Wells Fargo & Company — Q2 2023 Form 10-Q
Business context and reporting period. Wells Fargo is a diversified U.S. financial services company reporting for the quarter and six months ended June 30, 2023. Its four reportable segments are Consumer Banking and Lending, Commercial Banking, Corporate and Investment Banking, and Wealth and Investment Management. Unless noted otherwise, amounts below are U.S. dollars.
Financial performance and condition
| Metric | Q2 2023 | Comparison |
|---|---|---|
| Total revenue | $20.5 billion | Up 20% from Q2 2022 |
| Net interest income | $13.2 billion | Up 29%; taxable-equivalent net interest margin was 3.09%, versus 2.39% |
| Net income | $4.9 billion; $1.25 diluted EPS | Net income up 57%; diluted EPS was $0.75 in Q2 2022 |
| Noninterest expense | $13.0 billion | Up 1%; efficiency ratio improved to 63% from 75% |
| Provision for credit losses | $1.7 billion | Up from $580 million |
- First half: Revenue was $41.3 billion, up 19%; net income was $9.9 billion, up 43%; diluted EPS was $2.48, versus $1.66. Net interest income rose 36%, while noninterest income declined 4%.
- Cash flow, first half: Operating activities provided $6.7 billion, compared with $7.8 billion in 2022. Investing activities provided $12.6 billion versus $27.5 billion used; financing activities used $24.0 billion versus $59.4 billion used. Cash, cash equivalents and restricted cash ended at $154.4 billion.
- Balance sheet at June 30: Assets were $1.876 trillion, loans $948.0 billion, and deposits $1.345 trillion. Since year-end 2022, assets declined $4.7 billion, loans declined $7.9 billion, and deposits declined $39.4 billion. Deposit outflows reflected customer spending and migration to higher-yielding products; time deposits increased.
- Funding and liquidity: Short-term borrowings were $84.3 billion and long-term debt was $170.6 billion. The LCR was 123%, above the 100% minimum; primary liquidity sources totaled $413.0 billion, of which $376.9 billion was unencumbered. The filing states the company complied with the NSFR requirement.
- Capital: Standardized CET1 was 10.73%, above the 9.20% requirement; TLAC was 23.12%, above the 21.50% minimum. Total equity was $182.0 billion. The company repurchased 187 million common shares for $8.1 billion in the first half.
Material changes versus comparable periods
- Higher market interest rates and loan balances drove net interest income and overall revenue higher, partly offset by increased deposit and debt funding costs. Average deposits fell 7% year over year in Q2; average loans rose 2%.
- Credit costs rose materially. Q2 net charge-offs were $764 million, versus $345 million a year earlier. The loan allowance was $14.8 billion, or 1.56% of loans, versus $12.9 billion and 1.37% a year earlier.
- Commercial real estate, particularly office loans, was a key area of deterioration: criticized commercial loans increased to $29.0 billion from $25.0 billion at year-end 2022; commercial real estate nonaccrual loans rose to $2.5 billion from $958 million. Total nonperforming assets were $7.0 billion, or 0.74% of loans, versus $5.8 billion and 0.60% at year-end.
- Consumer charge-offs also increased, primarily in credit cards. Q2 consumer net charge-offs were $564 million versus $321 million; credit card delinquency rates were higher than a year earlier.
- Mortgage banking revenue declined with lower residential mortgage origination volumes. Wealth advisory and asset-based fees also fell, reflecting lower market valuations and advisory outflows. Trading gains increased substantially.
Outlook, risks, contingencies and unusual items
- Outlook: The filing provides no specific numerical earnings or revenue guidance. Management cautions that forward-looking statements are uncertain and actual results may differ materially.
- Regulatory constraints: The Federal Reserve’s 2018 consent order asset cap remains in place until specified plans and third-party reviews are completed to the regulator’s satisfaction. The company says remediation will take multiple years and warns delays or additional findings could prompt penalties, restrictions, or higher capital and liquidity requirements.
- FDIC assessment: A proposed special assessment could cost Wells Fargo up to $1.8 billion pre-tax; the company expects to expense the amount when the rule is finalized. The proposal may change.
- Capital developments after quarter-end: The Federal Reserve confirmed a 2.90% stress capital buffer for October 2023–September 2024, down from 3.20%. The board approved a Q3 dividend of $0.35 per share and authorized a new repurchase program of up to $30 billion. Proposed capital rules, if adopted, are expected by the company to significantly increase risk-weighted assets and net capital requirements.
- Legal and remediation exposure: The company disclosed numerous legal, regulatory and customer-remediation matters. The high end of reasonably possible legal losses in excess of accrued probable losses was approximately $1.5 billion at June 30; actual losses could exceed estimates. Certain shareholder cases had proposed settlements of $300 million and $1.0 billion that received preliminary court approval.
- Other notable matters: Adoption of long-duration insurance accounting was applied retrospectively and revised prior-period financial statements. The company reported $46.6 billion of net unrealized losses across available-for-sale and held-to-maturity debt securities; 99% of the combined portfolio was rated AA- or higher. Interest-rate, deposit-mix, commercial real estate, consumer credit, litigation, operational and regulatory risks remain material.
Important facts for investors to verify
- Whether the FDIC final assessment is adopted and how its amount and timing compare with the proposed maximum.
- Progress toward resolving consent orders and whether the Federal Reserve asset cap or related business restrictions change.
- Subsequent trends in office and other commercial real estate credit quality, criticized loans, nonaccruals, charge-offs and allowance coverage.
- Deposit balances, deposit pricing and funding costs, and whether net interest income and margin remain resilient as rates and customer behavior change.
- Final outcomes and costs of significant litigation, customer remediation matters and proposed settlements, compared with accruals and the disclosed $1.5 billion excess-loss range.
- Effects of proposed regulatory capital rules on risk-weighted assets, capital requirements, capital returns and the planned repurchase authorization.