Wells Fargo & Company — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. Wells Fargo is a diversified U.S. financial services company with approximately $1.9 trillion in assets and four reportable operating segments: Consumer Banking and Lending, Commercial Banking, Corporate and Investment Banking, and Wealth and Investment Management.
Key financial results
| Metric | Q3 2023 | Q3 2022 | First nine months 2023 | First nine months 2022 |
|---|---|---|---|---|
| Total revenue | $20.9 billion | $19.6 billion | $62.1 billion | $54.3 billion |
| Net interest income | $13.1 billion | $12.1 billion | $39.6 billion | $31.5 billion |
| Provision for credit losses | $1.2 billion | $784 million | $4.1 billion | $577 million |
| Noninterest expense | $13.1 billion | $14.3 billion | $39.8 billion | $41.0 billion |
| Wells Fargo net income | $5.8 billion | $3.6 billion | $15.7 billion | $10.5 billion |
| Diluted EPS | $1.48 | $0.86 | $3.96 | $2.52 |
| Taxable-equivalent net interest margin | 3.03% | 2.83% | 3.10% | 2.46% |
| Efficiency ratio | 63% | 73% | 64% | 75% |
Q3 net income rose 61% year over year, supported mainly by a $1.0 billion increase in net interest income and a $1.2 billion reduction in noninterest expense. The first-nine-month increase in net income was principally driven by $8.1 billion higher net interest income and lower expenses, partly offset by a $3.5 billion increase in credit-loss provision. Q3 net interest margin eased from 3.09% in Q2 2023.
For the first nine months, net cash provided by operating activities was $22.2 billion, investing activities provided $20.3 billion, and financing activities provided $15.1 billion. Cash, cash equivalents, and restricted cash ended the period at $216.7 billion. These bank cash-flow figures reflect significant movements in loans, securities, deposits, and borrowings.
Balance sheet, capital, and liquidity
- At September 30, assets were $1.91 trillion, loans were $942.4 billion, and deposits were $1.354 trillion. Total equity was $182.4 billion.
- Long-term debt was $190.0 billion and short-term borrowings were $93.3 billion. Short-term borrowings increased from $51.1 billion at year-end 2022; long-term debt increased from $174.9 billion.
- Deposits declined $30.0 billion from year-end 2022. Noninterest-bearing deposits fell 16% to $384.3 billion, while time deposits rose 164% to $174.5 billion. Management cited migration to higher-yielding alternatives and consumer spending-related outflows.
- Standardized CET1, the binding capital ratio, was 11.01%, above the 9.20% applicable requirement and buffers. TLAC was 23.98%, compared with a 21.50% minimum; the liquidity coverage ratio was 123%, above the 100% minimum. The Company reported compliance with the net stable funding ratio requirement.
- Available-for-sale and held-to-maturity debt securities had combined net unrealized losses of $61.1 billion, up from $49.7 billion at year-end 2022, primarily reflecting interest-rate changes. The filing says 99% of the combined portfolio was rated AA- or above.
Material changes and credit trends
- Average deposits were down 5% year over year in Q3; average loans were broadly flat. Period-end loans declined $13.4 billion from year-end 2022.
- The allowance for credit losses on loans was $15.1 billion, or 1.60% of total loans, up from $13.6 billion and 1.42% at year-end 2022. Nine-month loan provision was $4.1 billion versus $576 million a year earlier.
- Q3 net loan charge-offs were $850 million, versus $399 million in Q3 2022. Consumer charge-offs rose to $662 million, chiefly reflecting credit-card losses; commercial charge-offs were $188 million.
- Nonperforming assets rose 42% from year-end 2022 to $8.2 billion, or 0.87% of loans. Commercial nonaccrual loans rose to $4.6 billion from $1.8 billion, primarily due to commercial real estate, especially office loans.
- Criticized commercial loans increased to $31.9 billion from $25.1 billion at year-end, mainly in commercial real estate office and apartment properties. CRE office demand, vacancy, and operating performance remained areas of concern.
- Q3 noninterest expense fell 8% year over year, largely because operating losses were lower; personnel and technology costs increased. Nine-month noninterest income was down 1%, with stronger trading results offset by weaker deposit fees, mortgage banking, and advisory fees.
Management commentary, outlook, and risks
- Regulatory remediation and asset cap: Management says strengthening risk and control infrastructure remains the top priority and work on multiple consent orders is ongoing. The 2018 Federal Reserve consent order continues to cap consolidated assets at the level as of December 31, 2017, pending required reviews and regulatory approval. Wells Fargo warns that delays or failure to meet requirements could lead to penalties, business restrictions, or higher capital and liquidity requirements.
- Customer remediation: Accrued liabilities were approximately $1.5 billion at September 30, 2023, down from approximately $2.3 billion at December 31, 2022. Estimates may change as reviews and regulator communications continue.
- FDIC special assessment: Under the proposed rule, the company’s pre-tax assessment could be up to $1.8 billion. Wells Fargo expected to expense the amount when the rule is finalized, then expected in Q4 2023; the final amount and timing could differ.
- Capital regulation: Regulators proposed changes to risk-based capital requirements, which Wells Fargo expected to increase RWAs significantly and produce a net increase in capital requirements. Proposed implementation was to begin in July 2025 with a three-year phase-in; the company was evaluating balance-sheet and capital actions.
- Debit interchange: A proposed Federal Reserve rule issued October 25, 2023, could significantly reduce debit interchange fees if adopted as proposed.
- Legal and regulatory contingencies: The company paid $300 million to resolve an auto-lending securities class action and $200 million to resolve SEC and CFTC record-keeping investigations. It paid $1.0 billion to resolve consent-order disclosure litigation. The high end of reasonably possible legal losses above accrued probable losses was approximately $1.6 billion; actual losses could exceed accruals or estimates.
- Mortgage and interest-rate exposure: Mortgage originations and mortgage banking income remained weak. Management describes earnings sensitivity to interest rates and deposit pricing; its 12-month simulation estimated a $2.1 billion net interest income benefit from an instantaneous +100 basis-point parallel shift and a $2.1 billion decline from a -100 basis-point shift. Actual results may differ, including as deposit behavior changes.
- No specific consolidated earnings or revenue guidance is provided in the supplied filing text. Forward-looking statements are subject to economic, market, credit, regulatory, operational, and other risks.
Most important facts for investors to verify
- Whether CRE office credit quality, criticized loans, nonaccruals, and charge-offs continue to deteriorate, and whether the allowance adequately reflects that risk.
- The final FDIC special assessment, its timing, and the actual expense recorded versus the proposed maximum of $1.8 billion.
- Progress toward resolving consent orders and the Federal Reserve asset cap, including any new restrictions, penalties, or required remediation costs.
- Deposit trends, deposit costs, and net interest margin as customers move to higher-yielding products and rates or market conditions change.
- The final form and financial impact of proposed capital and debit-interchange rules, including any effect on capital ratios, RWAs, or fee income.
- Developments in legal matters and customer remediation, including whether losses exceed existing accruals and the disclosed $1.6 billion high-end estimate of reasonably possible legal losses above accruals.
- How much reported earnings growth depends on elevated interest rates, trading activity, lower legal/remediation expenses, and discrete Q3 tax benefits.