WELLS FARGO & COMPANY quarterly report, Q1 FY2019

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Wells Fargo & Company — Q1 2019 Form 10-Q

Reporting period: Quarter ended March 31, 2019. Wells Fargo is a diversified financial services company with $1.89 trillion in assets. Comparisons below are year over year unless otherwise stated.

Financial performance

  • Earnings: Net income was $5.86 billion, up 14%; net income applicable to common stock was $5.51 billion, up 16%. Diluted EPS was $1.20, versus $0.96.
  • Revenue and margin: Revenue was $21.61 billion, down about 1%. GAAP net interest income was $12.31 billion, up $73 million; taxable-equivalent net interest margin was 2.91%, versus 2.84%. Noninterest income declined 4% to $9.30 billion.
  • Expenses and profitability: Noninterest expense fell 7% to $13.92 billion, primarily because prior-year operating losses included a discrete litigation accrual. The efficiency ratio improved to 64.4% from 68.6%. Pre-tax, pre-provision profit was $7.69 billion, up 12%. Results included $297 million of net discrete tax benefits; the effective tax rate was 13.1%.
  • Cash flow: Operating activities provided $7.95 billion, compared with $15.23 billion. Investing activities used $9.03 billion, versus providing $10.16 billion; financing activities used $23.24 billion, versus $38.94 billion. Cash, cash equivalents and restricted cash declined $24.32 billion during the quarter to $148.97 billion.
  • Balance sheet and funding: Total assets were $1.888 trillion. Loans were $948.25 billion, down $4.86 billion from year-end; deposits were $1.264 trillion, down $22.16 billion. Long-term debt was $236.34 billion and short-term borrowings were $106.60 billion. Average deposit cost rose 31 basis points year over year to 65 basis points.
  • Liquidity and capital: Average consolidated liquidity coverage ratio was 123%, above the 100% minimum. Unencumbered primary liquidity sources totaled $399.8 billion. CET1 was 11.92%, up from 11.74% at year-end and above management’s 10% internal target; supplementary leverage ratio was 7.8%. Eligible external TLAC was 23.85% of risk-weighted assets, versus a 22.0% minimum.
  • Shareholder returns: The company returned $6.0 billion through common dividends and net repurchases, including repurchasing 97.4 million shares for $4.82 billion. The declared common dividend was $0.45 per share.

Credit quality and changes versus comparable periods

  • Net charge-offs were $695 million, or 0.30% of average loans, compared with $741 million and 0.32% a year earlier. Consumer losses improved, particularly in auto lending; commercial losses increased.
  • Provision for credit losses rose to $845 million from $191 million, reflecting a $150 million allowance build amid a somewhat less favorable economic outlook, versus a release a year earlier. Total allowance for credit losses was $10.82 billion, or 1.14% of loans.
  • Nonaccrual loans were $6.91 billion, up $409 million from year-end, mainly from commercial exposures including utilities and oil and gas. Nonperforming assets were $7.34 billion, or 0.77% of loans.
  • Compared with Q1 2018, lower noninterest income—particularly trust and investment fees and mortgage banking—offset higher net interest income and lower expenses. Community Banking net income rose 48% to $2.82 billion; Wholesale Banking fell 4% to $2.77 billion; WIM fell 19% to $577 million.

Outlook, management commentary, risks and unusual items

  • Leadership: Timothy Sloan stepped down as CEO and president on March 28 and announced his retirement effective June 30. Allen Parker became interim CEO and president; the board began an external search for a permanent CEO.
  • Federal Reserve asset cap: The 2018 consent order limits consolidated assets to the December 31, 2017 level until required governance and risk-management improvements, third-party review and Federal Reserve approval are completed. At quarter-end, assets calculated under the order were below the cap. Timing and conditions for removing the restriction remain uncertain.
  • Customer remediation and legal exposure: Reviews of past sales, auto lending, deposit-account handling, wealth-management fees, FX pricing and mortgage practices continued. The company stated that additional remediation or accruals may result. The high end of reasonably possible legal losses above accrued probable losses was approximately $3.1 billion; actual outcomes may exceed accruals or that range. The filing says the ultimate resolution of retail sales-practices matters could not be determined to have, or not have, a material adverse effect on consolidated financial condition.
  • Regulatory matters: 2018 CFPB and OCC consent orders require $1 billion in civil penalties and remediation. The company also reported ongoing agency inquiries and litigation. It paid $575 million under a 2018 agreement with state attorneys general, among other settlements and proceedings.
  • Other notable items: The company sold $1.6 billion of Pick-a-Pay PCI loans in Q1, recognizing a $608 million gain, and expected to close a further approximately $2.0 billion sale in Q2. It announced an agreement to sell Institutional Retirement and Trust on April 9, with closing expected in Q3 2019. It expected to continue share repurchases during the remainder of 2019, subject to regulatory, legal and other conditions.
  • Accounting and rate sensitivity: Wells Fargo expected to adopt CECL in Q1 2020 and estimated a $0–$1 billion decrease in its loan allowance at adoption based on the portfolio and conditions at March 31; a separate accounting change was expected to reduce the allowance by approximately $1.5 billion. Estimates may change. Management’s simulations indicated net interest income sensitivity over the next two years to both higher and lower rates, with results dependent on assumptions and not a full measure of earnings impact.
  • Operational and market risks: Disclosed risks include the asset cap and remediation burden, litigation and regulatory actions, deposit trends and funding costs, interest-rate and mortgage/servicing exposure, market disruption, cybersecurity and vendor failures, and Brexit. February’s data-center outage resulted in $35 million of customer fee waivers and reversals.

Important facts for investors to verify

  • Progress and regulatory acceptance of the Federal Reserve-mandated plans and reviews, and any change to the asset cap.
  • Whether customer remediation reviews produce additional costs, accruals, penalties or restrictions; monitor legal exposure alongside the approximately $3.1 billion disclosed excess-loss range.
  • Credit trends, especially rising commercial nonaccruals in utilities and oil and gas, and the effect of economic assumptions on provisions and allowance coverage.
  • Actual CECL adoption impact on allowance, retained earnings and regulatory capital versus the estimates disclosed in this filing.
  • Whether revenue, deposits, loan balances, and fee-generating wealth and mortgage businesses stabilize, and whether planned repurchases and the announced business sale proceed as expected.