WELLS FARGO & COMPANY quarterly report, Q2 FY2022

Business context and reporting period

Wells Fargo & Company filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2022. The diversified U.S. financial services company reported through four operating segments: Consumer Banking and Lending, Commercial Banking, Corporate and Investment Banking, and Wealth and Investment Management. The Federal Reserve asset cap remained in effect and constrained the company’s balance-sheet management.

Financial performance and condition

For the first half of 2022, revenue was $34.6 billion, down 11% year over year; net income was $6.8 billion, down 36%; and diluted EPS was $1.62 versus $2.40. Net interest income rose, supported by higher rates, loan growth and lower mortgage-backed securities premium amortization. Noninterest income fell, largely reflecting weaker equity-security gains and mortgage banking income. Q2 pretax pre-provision profit was $4.1 billion, down 40% year over year.

At June 30, assets were $1.88 trillion, loans $943.7 billion, deposits $1.425 trillion and total equity $179.8 billion. Period-end loans were up 5% from December 31, 2021; deposits were down 4%. Long-term debt was $150.3 billion. First-half cash flows were $7.8 billion provided by operations, $27.5 billion used in investing and $59.4 billion used in financing. Cash, cash equivalents and restricted cash fell to $155.1 billion from $234.2 billion at year-end.

Capital and liquidity remained above stated regulatory minimums: standardized CET1 was 10.38% versus a 9.10% required ratio; TLAC was 22.72% versus a 21.50% minimum; and LCR was 121% versus a 100% minimum. The allowance for credit losses on loans was $12.9 billion, or 1.37% of loans, down from $13.8 billion, or 1.54%, at year-end. Nonperforming assets were $6.1 billion, 0.65% of loans.

Material changes versus prior comparable periods

• Q2 net interest income increased 16% year over year, while noninterest income declined 40% to $6.8 billion. Mortgage banking income was $287 million versus $1.34 billion; net losses from equity securities were $615 million versus $2.70 billion of gains.
• Q2 noninterest expense decreased 3% to $12.9 billion, but operating losses rose 90% to $576 million, driven by litigation and customer remediation expense.
• The credit-loss provision shifted from a $1.26 billion release in Q2 2021 to a $580 million expense in Q2 2022, reflecting loan growth and modest weakening in the economic outlook.
• Average loans rose 8% year over year to $926.6 billion; average deposits rose 1% to $1.446 trillion. Asset-cap management reduced deposits in Corporate and Investment Banking and Corporate.
• First-half AOCI declined $8.9 billion, predominantly from unrealized losses on available-for-sale debt securities. The company transferred $43.0 billion of securities from available-for-sale to held-to-maturity during the first half.

Outlook, commentary, risks and unusual items

The filing does not provide a clear numerical consolidated earnings or revenue forecast. Management reported that it expects the overdraft policy changes introduced beginning in March 2022 to reduce certain deposit-related fees for the remainder of 2022. Following the June 2022 stress test, the company expected its stress capital buffer to rise 10 basis points to 3.20% for October 2022–September 2023, subject to the Federal Reserve’s final determination. On July 26, 2022, the Board approved a Q3 common dividend of $0.30 per share, up from $0.25.

Significant risks include continuing consent orders and remediation obligations, legal and regulatory proceedings, economic weakening and inflation, interest-rate and market movements, mortgage servicing and origination risks, and operational and cybersecurity risks. The 2018 Federal Reserve consent order’s asset cap remained tied to satisfactory completion and review of remediation plans; the company said compliance work could take multiple years and delays could bring further consequences. The OCC had assessed a $250 million penalty in 2021 concerning consent-order progress and Home Lending loss-mitigation activities.

Unusual items included a $576 million Q2 impairment of equity securities, predominantly in affiliated venture capital, and a $107 million write-down on unfunded leveraged-finance commitments. The filing disclosed a high end of approximately $3.2 billion for reasonably possible legal losses in excess of accrued probable losses; outcomes remain uncertain. Debt securities had $35.9 billion of net unrealized losses at quarter-end, primarily due to higher rates and wider credit spreads; management stated 98% of the combined AFS and HTM portfolio was rated AA- or higher. These fair-value losses and the accounting treatment of HTM securities merit attention.

Important facts for investors to verify

• Whether net interest income growth from higher rates persists as deposit costs and customer deposit mix change.
• Whether weaker mortgage originations, market-sensitive wealth fees and equity-security valuations continue to pressure noninterest revenue.
• Credit performance as loan balances grow and inflation, rising rates and possible economic contraction affect borrowers; monitor charge-offs, delinquencies and allowance adequacy.
• Progress on the Federal Reserve asset-cap requirements and other consent orders, including any further penalties, restrictions or customer remediation costs.
• The effect of AFS securities’ unrealized losses, the AFS-to-HTM transfers and the $8.9 billion first-half AOCI decline on capital and flexibility.
• Actual legal outcomes versus the disclosed $3.2 billion high-end estimate of reasonably possible losses above accruals, and execution of the announced dividend increase.