Wells Fargo & Company — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021. Wells Fargo is a diversified financial services company operating through four reportable segments: Consumer Banking and Lending, Commercial Banking, Corporate and Investment Banking, and Wealth and Investment Management.
Financial performance and condition
- Revenue: $18.1 billion, up 2% year over year. Net interest income was $8.8 billion, down 22%; noninterest income was $9.3 billion, up 45%.
- Profit: Net income was $4.742 billion versus $653 million; diluted EPS was $1.05 versus $0.01. Net income applicable to common stock was $4.363 billion.
- Credit provision and losses: Provision for credit losses was a benefit of $1.048 billion, versus expense of $4.005 billion a year earlier. Net charge-offs were $523 million, down 44% year over year.
- Expenses and margins: Noninterest expense rose 7% to $14.0 billion. The efficiency ratio was 77%, compared with 74%. Taxable-equivalent net interest margin was 2.05%, down from 2.58%.
- Balance sheet: Period-end assets were $1.960 trillion, deposits $1.437 trillion, and loans $861.6 billion. Compared with December 31, 2020, deposits rose 2% and loans fell 3%. Average loans were down 9% year over year, while average deposits increased 4%.
- Credit quality: Loan allowance for credit losses was $18.0 billion, or 2.09% of loans, down from $19.7 billion and 2.22% at year-end. Nonperforming assets were $8.2 billion, down 8% from year-end.
- Capital and liquidity: Total equity was $188.3 billion. CET1 was 11.85% under the Standardized Approach; LCR was 127%; SLR was 7.91%; and TLAC was 25.18%. The filing says these ratios exceeded applicable minimums.
- Debt and cash flows: Long-term debt was $183.3 billion, versus $213.0 billion at year-end; short-term borrowings were $58.9 billion. Operating cash flow was negative $3.5 billion, investing cash flow positive $15.5 billion, and financing cash flow positive $10.1 billion. Cash, cash equivalents, and restricted cash ended at $286.7 billion, up $22.1 billion during the quarter.
Material changes versus comparable periods
- Higher noninterest income—particularly mortgage banking, equity-related gains, and trading—more than offset lower net interest income. Mortgage banking income was $1.326 billion versus $379 million, reflecting stronger mortgage origination and sale gains.
- The sharp improvement in reported earnings primarily reflected the swing from a large credit-loss provision in Q1 2020 to a provision benefit in Q1 2021, alongside higher noninterest income.
- Average loans declined amid weak commercial demand, paydowns and prepayments, and the student-loan portfolio reclassification. Average deposits rose, supported by customer liquidity preferences, stimulus payments, and lower spending.
- Noninterest expense increased, mainly from higher personnel expense, partly offset by lower operating losses and lower professional-services expense.
- The Company repurchased 17.2 million common shares for $596 million and declared a $0.10 dividend per common share, compared with $0.51 in Q1 2020.
Outlook, management commentary, risks, and unusual items
- No specific earnings guidance: The filing does not provide a clear numerical earnings or revenue forecast. Management cautions that actual results may differ materially from forward-looking statements.
- Regulatory constraints: The Federal Reserve asset cap remains in place pending required remediation and reviews. The Company says addressing consent orders and regulatory actions remains its top priority and may take multiple years; delays or failures could lead to penalties or further enforcement.
- Credit uncertainty: Management describes the economic outlook as improved but still uncertain. The loan allowance used 50% base and 50% downside economic scenarios. COVID-related payment deferrals may delay recognition of delinquencies and credit losses; worsening conditions could require higher allowances.
- Capital distributions: Federal Reserve restrictions generally limited dividends and repurchases to specified levels through the stress-test process. The Company submitted its 2021 capital plan on April 5; the filing noted that the Federal Reserve expected to publish stress-test results by July 1, 2021.
- Divestitures and unusual items: Wells Fargo agreed to sell Wells Fargo Asset Management for $2.1 billion and Corporate Trust Services for $750 million, with closings expected in the second half of 2021, subject to conditions. The first phase of the student-loan sale generated a $208 million gain and a $104 million goodwill write-down; the remaining portfolio sale was completed in April, with a $147 million gain and $79 million goodwill write-down expected in Q2.
- Legal and remediation exposure: The high end of reasonably possible legal losses in excess of accruals was approximately $2.6 billion at March 31. The Company says ultimate outcomes are uncertain and could materially affect results for a particular period. It also warns that additional customer-remediation matters may emerge.
- Other risks: Interest-rate movements, mortgage-servicing valuations and hedging, LIBOR transition, cyber and operational risks, and adverse effects on commercial real estate or pandemic-affected borrowers could affect results. The Company reported no loss from closing its Archegos Capital Management prime-brokerage exposure.
Important facts for investors to verify
- Whether the improvement in earnings is sustainable as credit-loss benefits diminish and net interest income remains pressured.
- Progress toward satisfying Federal Reserve, OCC, and CFPB requirements, and any developments affecting the asset cap.
- Future loan growth, deposit mix, net interest margin, credit losses, and the adequacy of the $18.0 billion loan allowance as pandemic support measures unwind.
- Closing conditions, timing, and realized financial effects of the announced asset-management and Corporate Trust Services sales, and the Q2 accounting for the remaining student-loan sale.
- Results of the 2021 supervisory stress test and their effect on capital distributions, share repurchases, and dividends.
- Developments in legal proceedings and customer remediation, including the $2.6 billion reasonably possible loss estimate above accrued amounts.
- Interpretation of reported cash flows: operating cash flow was negative, while cash balances rose; the filing’s consolidated cash-flow statement should be reviewed for bank-specific effects and working-capital movements.