first quarter 2019 were $1.3 trillion, down $35.1 billion from first quarter 2018. The decline was driven by lower Wholesale Banking and Wealth and Investment Management deposits, partially offset by higher retail banking deposits. Our average deposit cost in first quarter 2019 was 65 basis points, up 31 basis points from a year ago, driven by an increase in Wholesale Banking and Wealth and Investment Management deposit rates.

Credit Quality
Solid overall credit results continued in first quarter 2019 as losses remained low and we continued to originate high quality loans, reflecting our long-term risk focus. Net charge-offs were $695 million, or 0.30% (annualized) of average loans, in first quarter 2019, compared with $741 million a year ago (0.32%) (annualized). The decrease in net charge-offs in first quarter 2019, compared with a year ago, was predominantly driven by lower losses in the automobile portfolio, partially offset by increases in the commercial and industrial portfolio and the credit card portfolio.
Our commercial portfolio net charge-offs were $145 million, or 11 basis points (annualized) of average commercial loans, in first quarter 2019, compared with net charge-offs of $78 million, or 6 basis points (annualized), a year ago. Net consumer credit losses decreased to 51 basis points (annualized) of average consumer loans in first quarter 2019 from 60 basis points (annualized) in first quarter 2018.
The allowance for credit losses as of March 31, 2019, decreased $492 million compared with a year ago and increased $114 million from December 31, 2018. We had a $150 million build in the allowance for credit losses in first quarter 2019, compared with a $550 million release a year ago. The allowance coverage for total loans was 1.14% at March 31, 2019, compared with 1.19% a year ago and 1.12% at December 31, 2018. 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 $845 million in first quarter 2019, up from $191 million a year ago. The increase was predominantly due to an allowance build in first quarter 2019 reflecting a higher probability of slightly less favorable economic conditions, compared with an allowance release for the same period last year, reflecting improvement in our outlook for 2017 hurricane–related losses.
 
Nonperforming assets increased $394 million, or 6%, from December 31, 2018 and represented 0.77% of total loans. Nonaccrual loans increased $409 million from December 31, 2018, driven in part by a borrower in the utility sector, as well as increases in oil and gas. Foreclosed assets declined $15 million from December 31, 2018.

Capital
Our financial performance in first quarter 2019 allowed us to maintain a solid capital position, with total equity of $198.7 billion at March 31, 2019, compared with $197.1 billion at December 31, 2018. We returned $6.0 billion to shareholders in first quarter 2019 through common stock dividends and net share repurchases, which was 49% more than the $4.0 billion we returned in first quarter 2018. 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 109%. We continued to reduce our common shares outstanding through the repurchase of 97.4 million common shares in the quarter. We expect to reduce our common shares outstanding through share repurchases throughout the remainder of 2019.
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, 2019, up from 11.74% at December 31, 2018, but well above our internal target of 10%. As of March 31, 2019, our eligible external total loss absorbing capacity (TLAC) as a percentage of total risk-weighted assets was 23.85%, compared with the required minimum of 22.0%. 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.

6
Earnings Performance (continued)




Earnings Performance 
Wells Fargo net income for first quarter 2019 was $5.9 billion ($1.20 diluted earnings per common share), compared with $5.1 billion ($0.96 diluted per share) for the same period a year ago. Our financial performance in first quarter 2019 benefited from a $73 million increase in net interest income, a $1.1 billion decrease in noninterest expense, and a $493 million decline in income tax expense, partially offset by a $398 million decrease in noninterest income, and a $654 million increase in our provision for credit losses. Net income in first quarter 2019 included net discrete income tax benefits of $297 million related mostly to the results of U.S. federal and state income tax examinations and the accounting for stock compensation activity.
Revenue, the sum of net interest income and noninterest income, was $21.6 billion in first quarter 2019, compared with $21.9 billion in the same period a year ago. The decrease in revenue in first quarter 2019, compared with the same period a year ago, was due to a decrease in noninterest income, partially offset by an increase in net interest income. Our diversified sources of revenue generated by our businesses continued to be balanced between net interest income and noninterest income. In first quarter 2019, net interest income represented 57% of revenue, compared with 56% for the same period a year ago. Noninterest income was $9.3 billion in first quarter 2019, representing 43% of revenue, compared with $9.7 billion (44%) in first quarter 2018.

Net Interest Income
Net interest income is the interest earned on debt securities, loans (including yield-related loan fees) and other interest-earning assets minus the interest paid on deposits, short-term borrowings and long-term debt. The net interest margin is the average yield on earning assets minus the average interest rate paid for deposits and our other sources of funding. Net interest income and the net interest margin are presented on a taxable-equivalent basis in Table 1 to consistently reflect income from taxable and tax-exempt loans and debt and equity securities based on a 21% federal statutory tax rate for the periods ending
March 31, 2019 and 2018.
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, variable sources of interest income, such as loan fees, periodic dividends, and collection of interest on nonaccrual loans, can fluctuate from period to period.
 
Net interest income on a taxable-equivalent basis was $12.5 billion in first quarter 2019, compared with $12.4 billion for the same period a year ago. Net interest margin on a taxable-equivalent basis was 2.91% in first quarter 2019, compared with 2.84% for the same period a year ago. The increase in net interest income and net interest margin in first quarter 2019, compared with the same period a year ago, was driven by:
•
the repricing benefits from higher interest rates;
•
favorable hedge ineffectiveness accounting results; and 
•
a reduction in securities premium amortization driven by a refinement of our methodology to determine the remaining contractual life of our agency mortgage-backed securities portfolio;
partially offset by:
•
a smaller balance sheet and an unfavorable shift of yields on earnings assets compared with funding sources;
•
lower variable sources of interest income, primarily driven by a decrease in interest income received on nonaccrual loans; and
•
lower loan swap income due to unwinding the received-fixed loan swap portfolio.

Average earning assets decreased $30.0 billion in first quarter 2019, compared with the same period a year ago. The change was driven by decreases in:
•
average interest-earning deposits of $31.5 billion;
•
average equity securities of $6.7 billion;
•
average mortgage loans held for sale of $4.5 billion;
•
other earning assets of $1.6 billion and
•
average loans of $1.0 billion;
partially offset by increases in:
•
average debt securities of $10.0 billion; and
•
average federal funds sold and securities purchased under resale agreements of $5.4 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 were $1.26 trillion in first quarter 2019, compared with $1.30 trillion for the same period a year ago, and represented 133% of average loans in first quarter 2019, compared with 136% in first quarter 2018. Average deposits were 73% of average earning assets in first quarter 2019, compared with 74% in first quarter 2018. The average deposit cost for first quarter 2019 was 65 basis points, up 31 basis points from a year ago, driven by an increase in Wholesale Banking and Wealth and Investment Management deposit rates.

7

Table 1: Average Balances, Yields and Rates Paid (Taxable-Equivalent Basis) (1)(2)
  
Quarter ended March 31,
 
 
 
 
 
 
2019

 
 
 
 
 
2018

(in millions)
Average
balance

 
Yields/
rates

 
Interest
income/
expense

 
Average
balance

 
Yields/
rates

 
Interest
income/
expense

Earning assets
 
 
 
 
 
 
 
 
 
 
 
Interest-earning deposits with banks
$
140,784

 
2.33
%
 
$
810

 
172,291

 
1.49
%
 
$
632

Federal funds sold and securities purchased under resale agreements
83,539

 
2.40

 
495

 
78,135

 
1.40

 
271

Debt securities (3): 
 
 
 
 
 
 
 
 
 
 
 
Trading debt securities
89,378

 
3.58

 
798

 
78,715

 
3.24

 
637

Available-for-sale debt securities:
 
 
 
 
 
 
 
 
 
 
 
Securities of U.S. Treasury and federal agencies
14,070

 
2.14

 
74

 
6,426

 
1.66

 
26

Securities of U.S. states and political subdivisions
48,342

 
4.02

 
486

 
49,956

 
3.37

 
421

Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
Federal agencies
151,494

 
3.10

 
1,173

 
158,472

 
2.72

 
1,076

Residential and commercial
5,984

 
4.31

 
64

 
8,871

 
4.12

 
91

Total mortgage-backed securities
157,478

 
3.14

 
1,237

 
167,343

 
2.79

 
1,167

Other debt securities
46,788

 
4.46

 
517

 
48,094

 
3.73

 
444

Total available-for-sale debt securities
266,678

 
3.48

 
2,314

 
271,819

 
3.04

 
2,058

Held-to-maturity debt securities:
 
 
 
 
 
 
 
 
 
 
 
Securities of U.S. Treasury and federal agencies
44,754

 
2.20

 
243

 
44,723

 
2.20

 
243

Securities of U.S. states and political subdivisions
6,158

 
4.03

 
62

 
6,259

 
4.34

 
68

Federal agency and other mortgage-backed securities
96,004

 
2.74

 
656

 
90,789

 
2.38

 
541

Other debt securities
61

 
3.96

 
1

 
695

 
3.23

 
5

Total held-to-maturity debt securities
146,977

 
2.63

 
962

 
142,466

 
2.42

 
857

Total debt securities
503,033

 
3.25

 
4,074

 
493,000

 
2.89

 
3,552

Mortgage loans held for sale (4)
13,898

 
4.37

 
152

 
18,406

 
3.89

 
179

Loans held for sale (4)
1,862

 
5.25

 
24

 
2,011

 
4.92

 
24

Loans:
 
 
 
 
 
 
 
 
 
 
 
Commercial loans:
 
 
 
 
 
 
 
 
 
 
 
Commercial and industrial – U.S.
286,577

 
4.48

 
3,169

 
272,040

 
3.85

 
2,584

Commercial and industrial – Non U.S.
62,821

 
3.90

 
604

 
60,216

 
3.23

 
479

Real estate mortgage
121,417

 
4.58

 
1,373

 
126,200

 
4.05

 
1,262

Real estate construction
22,435

 
5.43

 
301

 
24,449

 
4.54

 
274

Lease financing
19,391

 
4.61

 
224

 
19,265

 
5.30

 
255

Total commercial loans
512,641

 
4.48

 
5,671

 
502,170

 
3.91

 
4,854

Consumer loans:
 
 
 
 
 
 
 
 
 
 
 
Real estate 1-4 family first mortgage
285,214

 
3.96

 
2,821

 
284,207

 
4.02

 
2,852

Real estate 1-4 family junior lien mortgage
33,791

 
5.75

 
481

 
38,844

 
5.13

 
493

Credit card
38,182

 
12.88

 
1,212

 
36,468

 
12.75

 
1,147

Automobile
44,833

 
5.19

 
574

 
51,469

 
5.16

 
655

Other revolving credit and installment
35,349

 
7.14

 
623

 
37,866

 
6.46

 
604

Total consumer loans
437,369

 
5.26

 
5,711

 
448,854

 
5.16

 
5,751

Total loans (4)
950,010

 
4.84

 
11,382

 
951,024

 
4.50

 
10,605

Equity securities
33,080

 
2.56

 
211

 
39,754

 
2.35

 
233

Other
4,416

 
1.63

 
18

 
6,015

 
1.21

 
19

Total earning assets
$
1,730,622

 
4.00
%
 
$
17,166

 
1,760,636

 
3.55
%
 
$
15,515

Funding sources
 
 
 
 
 
 
 
 
 
 
 
Deposits:
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing checking
$
56,253

 
1.42
%
 
$
197

 
67,774

 
0.77
%
 
$
129

Market rate and other savings
688,568

 
0.50

 
847

 
679,068

 
0.22

 
368

Savings certificates
25,231

 
1.26

 
78

 
20,018

 
0.34

 
17

Other time deposits
97,830

 
2.67

 
645

 
76,589

 
1.84

 
347

Deposits in foreign offices
55,443

 
1.89

 
259

 
94,810

 
0.98

 
229

Total interest-bearing deposits
923,325

 
0.89

 
2,026

 
938,259

 
0.47

 
1,090

Short-term borrowings
108,651

 
2.23

 
597

 
101,779

 
1.24

 
312

Long-term debt
233,172

 
3.32

 
1,927

 
226,062

 
2.80

 
1,576

Other liabilities
25,292

 
2.28

 
143

 
27,927

 
1.92

 
132

Total interest-bearing liabilities
1,290,440

 
1.47

 
4,693

 
1,294,027

 
0.97

 
3,110

Portion of noninterest-bearing funding sources
440,182

 
—

 
—

 
466,609

 
—

 
—

Total funding sources
$
1,730,622

 
1.09

 
4,693

 
1,760,636

 
0.71

 
3,110

Net interest margin and net interest income on a taxable-equivalent basis (5)
 
 
2.91
%
 
$
12,473

 
 
 
2.84
%
 
$
12,405

Noninterest-earning assets
 
 
 
 
 
 
 
 
 
 
 
Cash and due from banks
$
19,614

 
  
 
  
 
18,853

 
  
 
  
Goodwill
26,420

 
  
 
  
 
26,516

 
  
 
  
Other
106,435

 
 
 
 
 
109,891

 
 
 
 
Total noninterest-earning assets
$
152,469

 
 
 
 
 
155,260

 
 
 
 
Noninterest-bearing funding sources
 
 
 
 
 
 
  
 
 
 
 
Deposits
$
338,737

 
 
 
 
 
358,919

 
 
 
 
Other liabilities
55,565

 
 
 
 
 
56,770

 
 
 
 
Total equity
198,349

 
 
 
 
 
206,180

 
 
 
 
Noninterest-bearing funding sources used to fund earning assets
(440,182
)
 
 
 
 
 
(466,609
)
 
 
 
 
Net noninterest-bearing funding sources
$
152,469

 
 
 
 
 
155,260

 
 
 
 
Total assets
$
1,883,091

 
 
 
 
 
1,915,896

 
 
 
 
(1)
Our average prime rate was 5.50% and 4.52% for the quarters ended March 31, 2019 and 2018, respectively. The average three-month London Interbank Offered Rate (LIBOR) was 2.69% and 1.93% for the quarters ended March 31, 2019 and 2018, respectively.
(2)
Yields/rates and amounts include the effects of hedge and risk management activities associated with the respective asset and liability categories.
(3)
Yields/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 $162 million and $167 million for the quarters ended March 31, 2019 and 2018, respectively, predominantly related to tax-exempt income on certain loans and securities. The federal statutory tax rate utilized was 21% for periods presented.

8
Earnings Performance (continued)




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

(in millions)
2019

 
2018

 
Change

Service charges on deposit accounts
$
1,094

 
1,173

 
(7
)%
Trust and investment fees:
 
 
 
 
 
Brokerage advisory, commissions and other fees
2,193

 
2,403

 
(9
)
Trust and investment management
786

 
850

 
(8
)
Investment banking
394

 
430

 
(8
)
Total trust and investment fees
3,373

 
3,683

 
(8
)
Card fees
944

 
908

 
4

Other fees:
 
 
 
 

Lending related charges and fees (1)
347

 
380

 
(9
)
Cash network fees
109

 
126

 
(13
)
Commercial real estate brokerage commissions
81

 
85

 
(5
)
Wire transfer and other remittance fees
113

 
116

 
(3
)
All other fees
120

 
93

 
29

Total other fees
770


800

 
(4
)
Mortgage banking:
 
 
 
 

Servicing income, net
364

 
468

 
(22
)
Net gains on mortgage loan origination/sales activities
344

 
466

 
(26
)
Total mortgage banking
708


934

 
(24
)
Insurance
96

 
114

 
(16
)
Net gains from trading activities
357

 
243

 
47

Net gains on debt securities
125

 
1

 
NM

Net gains from equity securities
814

 
783

 
4

Lease income
443

 
455

 
(3
)
Life insurance investment income
159

 
164

 
(3
)
All other
415

 
438

 
(5
)
Total
$
9,298


9,696

 
(4
)
NM – Not meaningful
(1)
Represents combined amount of previously reported “Charges and fees on loans” and “Letters of credit fees”.
Noninterest income was $9.3 billion in first quarter 2019, compared with $9.7 billion for the same period a year ago. This income represented 43% of revenue for first quarter 2019, compared with 44% for the same period a year ago. The decline in noninterest income in first quarter 2019, compared with the same period a year ago, was predominantly due to lower trust and investment fees, mortgage banking income, net gains on nonmarketable equity securities, and service charges on deposit accounts. These decreases were partially offset by higher deferred compensation gains (offset in employee benefits expense) and higher gains from trading and debt securities. For more information on our performance obligations and the nature of services performed for certain of our revenues discussed below, see Note 18 (Revenue from Contracts with Customers) to Financial Statements in this Report.
Service charges on deposit accounts were $1.1 billion in first quarter 2019, compared with $1.2 billion for the same period a year ago. The decrease in first quarter 2019, compared with the same period a year ago, was due to lower monthly service fees and lower treasury management fees. A significant portion of the lower treasury management fees were due to the impact of a higher earnings credit rate applied to commercial accounts due to increased interest rates. The decrease in service charges on deposit accounts also reflected $35 million in fee waivers and reversals for customers including those affected by our data
 
center system outage in February 2019, and the government shutdown in first quarter 2019.
Brokerage advisory, commissions and other fees were $2.2 billion in first quarter 2019, compared with $2.4 billion for the same period in 2018. The decrease in first quarter 2019, compared with the same period a year ago, was predominantly due to lower asset-based fees as well as lower transactional commission revenue. Retail brokerage client assets totaled $1.6 trillion at both March 31, 2019 and 2018. All retail brokerage services are provided by our 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 declined to $786 million in first quarter 2019, from $850 million for the same period a year ago, due to decreases in trust fees, investment management fees, and mutual fund asset fees, driven by lower average assets under management. Our AUM totaled $661.1 billion at March 31, 2019, compared with $680.4 billion at March 31, 2018, with substantially all of our AUM managed by our WIM operating

9

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 both March 31, 2019 and 2018.
Investment banking fees declined to $394 million in first quarter 2019, from $430 million for the same period in 2018, predominantly due to lower equity and debt originations, partially offset by higher advisory fees.
Card fees were $944 million in first quarter 2019, compared with $908 million for the same period in 2018, predominantly due to higher interchange fees driven by increased purchase activity, partially offset by higher rewards costs.
Other fees decreased to $770 million in first quarter 2019, from $800 million for the same period in 2018, driven by lower lending related charges and fees and lower cash network fees, partially offset by an increase in all other fees.
Mortgage banking noninterest income decreased to $708 million in first quarter 2019, from $934 million for the same period a year ago, driven by decreases in both net servicing income and net gains on mortgage loan origination/sales activities.
In addition to servicing fees, net 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 $364 million for first quarter 2019 included a $71 million net MSR valuation gain ($891 million decrease in the fair value of the MSRs and a $962 million hedge gain). 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).
Our portfolio of loans serviced for others was $1.68 trillion at March 31, 2019, and $1.71 trillion at December 31, 2018. At March 31, 2019, the ratio of combined residential and commercial MSRs to related loans serviced for others was 0.88%, compared with 0.94% at December 31, 2018. 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 $344 million in first quarter 2019, compared with $466 million for the same period a year ago. The decrease in first quarter 2019, compared with the same period a year ago, was predominantly due to lower mortgage loan originations. Total mortgage loan originations were $33 billion for first quarter 2019, compared with $43 billion for the same period a year ago. The production margin on residential held-for-sale mortgage loan originations, which represents net gains on residential mortgage loan origination/sales activities divided by total residential held-for-sale mortgage loan 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,
 
 
 
2019

2018

Net gains on mortgage loan origination/sales activities (in millions):
 
 
 
Residential
(A)
$
232

324

Commercial
 
47

76

Residential pipeline and unsold/repurchased loan management (1)
 
65

66

Total
 
$
344

466

Residential real estate originations (in billions):
 
 
 
Held-for-sale
(B)
$
22

34

Held-for-investment
 
11

9

Total
 
$
33

43

Production margin on residential held-for-sale mortgage loan originations
(A)/(B)
1.05
%
0.94

(1)
Predominantly includes the results of Government National Mortgage Association (GNMA) loss mitigation activities, interest rate management activities and changes in estimate to the liability for mortgage loan repurchase losses.
The production margin was 1.05% for first quarter 2019, compared with 0.94% for the same period in 2018. The increase in the production margin in first quarter 2019, compared with the same period in 2018, was largely attributable to a shift to more retail origination volume, which has a higher production margin. Mortgage applications were $64 billion for first quarter 2019, compared with $58 billion for the same period a year ago. The 1-4 family first mortgage unclosed application pipeline was $32 billion at March 31, 2019, compared with $24 billion at March 31, 2018. 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 11 (Mortgage Banking Activities) and Note 16 (Fair Values of Assets and Liabilities) to Financial Statements in this Report.
Insurance income was $96 million in first quarter 2019, compared with $114 million in the same period a year ago. The decrease in first quarter 2019, compared with the same period a year ago, was primarily driven by reduced commission income related to the sale of certain personal insurance agency relationships in second quarter 2018.
Net gains from trading activities, which reflect unrealized changes in fair value of our trading positions and realized gains and losses, were $357 million in first quarter 2019, compared with $243 million in the same period a year ago. The increase in first quarter 2019, compared with the same period a year ago, was due to growth in asset-backed securities trading driven by higher residential mortgage-backed securities (RMBS) trading volumes, as well as higher credit trading. Net gains from trading activities do not include interest and dividend income and expense on trading securities. Those amounts are reported within interest income from trading assets and other interest expense from trading liabilities. 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.

10
Earnings Performance (continued)




Net gains on debt and equity securities totaled $939 million in first quarter 2019, compared with $784 million for the same period in 2018, after other-than-temporary impairment (OTTI) write-downs of $81 million for first quarter 2019, compared with $30 million for the same period in 2018. The increase in net gains on debt and equity securities in first quarter 2019, compared with the same period a year ago, was predominantly due to higher deferred compensation plan investment results (offset in employee benefits expense – see Table 3a in this Report for more information) and higher net gains on debt securities, partially offset by lower net gains from nonmarketable equity securities. The increase in OTTI in first quarter 2019, compared with the same period a year ago, was predominantly driven by higher write-downs in municipal debt securities and commercial mortgage-backed securities.
Lease income was $443 million in first quarter 2019, compared with $455 million for the same period a year ago. The decrease was driven by lower equipment lease income.
 
All other income was $415 million in first quarter 2019, compared with $438 million for the same period a year ago. All other income includes losses on low income housing tax credit investments, foreign currency adjustments, income from investments accounted for under the equity method, hedge accounting results related to hedges of foreign currency risk, and the results of certain economic hedges, any of which can cause lower net gains or increased net losses, resulting in a decrease to all other income. The decrease in all other income in first quarter 2019, compared with the same period a year ago, reflected a pre-tax gain from the sale of Wells Fargo Shareowner Services in first quarter 2018 and a lower benefit from hedge ineffectiveness accounting results in first quarter 2019, partially offset by a $148 million pre-tax gain from the sale of Business Payroll Services in first quarter 2019 and a loss related to the sale of certain assets and liabilities of Reliable Financial Services, Inc. (a subsidiary of Wells Fargo’s automobile financing business) in first quarter 2018. All other income also included a $608 million and a $643 million gain from the sales of purchased credit-impaired Pick-a-Pay loans for first quarter 2019 and 2018, respectively.



11

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

(in millions)
2019

 
2018

 
Change

Salaries
$
4,425

 
4,363

 
1
 %
Commission and incentive compensation
2,845

 
2,768

 
3

Employee benefits
1,938

 
1,598

 
21

Equipment
661

 
617

 
7

Net occupancy (1)
717

 
713

 
1

Core deposit and other intangibles
28

 
265

 
(89
)
FDIC and other deposit assessments
159

 
324

 
(51
)
Outside professional services
678

 
821

 
(17
)
Contract services
563

 
447

 
26

Operating losses
238

 
1,468

 
(84
)
Operating leases (2)
286

 
320

 
(11
)
Advertising and promotion
237

 
153

 
55

Outside data processing
167

 
162

 
3

Travel and entertainment
147

 
152

 
(3
)
Postage, stationery and supplies
122

 
142

 
(14
)
Telecommunications
91

 
92

 
(1
)
Foreclosed assets
37

 
38

 
(3
)
Insurance
25

 
26

 
(4
)
All other
552

 
573

 
(4
)
Total
$
13,916

 
15,042

 
(7
)
(1)
Represents expenses for both leased and owned properties.
(2)
Represents expenses for assets we lease to customers.

Noninterest expense was $13.9 billion in first quarter 2019, down 7% from $15.0 billion a year ago. The decrease in first quarter 2019, compared with the same period a year ago, was substantially due to lower operating losses.
Personnel expenses, which include salaries, commissions, incentive compensation, and employee benefits, were up $479 million, or 5%, in first quarter 2019, compared with the
 
same period a year ago. The increase was due to higher deferred compensation costs (offset in net gains from equity securities), higher stock incentive compensation expense, and annual salary increases, partially offset by lower revenue-related incentive compensation. Table 3a presents deferred compensation plan investment results.
Table 3a: Deferred Compensation Plan Investment Results
 
 Quarter ended
 
(in millions)
Mar 31,
2019

 
Mar 31,
2018

Net interest income
$
13

 
10

Net gains (losses) from equity securities
345

 
(6
)
Total revenue from deferred compensation plan investments
358

 
4

Employee benefits expense
357

 
4

Income before income tax expense
$
1

 
—


Equipment expense was up $44 million, or 7%, in first quarter 2019, compared with the same period a year ago, due to higher computer software licensing and maintenance and depreciation expense.
Core deposit and other intangibles expense was down $237 million, or 89%, in first quarter 2019, compared with the same period a year ago, due to lower amortization expense reflecting the end of the 10-year amortization period on Wachovia intangibles.
Federal Deposit Insurance Corporation (FDIC) and other deposit assessments were down $165 million, or 51%, in first quarter 2019, compared with the same period a year ago, due to the completion of the FDIC temporary surcharge which ended September 30, 2018.
 
Outside professional and contract services expense was down $27 million, or 2%, in first quarter 2019, compared with the same period a year ago, reflecting a reduction in remediation-related project spending.
Operating losses were down $1.2 billion, or 84%, in first quarter 2019, compared with the same period a year ago, driven by lower litigation accruals. First quarter 2018 included an $800 million discrete litigation accrual in connection with entering into the consent orders with the CFPB and OCC on April 20, 2018.
Advertising and promotion expense was up $84 million, or 55%, in first quarter 2019, compared with the same period a year ago, due to increases in marketing and branding campaign volumes.

12
Earnings Performance (continued)




Our efficiency ratio was 64.4% in first quarter 2019, compared with 68.6% in first quarter 2018.

Income Tax Expense
Our effective income tax rate was 13.1% and 21.1% for first quarter 2019 and 2018, respectively. The lower rate in first quarter 2019 was related to net discrete income tax benefits of $297 million related mostly to the results of U.S. federal and state income tax examinations and the accounting for stock compensation activity. The first quarter 2018 rate reflected the non-tax deductible treatment of an $800 million discrete litigation accrual in connection with entering into the consent orders with the CFPB and OCC on April 20, 2018.
 
Operating Segment Results
We are organized for management reporting purposes into three operating segments: Community Banking; Wholesale Banking; and Wealth and Investment Management (WIM). These segments are defined by product type and customer segment and their results are based on our management accounting process, for which there is no comprehensive, authoritative financial accounting guidance equivalent to generally accepted accounting principles (GAAP). 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 22 (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)
 
2019

 
2018

 
2019

 
2018

 
2019

 
2018

 
2019

 
2018

 
2019

 
2018

Quarter ended March 31,
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue
 
$
11,750

 
11,830

 
7,111

 
7,279

 
4,079

 
4,242

 
(1,331
)
 
(1,417
)
 
21,609

 
21,934

Provision (reversal of provision) for credit losses
 
710

 
218

 
134

 
(20
)
 
4

 
(6
)
 
(3
)
 
(1
)
 
845

 
191

Noninterest expense
 
7,689

 
8,702

 
3,838

 
3,978

 
3,303

 
3,290

 
(914
)
 
(928
)
 
13,916

 
15,042

Net income (loss)
 
2,823

 
1,913

 
2,770

 
2,875

 
577

 
714

 
(310
)
 
(366
)
 
5,860

 
5,136

Average loans
 
$
458.2

 
470.5

 
476.4

 
465.1

 
74.4

 
73.9

 
(59.0
)
 
(58.5
)
 
950.0

 
951.0

Average deposits
 
765.6

 
747.5

 
409.8

 
446.0

 
153.2

 
177.9

 
(66.5
)
 
(74.2
)
 
1,262.1

 
1,297.2

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

13

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 the other operating segments and results of investments in our affiliated venture capital and private equity partnerships. We continue to wind down the personal insurance business and expect to substantially complete these activities in the first half of 2019. 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)
2019

 
2018

 
% Change

Net interest income
$
7,248

 
7,195

 
1
 %
Noninterest income:
 
 
 
 
 
Service charges on deposit accounts
610

 
639

 
(5
)
Trust and investment fees:
 
 
 
 

Brokerage advisory, commissions and other fees (1)
449

 
478

 
(6
)
Trust and investment management (1)
210

 
233

 
(10
)
Investment banking (2)
(20
)
 
(10
)
 
(100
)
Total trust and investment fees
639

 
701

 
(9
)
Card fees
858

 
821

 
5

Other fees
332

 
327

 
2

Mortgage banking
641

 
842

 
(24
)
Insurance
11

 
28

 
(61
)
Net gains (losses) from trading activities
5

 
(1
)
 
600

Net gains on debt securities
37

 
—

 
NM

Net gains from equity securities (3)
601

 
684

 
(12
)
Other income of the segment
768

 
594

 
29

Total noninterest income
4,502

 
4,635

 
(3
)
 
 
 
 
 

Total revenue
11,750

 
11,830

 
(1
)
 
 
 
 
 

Provision for credit losses
710

 
218

 
226

Noninterest expense:
 
 
 
 

Personnel expense
5,981

 
5,511

 
9

Equipment
641

 
596

 
8

Net occupancy
542

 
534

 
1

Core deposit and other intangibles
1

 
101

 
(99
)
FDIC and other deposit assessments
106

 
181

 
(41
)
Outside professional services
316

 
397

 
(20
)
Operating losses
219

 
1,440

 
(85
)
Other expense of the segment
(117
)
 
(58
)
 
NM

Total noninterest expense
7,689

 
8,702

 
(12
)
Income before income tax expense and noncontrolling interests
3,351

 
2,910

 
15

Income tax expense
424

 
809

 
(48
)
Net income from noncontrolling interests (4)
104

 
188

 
(45
)
Net income
$
2,823

 
1,913

 
48

Average loans
$
458.2

 
470.5

 
(3
)
Average deposits
765.6

 
747.5

 
2

NM – Not meaningful
(1)
Represents income on products and services for WIM customers served through Community Banking distribution channels which is offset in our WIM segment and eliminated in consolidation.
(2)
Includes syndication and underwriting fees paid to Wells Fargo Securities which are offset in our Wholesale Banking segment and eliminated in consolidation.
(3)
Primarily 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 $2.8 billion for first quarter 2019, up $910 million, or 48%, compared with the same period a year ago. Revenue was $11.8 billion for first quarter 2019, down $80 million, or 1%, from the same period a year ago. The decrease in revenue from first quarter 2018 was due to lower mortgage banking income, trust and investment fees, and market sensitive revenue (consists of net gains from trading activities, debt securities and equity securities), partially offset by higher card fees, other income and net interest income. Average loans of $458.2 billion in first quarter 2019 decreased $12.3 billion, or 3%, from first quarter 2018, as growth in nonconforming mortgage loan originations and consumer credit card loans was more than offset by declines in automobile loans and legacy consumer real estate portfolios, including purchased credit-impaired (PCI) Pick-a-Pay and junior lien mortgage loans due to run-off and sales. Average deposits of $765.6 billion in
 
first quarter 2019 increased $18.1 billion, or 2%, from first quarter 2018.
Noninterest expense was $7.7 billion in first quarter 2019, down $1.0 billion, or 12%, from first quarter 2018, predominantly due to lower operating losses, core deposit and other intangibles amortization expense, outside professional services, and FDIC expense, partially offset by higher personnel expense. The provision for credit losses increased $492 million from first quarter 2018, predominantly due to an allowance build in first quarter 2019, reflecting a higher probability of slightly less favorable economic conditions, compared with an allowance release in first quarter 2018 primarily due to improvement in our outlook for 2017 hurricane–related losses. The allowance build was partially offset by lower net charge-offs in the automobile portfolio. Income tax expense decreased $385 million from first quarter 2018, and included net discrete income tax benefits

14
Earnings Performance (continued)




related mostly to the results of U.S. federal and state income tax examinations and the accounting for stock compensation activity.

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
 
Commercial Banking, Commercial Real Estate, Corporate and Investment Banking, Credit Investment Portfolio, Treasury Management, and Commercial Capital. 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)
2019

 
2018

 
% Change

Net interest income
$
4,534

 
4,532

 
—
 %
Noninterest income:
 
 
 
 
 
Service charges on deposit accounts
483

 
534

 
(10
)
Trust and investment fees:
 
 
 
 

Brokerage advisory, commissions and other fees
78

 
67

 
16

Trust and investment management
114

 
113

 
1

Investment banking
412

 
440

 
(6
)
Total trust and investment fees
604

 
620

 
(3
)
Card fees
86

 
87

 
(1
)
Other fees
437

 
472

 
(7
)
Mortgage banking
68

 
93

 
(27
)
Insurance
78

 
79

 
(1
)
Net gains from trading activities
333

 
225

 
48

Net gains on debt securities
88

 
1

 
NM

Net gains from equity securities
77

 
93

 
(17
)
Other income of the segment
323

 
543

 
(41
)
Total noninterest income
2,577

 
2,747

 
(6
)
 
 
 
 
 

Total revenue
7,111

 
7,279

 
(2
)
 
 
 
 
 

Provision (reversal of provision) for credit losses
134

 
(20
)
 
770

Noninterest expense:
 
 
 
 

Personnel expense
1,510

 
1,536

 
(2
)
Equipment
9

 
12

 
(25
)
Net occupancy
95

 
100

 
(5
)
Core deposit and other intangibles
24

 
95

 
(75
)
FDIC and other deposit assessments
45

 
122

 
(63
)
Outside professional services
184

 
233

 
(21
)
Operating losses
1

 
8

 
(88
)
Other expense of the segment
1,970

 
1,872

 
5

Total noninterest expense
3,838

 
3,978

 
(4
)
Income before income tax expense and noncontrolling interests
3,139

 
3,321

 
(5
)
Income tax expense
369

 
448

 
(18
)
Net loss from noncontrolling interests
—

 
(2
)
 
100

Net income
$
2,770

 
2,875

 
(4
)
Average loans
$
476.4

 
465.1

 
2

Average deposits
409.8

 
446.0

 
(8
)
NM – Not meaningful
Wholesale Banking reported net income of $2.8 billion in first quarter 2019, down $105 million, or 4%, from the same period a year ago. Revenue decreased $168 million, or 2%, from first quarter 2018, largely due to the gain related to the sale of Wells Fargo Shareowner Services in first quarter 2018, a decrease in service charges on deposit accounts driven by lower treasury management fees, and lower mortgage banking income, partially offset by higher market sensitive revenue. Net interest income of $4.5 billion in first quarter 2019 was relatively stable compared with the same period a year ago. Average loans of $476.4 billion in first quarter 2019, increased $11.3 billion, or 2%, from first quarter 2018, as growth in commercial and industrial loans in Corporate and Investment Banking and Commercial Capital were partially offset by lower commercial real estate lending. Average deposits of $409.8 billion in first quarter 2019 decreased $36.2 billion, or 8%, from first quarter 2018. The decline in average deposits in first quarter 2019, compared with the same period a year ago, was driven by actions taken in the first half of 2018 in response to the asset cap included in the FRB consent order on February 2, 2018, and declines across many businesses as commercial customers allocated more cash to higher-rate
 
alternatives. Noninterest expense decreased $140 million, or 4%, from first quarter 2018, mostly due to lower FDIC assessments, core deposit and other intangibles amortization, personnel expenses and operating lease expense. This decrease was partially offset by higher regulatory, risk, and technology expenses. The provision for credit losses increased $154 million from first quarter 2018 predominately due to an allowance build in first quarter 2019, reflecting higher nonaccrual loans, compared with an allowance release in first quarter 2018, as well as lower recoveries in first quarter 2019.

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

15

investment management capabilities delivered to global institutional clients through separate accounts and the Wells Fargo Funds. On April 9, 2019, we announced an agreement to sell our Institutional Retirement and Trust
 
business. The transaction is expected to close in third quarter 2019. 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)
2019

 
2018

 
% Change

Net interest income
$
1,101

 
1,112

 
(1
)%
Noninterest income:
 
 
 
 
 
Service charges on deposit accounts
4

 
4

 
—

Trust and investment fees:
 
 
 
 
 
Brokerage advisory, commissions and other fees
2,124

 
2,344

 
(9
)
Trust and investment management
676

 
743

 
(9
)
Investment banking
5

 
—

 
NM

Total trust and investment fees
2,805

 
3,087

 
(9
)
Card fees
1

 
1

 
—

Other fees
4

 
4

 
—

Mortgage banking
(3
)
 
(3
)
 
—

Insurance
17

 
18

 
(6
)
Net gains from trading activities
19

 
19

 
—

Net gains on debt securities
—

 
—

 
NM

Net gains from equity securities
136

 
6

 
NM

Other income of the segment
(5
)
 
(6
)
 
17

Total noninterest income
2,978

 
3,130

 
(5
)
 
 
 
 
 
 
Total revenue
4,079

 
4,242

 
(4
)
 
 
 
 
 
 
Provision (reversal of provision) for credit losses
4

 
(6
)
 
167

Noninterest expense: