WELLS FARGO & COMPANY quarterly report, Q1 FY2015

Wells Fargo & Company — Q1 2015 Form 10-Q

Reporting period: Quarter ended March 31, 2015; comparisons are primarily with Q1 2014, and balance-sheet comparisons with December 31, 2014. Wells Fargo is a diversified U.S. financial-services company reporting Community Banking, Wholesale Banking, and Wealth, Brokerage and Retirement.

Financial results and position

MetricQ1 2015 / March 31, 2015Comparable period
Total revenue$21.28 billion$20.63 billion, Q1 2014 (+3%)
Net interest income$10.99 billion; taxable-equivalent $11.23 billion$10.62 billion GAAP; taxable-equivalent $10.83 billion
Net interest margin2.95%3.20%, Q1 2014
Noninterest income$10.29 billion$10.01 billion, Q1 2014 (+3%)
Noninterest expense$12.51 billion$11.95 billion, Q1 2014 (+5%)
Net income / diluted EPS$5.80 billion / $1.04$5.89 billion / $1.05, Q1 2014
Efficiency ratio58.8%57.9%, Q1 2014
Average loans / period-end loans$863.3 billion / $861.2 billionAverage loans +5% year over year; period-end loans +4%
Deposits$1.197 trillion$1.168 trillion at year-end 2014; +9% year over year
Total assets / total equity$1.738 trillion / $190.0 billionAssets +3% and equity +3% versus year-end 2014
Long-term debt / short-term borrowings$183.3 billion / $77.7 billionAt March 31, 2015

Return on average assets was 1.38% and return on average common equity was 13.17%. The declared common dividend was $0.35 per share. Pre-tax, pre-provision profit was $8.77 billion, approximately flat year over year.

Cash flow: Operating activities provided $2.52 billion, investing activities used $42.92 billion, and financing activities provided $40.63 billion. Cash and due from banks increased $222 million to $19.79 billion. Investing outflows chiefly reflected growth in short-term investments and securities; financing inflows included deposit and short-term borrowing growth.

Liquidity and capital: Unencumbered primary liquidity was $373.3 billion, up from $321.1 billion at year-end. Core deposits were $1.087 trillion, or 126% of loans. Basel III Standardized Approach CET1 was 10.69% (11.04% at year-end, with a change in RWA approach affecting comparability); estimated fully phased-in Advanced Approach CET1 was 10.48%. The company reported a 9.48% Tier 1 leverage ratio and stated the company and insured banks were well-capitalized.

Material changes and drivers

  • Revenue rose 3% year over year, mainly on higher net interest income and trust, investment, card, mortgage origination, and debt-security income. Net interest income increased with earning-asset growth and lower funding costs, while net interest margin fell 25 basis points as liquidity-related funding and lower-yielding assets diluted margin.
  • Net income declined 2% and diluted EPS declined 1%. Higher noninterest expense—particularly compensation and operating losses—offset revenue growth. Operating losses were $295 million, up 86%, primarily reflecting higher litigation accruals.
  • Net charge-offs improved to $708 million, or 0.33% of average loans, from $825 million, or 0.41%, a year earlier. Nonperforming assets fell 4% from year-end to $14.84 billion. The allowance for credit losses was $13.01 billion, or 1.51% of loans.
  • The credit-loss provision was $608 million, versus $325 million a year earlier, despite a $100 million allowance release in Q1 2015; the prior-year release was $500 million. Thus, the year-over-year provision increase reflected a smaller release as well as portfolio and segment-level factors.
  • Core loans grew $914 million during the quarter, while non-strategic and liquidating loans declined $2.23 billion. Securities increased $11.8 billion, largely from purchases of Treasuries and agency mortgage-backed securities.
  • Segment net income was $3.67 billion in Community Banking (-5%), $1.80 billion in Wholesale Banking (+3%), and $561 million in Wealth, Brokerage and Retirement (+18%).

Outlook, commentary, and risks

  • Management expected the full-year 2015 efficiency ratio to remain within its 55%–59% target range. Absent further discrete tax benefits, it expected the full-year effective tax rate to be higher than Q1’s 28.2%.
  • The Federal Reserve did not object to the 2015 capital plan. The plan proposed a Q2 common dividend of $0.375 per share, approved by the Board on April 28, 2015; management also expected share repurchases to continue through the rest of 2015. Q1 repurchases totaled 48.4 million shares for $2.6 billion.
  • Management said higher interest rates would benefit net interest income over time, but lower-rate scenarios were unfavorable to earnings over the 24-month simulation horizon. Outcomes depend on the rate path, funding mix, mortgage activity, and MSR valuations.
  • On April 10, 2015, Wells Fargo announced an agreement to buy approximately $9 billion of performing commercial real estate mortgage loans from GE Capital and to provide $4 billion of secured financing to Blackstone Mortgage Trust; closings were expected in Q2 and Q3.
  • Key exposures include mortgage servicing and repurchase obligations, legacy Pick-a-Pay and other liquidating loans, litigation, regulatory and compliance costs, cybersecurity and operational risks, interest-rate sensitivity, and possible deterioration in economic or housing conditions. The high end of reasonably possible litigation losses above recorded liability was approximately $1.2 billion; the high end of reasonably possible mortgage repurchase losses above the recorded liability was $936 million. Management cautioned that unfavorable developments could materially affect results in a particular period.
  • Management reported effective disclosure controls as of March 31, 2015, and no material change in internal control over financial reporting during the quarter.

Most important facts for investors to verify

  • Whether loan and deposit growth, including core-loan growth, continues to offset runoff in liquidating portfolios and the pressure on net interest margin.
  • Whether compensation, litigation accruals, and other operating costs remain consistent with the full-year efficiency-ratio target.
  • Credit-loss trends and allowance adequacy, especially in residential real estate, junior liens, commercial lending, and legacy PCI/Pick-a-Pay portfolios.
  • Capital and liquidity after planned dividends, repurchases, regulatory implementation, and the announced commercial real estate transactions.
  • Updates to litigation and mortgage repurchase exposures, including the distinction between recorded liabilities and reasonably possible additional losses.