Wells Fargo & Company — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. Wells Fargo is a diversified U.S. financial services company with approximately $1.9 trillion in assets. Comparisons below are primarily with the corresponding 2020 period; balance-sheet comparisons are identified separately.
Financial results and position
| Metric | Q2 2021 | Comparable period / context |
|---|---|---|
| Total revenue | $20.27 billion | Up 11% from Q2 2020 |
| Net interest income | $8.80 billion | Down 11% year over year; taxable-equivalent net interest margin was 2.02%, versus 2.25% |
| Noninterest income | $11.47 billion | Up 37%; included $2.70 billion in net gains from equity securities and $1.34 billion in mortgage banking income |
| Noninterest expense | $13.34 billion | Down 8%; efficiency ratio was 66%, versus 80% |
| Provision for credit losses | $(1.26) billion | Compared with $9.53 billion expense in Q2 2020 |
| Net income / diluted EPS | $6.04 billion / $1.38 | Compared with a $3.85 billion net loss / $(1.01) diluted EPS |
| Six-month net income / diluted EPS | $10.68 billion / $2.40 | Compared with a $2.93 billion net loss / $(0.94) diluted EPS |
| Loans and deposits, period end | $852.3 billion / $1.440 trillion | Loans down 9% year over year; deposits up 2% |
| Capital and liquidity | CET1 12.07%; LCR 123%; total equity $193.1 billion | Ratios exceeded stated regulatory minimums; LCR minimum is 100% |
For the first half, operating cash flow was $(11.5) billion, investing cash flow was $30.8 billion, and financing cash flow was $(9.7) billion. Cash, cash equivalents, and restricted cash increased $9.6 billion to $274.2 billion. Long-term debt was $179.7 billion and short-term borrowings were $45.6 billion at June 30.
Material changes versus prior periods
- Earnings swung to a profit chiefly because credit-loss provisions fell sharply, alongside higher noninterest income and lower Q2 expenses. The prior-year comparison included substantial pandemic-related reserve building.
- Net interest income and margin declined as low rates, lower loan balances, elevated prepayments, and mortgage-backed-security premium amortization weighed on results. Average loans fell 12% year over year in Q2, while average deposits rose 4%.
- Credit measures improved: the loan allowance fell to $16.4 billion from $19.7 billion at year-end 2020; allowance coverage was 1.92% of loans, versus 2.22%. Nonperforming assets were $7.5 billion, down 16% from year-end.
- Noninterest income benefited from equity-security gains and mortgage banking. In the first half, student-loan portfolio sales generated $355 million of gains and $183 million of goodwill write-downs.
- Period-end assets were $1.946 trillion, down from $1.953 trillion at year-end 2020. The company continued managing within the Federal Reserve asset cap.
Outlook, commentary, risks, and unusual items
- Outlook and capital actions: The filing provides no broad earnings or revenue guidance. Management expected a 3.10% stress capital buffer for October 2021–September 2022, pending the Federal Reserve’s final determination. On July 27, the Board approved a Q3 common dividend of $0.20 per share and a capital plan for approximately $18 billion of gross repurchases over the four quarters beginning Q3 2021.
- Regulatory constraints: The 2018 Federal Reserve consent order continued to cap consolidated assets at the December 31, 2017 level, subject to defined measurement rules. Wells Fargo said remediation and regulatory work would take multiple years; delays or noncompliance could result in further penalties or restrictions. Other consent-order requirements also remained unresolved.
- Legal and customer remediation exposure: The high end of reasonably possible legal losses above accrued amounts was approximately $2.8 billion. The company said actual losses could exceed the accrual or estimated range. Customer remediation costs may change as reviews and regulator communications continue.
- COVID-19 and credit risk: The company noted that payment deferrals and government support could delay recognition of delinquencies and charge-offs. Its allowance scenarios assigned equal weight to a base and a downside economic scenario; worsening conditions could require additional reserves.
- Asset cap and strategy: Agreements to sell Wells Fargo Asset Management for $2.1 billion and Corporate Trust Services for $750 million were expected to close in the second half of 2021, subject to conditions. The asset cap constrained growth and contributed to lower deposits in certain businesses.
- Other items: Retrospective accounting changes for low-income-housing and solar tax-credit investments revised prior-period presentation; management said annual net-income and retained-earnings effects were nominal, though quarterly results and the efficiency ratio were affected. The USD LIBOR transition and sensitivity to interest rates, mortgage servicing values, markets, operations, and litigation remained risks.
Most important facts for investors to verify
- How much earnings depend on reserve releases, equity-security gains, mortgage banking, and other items that may not recur.
- Whether loan demand and net interest income stabilize, and how the asset cap affects loan and deposit growth.
- Whether credit quality remains resilient as customer support programs end, including commercial real estate and loans previously in deferral.
- Progress toward satisfying consent orders and removing the asset cap; any additional regulatory actions or penalties.
- The ultimate costs and timing of legal matters and customer remediation, including exposure beyond accrued amounts.
- Final stress-capital-buffer requirements, execution of planned repurchases, and the company’s ability to sustain capital distributions.
- Completion and terms of announced divestitures, and the cash-flow drivers behind negative first-half operating cash flow.