Business context and reporting period
Wells Fargo & Company filed this Form 10-Q for the quarter and nine months ended September 30, 2021. The diversified financial services company reported through Consumer Banking and Lending, Commercial Banking, Corporate and Investment Banking, and Wealth and Investment Management, with other activities included in Corporate. The company remained subject to a Federal Reserve asset cap tied to its 2018 consent order.
Financial performance and condition
| Metric | Q3 2021 | Comparison |
|---|---|---|
| Total revenue | $18.8 billion | Down 2% year over year and 7% from Q2 2021 |
| Net interest income | $8.9 billion | Down 5% year over year |
| Net income | $5.1 billion | Up 59% year over year; down 15% from Q2 |
| Net income applicable to common stock | $4.8 billion | Up 65% year over year |
| Diluted EPS | $1.17 | $0.70 in Q3 2020 |
| Noninterest expense | $13.3 billion | Down 13% year over year |
| Net interest margin | 2.03% | 2.13% in Q3 2020 |
| Efficiency ratio | 71% | 79% in Q3 2020 |
For the first nine months of 2021, revenue was $57.6 billion, up 3%; net income was $15.8 billion versus $286 million in 2020; and diluted EPS was $3.57 versus a diluted loss of $0.23. The improvement mainly reflected a $18.0 billion year-over-year reduction in credit-loss provision, higher noninterest income, and lower expenses. These comparisons also reflect the unusually high pandemic-related provision in 2020.
Quarterly revenue fell year over year as lower net interest income offset broadly steady noninterest income. For the first nine months, noninterest income increased 24%, including stronger equity-security gains, mortgage banking income, and investment advisory fees, while net interest income declined 13%.
Average loans were $854.0 billion, down 8% year over year; period-end loans were $862.8 billion, down 6% from September 2020. Average deposits were $1.45 trillion, up 4% year over year; period-end deposits were $1.47 trillion, up 6%. Total assets were $1.95 trillion and total equity was $191.1 billion at quarter-end. Long-term debt was $163.0 billion and short-term borrowings were $42.0 billion.
Credit conditions improved: the loan allowance for credit losses was $14.7 billion, or 1.70% of loans, versus $19.7 billion and 2.22% at year-end 2020. Nonperforming assets were $7.2 billion, or 0.83% of loans, down 19% from year-end. The filing’s summary reports Q3 net charge-offs of $257 million, while a detailed allowance table reports $259 million; investors should reconcile this difference in the underlying filing.
Liquidity and capital remained above stated regulatory minimums: the liquidity coverage ratio was 119% versus a 100% minimum; the standardized CET1 ratio was 11.62%; and the TLAC ratio was 23.68% versus a 21.50% minimum. The supplementary leverage ratio was 6.94%. Cash, cash equivalents, and restricted cash totaled $266.7 billion at period-end. For the first nine months, operating cash flow was negative $16.3 billion, investing cash flow was positive $23.8 billion, financing cash flow was negative $5.4 billion, and cash increased $2.1 billion.
Material changes versus comparable periods
- Q3 net income rose from $3.2 billion a year earlier, chiefly because the provision for credit losses fell by $2.2 billion and noninterest expense fell by $1.9 billion; lower net interest income and higher income tax expense partly offset the improvement.
- Net interest margin declined year over year amid lower loan yields and balances. Management cited soft loan demand, elevated prepayments, and low rates; lower funding costs and reduced long-term debt partly mitigated the pressure.
- Average consumer and commercial loan balances generally contracted, while customer deposits grew amid high liquidity and savings. Asset-cap management actions reduced deposits in Corporate and Investment Banking and Corporate.
- At September 30, the company had repurchased 167 million common shares for $7.5 billion during the first nine months. The common dividend declared for Q3 was $0.20 per share, compared with $0.10 a year earlier.
- The company transferred $41.3 billion of available-for-sale debt securities to held-to-maturity in the first nine months, citing portfolio positioning for capital management.
Outlook, commentary, risks, and unusual items
- No specific near-term earnings or revenue guidance is provided in the supplied filing text. Management emphasized that regulatory remediation remains a priority and is expected to take multiple years; delays or failures could bring additional penalties or restrictions.
- On September 9, 2021, the OCC assessed a $250 million civil money penalty tied to insufficient progress under the 2018 consent order and Home Lending loss-mitigation activities. A new OCC consent order requires improvements in execution, risk management, and oversight, and restricts certain mortgage-servicing acquisitions and loan transfers.
- The Federal Reserve consent order continues to cap consolidated assets at the specified 2017 level until required plans and reviews are satisfactorily completed. The filing says Wells Fargo had not excluded PPP and Main Street Lending exposures from the cap.
- Possible legal losses above accrued probable and estimable amounts had a stated high-end range of approximately $3.0 billion at September 30, 2021. Wells Fargo said actual outcomes may exceed accrued amounts; an unfavorable resolution could materially affect results in a particular period.
- Credit-loss estimates remain sensitive to COVID-19 effects and economic forecasts. Customer payment deferrals may delay recognition of delinquencies, charge-offs, and nonaccrual status. Management weighted base and downside scenarios in its allowance estimate and cautioned that additional losses may arise.
- Other risks include interest-rate and mortgage-servicing valuation volatility, asset-cap constraints, regulatory and customer-remediation matters, cybersecurity and operational risks, and the LIBOR transition. The company expected to offer alternative reference-rate products before year-end 2021.
- On November 1, 2021, after quarter-end, the company closed sales of Corporate Trust Services and Wells Fargo Asset Management; the asset-management sale includes post-closing adjustments and earn-out provisions. The filing also describes a $355 million gain on student-loan sales in the first nine months and goodwill write-downs related to divestitures.
- The filing reports a change in accounting for low-income housing tax-credit investments and a revised presentation for solar investment tax credits, with comparative periods revised. Management concluded disclosure controls were effective at September 30, 2021, and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Reconcile the reported Q3 net charge-offs of $257 million in the summary highlights with $259 million in the detailed allowance table.
- Track progress on the Federal Reserve asset cap and OCC/CFPB consent-order remediation, including the effects of the $250 million penalty and new Home Lending restrictions.
- Assess sustainability of earnings as credit-loss reserve releases ease, net interest income remains under pressure, and loan balances are lower.
- Monitor credit performance after customer deferrals and the evolution of the $14.7 billion loan allowance, particularly in commercial real estate and consumer lending.
- Review legal contingencies, including the approximately $3.0 billion high-end reasonably possible loss estimate above accrued probable losses, and developments in customer remediation.
- Assess the effects of the completed divestitures, capital returns, and continued regulatory constraints on future growth, expense levels, and capital distributions.