10-Q 1 wfc-03312018x10q.htm FORM 10-Q Document


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended 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
 
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

Equity Securities
 
8

Other Assets
 
9

Securitizations and Variable Interest Entities
 
10

Mortgage Banking Activities
 
11

Intangible Assets
 
12

Guarantees, Pledged Assets and Collateral, and Other Commitments
 
13

Legal Actions
 
14

Derivatives
 
15

Fair Values of Assets and Liabilities
 
16

Preferred Stock
 
17

Revenue from Contracts with Customers
 
18

Employee Benefits
 
19

Earnings Per Common Share
 
20

Other Comprehensive Income
 
21

Operating Segments
 
22

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, 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) 2016-01Financial 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.

2

Overview (continued)

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


3


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,

4

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

5


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.

6

Earnings Performance (continued)




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

7


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 2017-12Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities.

8

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 RewindSM, 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.

9


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.

10

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.

11


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.


12

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.

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 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.


14

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.


15


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

 
66

 
(91
)
Other income of the segment