Wells Fargo Reports Preliminary First Quarter 2018 Net Income of $5.9 Billion; Diluted EPS of $1.12

Wells Fargo & Company (NYSE:WFC):

• Our preliminary financial results may need to be revised to reflect additional accruals for the CFPB/OCC matter, discussed on page 2, when we file our final financial statements in our Quarterly Report on Form 10-Q.
• Preliminary financial results:
  • Preliminary net income of $5.9 billion, compared with $5.6 billion in first quarter 2017
  • Diluted earnings per share (EPS) of $1.12, compared with $1.03
  • Revenue of $21.9 billion, down from $22.3 billion
    • Net interest income of $12.2 billion, down $86 million, or 1 percent
    • Noninterest income of $9.7 billion, down $235 million, or 2 percent
  • Average deposits of $1.3 trillion, down $2.0 billion
  • Average loans of $951.0 billion, down $12.6 billion, or 1 percent
  • Return on assets (ROA) of 1.26 percent, return on equity (ROE) of 12.37 percent, and return on average tangible common equity (ROTCE) of 14.75 percent¹
• Credit quality:
  • Provision expense of $191 million, down $414 million, or 68 percent, from first quarter 2017
    • Net charge-offs of $741 million, down $64 million
      • Net charge-offs were 0.32 percent of average loans (annualized), down from 0.34 percent
    • Reserve release² of $550 million, compared with a $200 million reserve release in first quarter 2017
  • Nonaccrual loans of $7.7 billion, down $2.0 billion, or 21 percent
• Capital position and return:
  • Common Equity Tier 1 ratio (fully phased-in) of 12.0 percent³
  • Returned $4.0 billion to shareholders through common stock dividends and net share repurchases, up 30 percent from $3.1 billion in first quarter 2017
    • Net share repurchases of $2.1 billion, up 78 percent
    • Period-end common shares outstanding down 122.9 million shares

Final financial results and other disclosures will be reported in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2018, and may differ materially from the results and disclosures in this document due to, among other things, the completion of final review procedures, the occurrence of subsequent events, including developments with respect to the resolution of regulatory matters, which could cause us to take additional accruals in the first quarter, or the discovery of additional information.

Wells Fargo & Company (NYSE:WFC) reported preliminary results, including net income of $5.9 billion, or $1.12 per diluted common share, for first quarter 2018, compared with $5.6 billion, or $1.03 per share, for first quarter 2017, and $6.2 billion, or $1.16 per share, for fourth quarter 2017. These preliminary results are subject to change due to our ongoing discussions with the Consumer Financial Protection Bureau (CFPB) and Office of the Comptroller of the Currency (OCC) to resolve matters regarding our compliance risk management program and our past practices involving certain automobile collateral protection insurance policies and certain mortgage interest rate lock extensions (the “CFPB/OCC matter”), which the CFPB and OCC have collectively offered to resolve for an aggregate of $1 billion in civil money penalties. At this time, we are unable to predict final resolution of the CFPB/OCC matter and cannot reasonably estimate our related loss contingency. Accordingly, the preliminary financial results we report today may need to be revised to reflect additional accruals for the CFPB/OCC matter when we file our final financial statements in our Quarterly Report on Form 10-Q with the SEC.

Chief Executive Officer Tim Sloan said, “I’m confident that our outstanding team will continue to transform Wells Fargo into a better, stronger company; however, we recognize that it will take time to put all of our challenges behind us. During the first quarter our team members continued to focus on our vision of satisfying our customers’ financial needs and helping them succeed financially. We also made progress on our priority of rebuilding trust with our customers, team members, communities, regulators, and shareholders. The efforts to build a better Wells Fargo during the quarter included continuing to improve our compliance and operational risk management programs, investing in innovative products and services that enhance the customer experience including the roll-out of our digital mortgage application and predictive banking service, and increasing the minimum hourly pay rate for U.S.-based team members. We also began executing on our goal to increase donations to nonprofit and community organizations by approximately 40 percent in 2018, and we’re proud that Wells Fargo was recently named number one in U.S. workplace giving for the ninth consecutive year by United Way Worldwide. In addition, we continued to make progress on our expense savings initiatives and remain on track to achieve our target of $4 billion in expense reductions by the end of 2019.”

Chief Financial Officer John Shrewsberry said, “Wells Fargo preliminarily reported $5.9 billion of net income in the first quarter, subject to the resolution of the CFPB/OCC matter noted in today's earnings release. Our financial results included continued strong credit performance, liquidity and capital levels. We returned $4.0 billion to shareholders through common stock dividends and net share repurchases in the first quarter, up 30 percent from a year ago. Our capital remained well above our internal target, and returning more capital to shareholders remains a priority. Our expenses in the first quarter included typically higher personnel expense; however, our noninterest expense dollar target range for full year 2018 remains unchanged.”

Net Interest Income

Net interest income in first quarter 2018 was $12.2 billion, down $75 million, compared with fourth quarter 2017, driven primarily by two fewer days in the quarter, hedge ineffectiveness accounting, and lower loan swap income related to the unwind of the receive-fixed swap portfolio, partially offset by the net repricing impact of higher interest rates.

Net interest margin was 2.84 percent, flat compared with fourth quarter 2017. The negative impact to net interest margin from hedge ineffectiveness accounting and lower loan swap income was offset by the net repricing benefit of higher interest rates.

Noninterest Income

Noninterest income in first quarter was $9.7 billion, down $41 million, compared with fourth quarter 2017. First quarter noninterest income reflected lower deposit service charges, card fees, other fees and insurance income, partially offset by higher market sensitive revenue⁴. First quarter results include the impact of the adoption of new accounting standards for Recognition and Measurement of Financial Assets and Financial Liabilities (Financial Instruments) and Revenue from Contracts With Customers (Revenue Recognition). See pages 17 and 18 in this Report for more information.

• Deposit service charges of $1.2 billion were down $73 million in the first quarter primarily driven by the impact of customer-friendly changes including the first full quarter impact of Overdraft Rewind^SM.
• Card fees were $908 million, down from $996 million in fourth quarter 2017, and included 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. Additionally, interchange revenue was seasonally lower in the first quarter.
• Other fees were $800 million, compared with $913 million in fourth quarter 2017, as first quarter results included lower commercial real estate brokerage commissions.
• Mortgage banking income was $934 million, up slightly from $928 million in fourth quarter 2017. As expected, residential mortgage loan originations declined in the first quarter, down to $43 billion, from $53 billion in the fourth quarter. The production margin on residential held-for-sale mortgage loan originations⁵ was 0.94 percent, compared with 1.25 percent in the fourth quarter, due to increased price competition and a higher percentage of correspondent volume, which has lower production margins than retail originations. Net mortgage servicing income was $468 million in the first quarter, up from $262 million in the fourth quarter, driven by higher net mortgage servicing rights (MSR) valuation gains, lower unreimbursed servicing costs and lower loan payoffs.
• Insurance income was $114 million, down $109 million from fourth quarter 2017, due to the sale of Wells Fargo Insurance Services USA, which closed in November 2017.
• Market sensitive revenue was $1.0 billion, compared with $728 million in fourth quarter 2017. Net gains from equity securities included $250 million of 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. In addition, net gains from trading activities were higher in first quarter 2018 due to increased trading results in Wells Fargo Securities. These increases were partially offset by lower net gains from debt securities.
• Other income was $438 million, compared with $405 million in the fourth quarter. First quarter results included a $643 million gain from sales of $1.6 billion of purchased credit-impaired Pick-a-Pay loans and a $202 million gain from the sale of Wells Fargo Shareowner Services, which closed in February 2018. These gains were partially offset by a lower of cost or market (LOCOM) adjustment related to the previously announced sale of certain automobile loans of Reliable Financial Services Inc., as well as other mark-to-market adjustments. Fourth quarter 2017 included an $848 million gain on the sale of Wells Fargo Insurance Services USA, partially offset by $414 million of impairments on low income housing and renewable energy investments due to the Tax Cuts & Jobs Act (Tax Act).

Noninterest Expense

Noninterest expense in the first quarter was $14.2 billion, compared with $16.8 billion in the prior quarter. First quarter expenses included operating losses of $668 million, down from $3.5 billion in fourth quarter 2017, which were elevated due to litigation accruals for a variety of matters, including mortgage-related regulatory investigations, sales practices, and other consumer-related matters. First quarter expenses also included $781 million of seasonally higher employee benefits and incentive compensation expense. Other expense was higher primarily due to a reduction in other expense in fourth quarter 2017 as a result of a $117 million gain on the sale of a corporate property. Outside professional services and advertising and promotion expense, which typically decline in the first quarter, were lower compared with fourth quarter 2017. The efficiency ratio was 64.9 percent in first quarter 2018, down from 76.2 percent in the fourth quarter, driven primarily by lower operating losses.

Loans

Total average loans were $951.0 billion in the first quarter, down $798 million from the fourth quarter. Period-end loan balances were $947.3 billion at March 31, 2018, down $9.5 billion from December 31, 2017. Commercial loans were flat compared with December 31, 2017 with growth in commercial and industrial loans, largely offset by declines in commercial real estate loans. Consumer loans decreased $9.5 billion from the prior quarter, driven by:

• a $3.8 billion decline in automobile loans due to the reclassification of $1.6 billion to loans held for sale as a result of the previously announced sale of certain assets of Reliable Financial Services Inc., as well as expected continued runoff
• a $1.9 billion decline in credit card balances primarily due to seasonality
• a $1.8 billion decline in the junior lien mortgage portfolio as payoffs continued to exceed new originations
• a $1.4 billion decline in 1-4 family first mortgage loans, driven by $1.6 billion of sales of purchased credit-impaired Pick-a-Pay loans

Debt and Equity Securities

As a result of the adoption of the new accounting standard for Financial Instruments, the balance sheet now includes more detailed disclosure of debt and equity securities.

Debt securities include debt securities available for sale and held to maturity, as well as debt securities held for trading. Debt securities were $473.0 billion at March 31, 2018, down $398 million from the fourth quarter, as approximately $13.1 billion of purchases, primarily federal agency mortgage-backed securities (MBS) in the available-for-sale portfolio, were more than offset by run-off and sales.

Net unrealized losses on available-for-sale debt securities were $(1.9) billion at March 31, 2018, compared with net unrealized gains of $1.5 billion at December 31, 2017, primarily due to higher interest rates and wider MBS spreads during the quarter.

Equity securities include marketable and non-marketable equity securities, as well as equity securities held for trading. Equity securities were $58.9 billion at March 31, 2018, down $3.6 billion from the fourth quarter, predominantly due to a decline in equity securities held for trading.

Deposits

Total average deposits for first quarter 2018 were $1.3 trillion, down $14.4 billion from the prior quarter. The decline was driven by a decrease in commercial deposits primarily from financial institutions, including a modest impact from actions the Company took to comply with the asset cap included in the consent order issued by the Board of Governors of the Federal Reserve System on February 2, 2018. Average consumer and small business banking deposits of $755.5 billion for first quarter 2018 were down $2.1 billion from the prior quarter, as growth in Community Banking deposits was more than offset by lower Wealth and Investment Management deposits. The average deposit cost for first quarter 2018 was 34 basis points, up 6 basis points from the prior quarter and 17 basis points from a year ago, primarily driven by an increase in commercial and Wealth and Investment Management deposit rates.

Capital

Capital in the first quarter continued to exceed our internal target, with a Common Equity Tier 1 ratio (fully phased-in) of 12.0 percent³, flat compared with the prior quarter. In first quarter 2018, the Company repurchased 50.6 million shares of its common stock, which reduced period-end common shares outstanding by 17.7 million.

Credit Quality

Net Loan Charge-offs

The quarterly loss rate was 0.32 percent (annualized), compared with 0.31 percent in the prior quarter and 0.34 percent a year ago. Commercial and consumer losses were 0.06 percent and 0.60 percent, respectively. Total credit losses were $741 million in first quarter 2018, down $10 million from fourth quarter 2017. Commercial losses were down $37 million driven by lower oil and gas portfolio losses. Consumer losses increased $27 million driven by higher automobile loan losses.

Nonperforming Assets

Nonperforming assets decreased $388 million, or 4 percent, from fourth quarter 2017 to $8.3 billion. Nonaccrual loans decreased $317 million from fourth quarter 2017 to $7.7 billion primarily driven by lower commercial and industrial nonaccruals reflecting continued improvement in the oil and gas portfolio, as well as continued declines in consumer real estate nonaccruals.

Allowance for Credit Losses

The allowance for credit losses, including the allowance for unfunded commitments, totaled $11.3 billion at March 31, 2018, down $647 million from December 31, 2017. “Credit performance remained strong in the first quarter,” said Chief Risk Officer Mike Loughlin. “We released $550 million from the allowance for credit losses. Approximately $400 million of the release was driven by a reduction in allowance previously held for hurricane-related losses. The remainder of the release was due to continued improvement in residential real estate, both in first and junior lien mortgage loan portfolios, and lower loan balances.” The allowance coverage for total loans was 1.19 percent, compared with 1.25 percent in fourth quarter 2017. The allowance covered 3.8 times annualized first quarter net charge-offs, compared with 4.0 times in the prior quarter. The allowance coverage for nonaccrual loans was 147 percent at March 31, 2018, compared with 149 percent at December 31, 2017. The Company believes the allowance was appropriate for losses inherent in the loan portfolio at March 31, 2018.

Business Segment Performance

Financial information for our operating segments reflect revisions to our previously reported amounts to reflect a change, adopted in first quarter 2018, in our methodology for assigning funding charges and credits to our lines of business and for reclassifications made in connection with the adoption of a new accounting standard for Financial Instruments. See pages 17 and 18 in this Report for more information.

Wells Fargo defines its operating segments by product type and customer segment. Segment net income for each of the three business segments was:

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 Wealth and Investment Management business partners. The Community Banking segment also includes the results of our Corporate Treasury activities net of allocations in support of the other operating segments and results of investments in our affiliated venture capital partnerships.

Community Banking reported net income of $2.7 billion, down $759 million, or 22 percent, from fourth quarter 2017. The decline in net income from fourth quarter 2017 was primarily driven by the inclusion in the fourth quarter of the benefit of the estimated impact of the Tax Act to the Company. Revenue in the first quarter was $11.8 billion, up $110 million, or 1 percent, from fourth quarter 2017, and included a gain on sales of Pick-a-Pay loans and higher market sensitive revenue, partially offset by lower net interest income, card fees, and service charges on deposit accounts. Noninterest expense decreased $2.3 billion, or 23 percent, compared with fourth quarter 2017, driven primarily by a decline in litigation accruals, partially offset by seasonally higher personnel expense. The provision for credit losses decreased $418 million from the prior quarter.

Net income was down $111 million, or 4 percent, from first quarter 2017 due to higher expenses, partially offset by a lower provision for credit losses and the lower income tax rate. Revenue was flat compared with a year ago due to higher net interest income, a gain on sales of Pick-a-Pay loans, higher market sensitive revenue, and higher trust and investment fees, offset by lower mortgage banking revenue and service charges on deposit accounts. Noninterest expense increased $621 million, or 9 percent, from a year ago primarily driven by higher operating losses and personnel expense. The provision for credit losses decreased $428 million from a year ago.

Retail Banking and Consumer Payments, Virtual Solutions and Innovation

• Nearly 387,000 branch customer experience surveys completed during first quarter 2018, with ‘Loyalty’ scores reaching their highest levels since August 2016, while ‘Overall Satisfaction with Most Recent Visit’ scores continued to improve from the prior quarter
• 5,805 retail bank branches as of the end of first quarter 2018, reflecting 58 branch consolidations in the quarter
• Primary consumer checking customers^6,7 up 0.9 percent year-over-year
• Debit card point-of-sale purchase volume⁸ of $81.8 billion in first quarter, up 8 percent year-over-year
• Credit card point-of-sale purchase volume of $17.4 billion in first quarter, up 8 percent year-over-year
• 28.8 million digital (online and mobile) active customers, including 21.8 million mobile active users^7,9
• Dynatrace's Mobile Banking Scorecard named Wells Fargo's mobile app #1 in Overall Performance, Functionality, and Quality and Availability (March 2018)
• In March, Barlow Research awarded Wells Fargo Gateway "Overall Most Innovative" in its 2018 Monarch Innovation Awards

Consumer Lending

• Home Lending
  • Originations of $43 billion, down from $53 billion in prior quarter, primarily due to seasonality
  • Applications of $58 billion, down from $63 billion in prior quarter, primarily due to seasonality
  • Application pipeline of $24 billion at quarter end, up from $23 billion at December 31, 2017
• Automobile originations of $4.4 billion in first quarter, up 2 percent compared with prior quarter; and down 20 percent from prior year, as proactive steps to tighten underwriting standards resulted in lower origination volume

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.

Wholesale Banking reported net income of $2.9 billion, up $502 million, or 21 percent, from fourth quarter 2017. First quarter results benefited from the reduced income tax rate. Revenue of $7.3 billion decreased $161 million, or 2 percent, compared with the prior quarter, due to lower net interest income, lower commercial real estate brokerage fees, lower insurance income related to the sale of Wells Fargo Insurance Services USA (WFIS), and the gain on the sale of WFIS recognized in fourth quarter 2017, partially offset by the gain on the sale of Wells Fargo Shareowner Services recognized in the first quarter and higher market sensitive revenue. Fourth quarter 2017 also included impairments on low income housing and tax-advantaged renewable energy investments due to the Tax Act. Noninterest expense decreased $209 million, or 5 percent, from the prior quarter reflecting two less months of WFIS operating expenses and lower operating losses, partially offset by seasonally higher personnel expenses. The provision for credit losses decreased $40 million from the prior quarter.

Net income increased $390 million, or 16 percent, from first quarter 2017 and benefited from the lower income tax rate. Revenue decreased $298 million, or 4 percent, from first quarter 2017, on lower net interest income, the impact of the sale of WFIS in fourth quarter 2017, lower mortgage banking fees, and lower operating lease income, partially offset by the gain related to the sale of Wells Fargo Shareowner Services. Noninterest expense decreased $189 million, or 5 percent, from a year ago reflecting the sale of WFIS, partially offset by higher regulatory, risk, cyber and technology expenses. The provision for credit losses increased $23 million from a year ago.

Wealth and Investment Management (WIM) 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 customers’ 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.

Wealth and Investment Management reported net income of $714 million, up $39 million, or 6 percent, from fourth quarter 2017. First quarter results benefited from the reduced income tax rate. Revenue of $4.2 billion decreased $91 million, or 2 percent, from the prior quarter, primarily due to lower gains on deferred compensation plan investments (offset in employee benefits expense), lower net interest income, and lower transaction revenue, partially offset by higher asset-based fees. Noninterest expense increased $44 million, or 1 percent, from the prior quarter, primarily driven by seasonally higher personnel expenses, partially offset by lower non-personnel expense and lower deferred compensation plan expense (offset in gains on equity securities).

Net income was up $49 million, or 7 percent, from first quarter 2017 and benefited from the lower income tax rate. Revenue decreased $15 million from a year ago primarily driven by lower gains on deferred compensation plan investments (offset in employee benefits expense), lower transaction revenue, lower net interest income, and lower other revenue, partially offset by higher asset-based fees. Noninterest expense increased $86 million, or 3 percent, from a year ago, primarily due to higher broker commissions, higher regulatory, risk, cyber and technology expenses, and higher other personnel expense, partially offset by lower deferred compensation plan expense (offset in gains on equity securities).

• WIM total client assets of $1.9 trillion, up 4 percent from a year ago, driven by higher market valuations
• Continued loan growth, with average balances up 5 percent from a year ago largely due to growth in non-conforming mortgage loans
• First quarter 2018 average closed referred investment assets (referrals resulting from the WIM/Community Banking partnership) were up 5 percent compared with the prior quarter and up 6 percent from a year ago

Retail Brokerage

• Client assets of $1.6 trillion, up 4 percent from prior year
• Advisory assets of $540 billion, up 10 percent from prior year, primarily driven by higher market valuations and positive net flows

Wealth Management

• Client assets of $242 billion, up 2 percent from prior year

Asset Management

• Total assets under management of $497 billion, up 3 percent from prior year, driven by higher market valuations, positive money market and fixed income net flows, partially offset by equity net outflows

Retirement

• IRA assets of $403 billion, up 5 percent from prior year
• Institutional Retirement plan assets of $386 billion, up 7 percent from prior year

Conference Call

The Company will host a live conference call on Friday, April 13, at 7:00 a.m. PT (10:00 a.m. ET). You may participate by dialing 866-872-5161 (U.S. and Canada) or 440-424-4922 (International). The call will also be available online at https://www.wellsfargo.com/about/investor-relations/quarterly-earnings/ and https://engage.vevent.com/rt/wells_fargo_ao~1293006.

A replay of the conference call will be available beginning at 10:00 a.m. PT (1:00 p.m. ET) on Friday, April 13 through Friday, April 27. Please dial 855-859-2056 (U.S. and Canada) or 404-537-3406 (International) and enter Conference ID #1293006. The replay will also be available online at https://www.wellsfargo.com/about/investor-relations/quarterly-earnings/ and https://engage.vevent.com/rt/wells_fargo_ao~1293006.

End Notes

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, which utilizes tangible common equity, is a useful financial measure because it enables investors and others to assess the Company's use of equity. For additional information, including a corresponding reconciliation to GAAP financial measures, see the "Tangible Common Equity" tables on page 36.

² Reserve build represents the amount by which the provision for credit losses exceeds net charge-offs, while reserve release represents the amount by which net charge-offs exceed the provision for credit losses.

³ See table on page 37 for more information on Common Equity Tier 1. Common Equity Tier 1 (fully phased-in) is a preliminary estimate and is calculated assuming the full phase-in of the Basel III capital rules.

⁴ Market sensitive revenue represents net gains from trading activities, debt securities, and equity securities.

⁵ Production margin represents net gains on residential mortgage loan origination/sales activities divided by total residential held-for-sale mortgage originations. See the Selected Five Quarter Residential Mortgage Production Data table on page 42 for more information.

⁶ Customers who actively use their checking account with transactions such as debit card purchases, online bill payments, and direct deposit.

⁷ Data as of February 2018, comparisons with February 2017.

⁸ Combined consumer and business debit card purchase volume dollars.

⁹ Primarily includes retail banking, consumer lending, small business and business banking customers.

Forward-Looking Statements

This document contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. In addition, we may make forward-looking statements in our other documents filed or furnished with the SEC, and our management may make forward-looking statements orally to analysts, investors, representatives of the media and others. Forward-looking statements can be identified by words such as “anticipates,” “intends,” “plans,” “seeks,” “believes,” “estimates,” “expects,” “target,” “projects,” “outlook,” “forecast,” “will,” “may,” “could,” “should,” “can” and similar references to future periods. In particular, forward-looking statements include, but are not limited to, statements we make about: (i) the future operating or financial performance of the Company, including our outlook for future growth; (ii) our noninterest expense and efficiency ratio; (iii) future credit quality and performance, including our expectations regarding future loan losses and allowance levels; (iv) the appropriateness of the allowance for credit losses; (v) our expectations regarding net interest income and net interest margin; (vi) loan growth or the reduction or mitigation of risk in our loan portfolios; (vii) future capital or liquidity levels or targets and our estimated Common Equity Tier 1 ratio under Basel III capital standards; (viii) the performance of our mortgage business and any related exposures; (ix) the expected outcome and impact of legal, regulatory and legislative developments, as well as our expectations regarding compliance therewith; (x) future common stock dividends, common share repurchases and other uses of capital; (xi) our targeted range for return on assets and return on equity; (xii) the outcome of contingencies, such as legal proceedings; and (xiii) the Company’s plans, objectives and strategies.

Forward-looking statements are not based on historical facts but instead represent our current expectations and assumptions regarding our business, the economy and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict. Our actual results may differ materially from those contemplated by the forward-looking statements. We caution you, therefore, against relying on any of these forward-looking statements. They are neither statements of historical fact nor guarantees or assurances of future performance. While there is no assurance that any list of risks and uncertainties or risk factors is complete, important factors that could cause actual results to differ materially from those in the forward-looking statements include the following, without limitation:

• current and future economic and market conditions, including the effects of declines in housing prices, high unemployment rates, U.S. fiscal debt, budget and tax matters (including the impact of the Tax Cuts & Jobs Act), geopolitical matters, and the overall slowdown in global economic growth;
• our capital and liquidity requirements (including under regulatory capital standards, such as the Basel III capital standards) and our ability to generate capital internally or raise capital on favorable terms;
• financial services reform and other current, pending or future legislation or regulation that could have a negative effect on our revenue and businesses, including the Dodd-Frank Act and other legislation and regulation relating to bank products and services;
• the extent of our success in our loan modification efforts, as well as the effects of regulatory requirements or guidance regarding loan modifications;
• the amount of mortgage loan repurchase demands that we receive and our ability to satisfy any such demands without having to repurchase loans related thereto or otherwise indemnify or reimburse third parties, and the credit quality of or losses on such repurchased mortgage loans;
• negative effects relating to our mortgage servicing and foreclosure practices, as well as changes in industry standards or practices, regulatory or judicial requirements, penalties or fines, increased servicing and other costs or obligations, including loan modification requirements, or delays or moratoriums on foreclosures;
• resolution of regulatory matters, including the claims pending against us from the Consumer Financial Protection Bureau and Office of the Comptroller of the Currency regarding our compliance risk management program and our past practices involving certain automobile collateral protection insurance policies and certain mortgage interest rate lock extensions;
• our ability to realize our efficiency ratio target as part of our expense management initiatives, including as a result of business and economic cyclicality, seasonality, changes in our business composition and operating environment, growth in our businesses and/or acquisitions, and unexpected expenses relating to, among other things, litigation and regulatory matters;
• the effect of the current low interest rate environment or changes in interest rates on our net interest income, net interest margin and our mortgage originations, mortgage servicing rights and mortgages held for sale;
• significant turbulence or a disruption in the capital or financial markets, which could result in, among other things, reduced investor demand for mortgage loans, a reduction in the availability of funding or increased funding costs, and declines in asset values and/or recognition of other-than-temporary impairment on securities held in our debt securities and equity securities portfolios;
• the effect of a fall in stock market prices on our investment banking business and our fee income from our brokerage, asset and wealth management businesses;
• negative effects from the retail banking sales practices matter and from other instances where customers may have experienced financial harm, including on our legal, operational and compliance costs, our ability to engage in certain business activities or offer certain products or services, our ability to keep and attract customers, our ability to attract and retain qualified team members, and our reputation;
• reputational damage from negative publicity, protests, fines, penalties and other negative consequences from regulatory violations and legal actions;
• a failure in or breach of our operational or security systems or infrastructure, or those of our third party vendors or other service providers, including as a result of cyber attacks;
• the effect of changes in the level of checking or savings account deposits on our funding costs and net interest margin;
• fiscal and monetary policies of the Federal Reserve Board; and
• the other risk factors and uncertainties described under “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2017.

In addition to the above factors, we also caution that the amount and timing of any future common stock dividends or repurchases will depend on the earnings, cash requirements and financial condition of the Company, market conditions, capital requirements (including under Basel capital standards), common stock issuance requirements, applicable law and regulations (including federal securities laws and federal banking regulations), and other factors deemed relevant by the Company’s Board of Directors, and may be subject to regulatory approval or conditions.

For more information about factors that could cause actual results to differ materially from our expectations, refer to our reports filed with the Securities and Exchange Commission, including the discussion under “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2017, as filed with the Securities and Exchange Commission and available on its website at www.sec.gov.

Any forward-looking statement made by us speaks only as of the date on which it is made. Factors or events that could cause our actual results to differ may emerge from time to time, and it is not possible for us to predict all of them. We undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future developments or otherwise, except as may be required by law.

About Wells Fargo

Wells Fargo & Company (NYSE: WFC) is a diversified, community-based financial services company with $1.9 trillion in assets. Wells Fargo’s vision is to satisfy our customers’ financial needs and help them succeed financially. Founded in 1852 and headquartered in San Francisco, Wells Fargo provides banking, investments, mortgage, and consumer and commercial finance through 8,200 locations, 13,000 ATMs, the internet (wellsfargo.com) and mobile banking, and has offices in 42 countries and territories to support customers who conduct business in the global economy. With approximately 265,000 team members, Wells Fargo serves one in three households in the United States. Wells Fargo & Company was ranked No. 25 on Fortune’s 2017 rankings of America’s largest corporations.

SIGNIFICANT ACCOUNTING AND PRESENTATION CHANGES

Following is a discussion of key accounting and presentation changes in first quarter 2018 that resulted from adoption of new accounting standards and a change in our methodology for measuring operating segment results. Prior periods have been revised as appropriate for these changes to maintain comparability.

Accounting Standards Adopted in 2018

In first quarter 2018, we adopted the following new accounting guidance:

• Accounting Standards Update (ASU or Update) 2016-18 - Statement of Cash Flows (Topic 230): Restricted Cash
• ASU 2016-04 - Liabilities - Extinguishments of Liabilities (Subtopic 405-20): Recognition of Breakage for Certain Prepaid Stored-Value Products;
• ASU 2016-01 - Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities; and
• ASU 2014-09 - Revenue from Contracts With Customers (Topic 606) and subsequent related Updates.

In connection with the adoption of ASU 2016-18 we have 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.

ASU 2016-04 modifies the accounting for certain prepaid card products to require the recognition of breakage. Breakage represents the estimated amount that will not be redeemed by the cardholder for goods or services. Upon adoption, we recorded a cumulative-effect adjustment that increased retained earnings, given estimated breakage, by $26 million.

ASU 2016-01 changes the accounting for certain equity investments to record at fair value with unrealized gains or losses reflected in earnings, as well as improve the disclosures of equity investments and the fair value of financial instruments.

We adopted the Update in first quarter 2018 and recorded a cumulative-effect adjustment as of January 1, 2018, that increased retained earnings by $106 million as a result of a transition adjustment to reclassify $118 million in net unrealized gains from other comprehensive income to retained earnings, partially offset by a transition adjustment to decrease retained earnings by $12 million to adjust the carrying value of our auction rate securities from cost to fair value. No transition adjustment was recorded for investments changed to the measurement alternative (described below), which was applied prospectively.

As a result of adopting this ASU, our investments in marketable equity securities, including those previously classified as available-for-sale, are now accounted for at fair value with unrealized gains or losses reflected in earnings. Additionally, our share of unrealized gains or losses of marketable equity securities held by investees in our nonmarketable equity securities accounted for using the equity method are now reflected in earnings. Prior to adoption, such unrealized gains and losses were reflected in other comprehensive income. Our investments in nonmarketable equity securities previously accounted for under the cost method of accounting, except for federal bank stock, are now accounted for either at fair value with unrealized gains and losses reflected in earnings or using the measurement alternative. The measurement alternative is similar to the cost method of accounting, except the carrying value is adjusted through earnings for impairment, if any, and changes in observable and orderly transactions in the same or similar investment. We now account for substantially all of our private equity investments using the measurement alternative, except for those accounted for using the equity method of accounting. Our auction rate securities portfolio is now accounted for at fair value with unrealized gains or losses reflected in earnings.

In connection with our adoption of this Update, we have modified our balance sheet and income statement presentation to report marketable and nonmarketable equity securities and their results separately from debt securities by now reporting all equity securities in a new line labeled “Equity securities” in both the balance sheet and income statement. Additionally we now report loans held for trading purposes in loans held for sale and have reclassified net gains and losses on marketable equity securities used as economic hedges of deferred compensation obligations from “Net gains for trading activities” to “Net gains from equity securities”. All prior periods have been revised to conform to these changes in reporting.

The following table provides a summary of our reporting changes implemented in connection with our adoption of ASU 2016-01.

The following table illustrates the changes to the balance sheet as of December 31, 2017, and related consolidated statement of income for the year ended December 31, 2017, in connection with our adoption of ASU 2016-01.

ASU 2014-09 modifies the guidance used to recognize revenue from contracts with customers for transfers of goods or services and transfers of non-financial assets, unless those contracts are within the scope of other guidance. Upon adoption, we recorded a cumulative-effect adjustment that decreased retained earnings by $44 million, due to changes in the timing of revenue for corporate trust services that are provided over the life of the associated trust. In addition, we changed the presentation of some costs such that underwriting expenses of our broker-dealer business that were previously netted against revenue are now included in noninterest expense, and card payment network charges that were previously included in noninterest expense are now netted against card fee revenue.

Operating Segment Financial Information Changes

Financial information for our operating segments presented in this Report reflect revisions to our previously reported amounts to reflect a change, adopted in first quarter 2018, in our methodology for assigning funding charges and credits to our lines of business and for the reclassifications made in connection with the adoption of ASU 2016-01. Effective first quarter 2018, assets and liabilities will 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. Our previously reported consolidated financial results were not impacted by the methodology change; however, in connection with the adoption of ASU 2016-01, certain reclassifications will occur within noninterest income.