Wells Fargo & Company — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022. Wells Fargo is a diversified U.S. financial services company with four reportable operating segments. Comparisons below are primarily with Q1 2021; balance-sheet comparisons are with December 31, 2021.
Key financial metrics
| Metric | Q1 2022 / March 31, 2022 | Comparison |
|---|---|---|
| Total revenue | $17.6 billion | Down 5% year over year |
| Net interest income | $9.2 billion; taxable-equivalent net interest margin 2.16% | Net interest income up 5%; margin was 2.05% in Q1 2021 |
| Net income / diluted EPS | $3.7 billion / $0.88 | Net income down 21%; diluted EPS was $1.02 in Q1 2021 |
| Pre-tax pre-provision profit | $3.7 billion | Down 18% year over year |
| Noninterest expense / efficiency ratio | $13.9 billion / 79% | Expense down 1%; efficiency ratio was 75% in Q1 2021 |
| Credit provision / loan losses | Provision benefit of $787 million; net charge-offs $305 million | Provision benefit was $1.0 billion in Q1 2021; charge-offs down 42% |
| Loans / deposits | $911.8 billion / $1.481 trillion | Loans up 2% and deposits essentially unchanged from year-end; loans up 6% and deposits up 3% year over year |
| Allowance for credit losses on loans | $12.7 billion, or 1.39% of loans | Down from $13.8 billion and 1.54% at year-end |
| Assets / equity | $1.940 trillion / $181.7 billion | Assets down $8.4 billion and equity down $8.4 billion from year-end |
| Long-term debt | $153.3 billion | Compared with $160.7 billion at year-end |
| Capital and liquidity | Standardized CET1 10.45%; SLR 6.61%; TLAC 22.31%; LCR 119% | Each exceeded the stated regulatory minimum; CET1 was 11.35% and LCR 118% at year-end |
| Cash flows | Operating +$0.2 billion; investing −$23.0 billion; financing −$9.6 billion | Operating cash flow was −$3.5 billion in Q1 2021; cash, cash equivalents and restricted cash fell $32.3 billion during Q1 2022 |
Material changes and performance drivers
- Revenue fell mainly because mortgage banking, other income, and investment advisory and asset-based fees declined. Mortgage banking revenue was $693 million, down 48% year over year, reflecting lower mortgage origination volumes and margins.
- Higher net interest income reflected higher loan balances, lower long-term debt costs and lower mortgage-backed securities premium amortization. Average loans rose to $898.0 billion; commercial, credit-card and auto growth was partly offset by residential mortgage paydowns.
- The credit provision was a benefit, reflecting lower charge-offs and reduced COVID-related economic uncertainty, partly offset by greater uncertainty about high inflation. Management also cited geopolitical risks in its credit outlook.
- Noninterest expense was nearly flat overall: lower personnel and professional-services costs were largely offset by a $460 million year-over-year increase in operating losses, mainly customer remediation expense. The efficiency ratio worsened as revenue declined.
- Commercial Banking net income increased to $857 million from $637 million, while Consumer Banking and Lending fell to $1.77 billion from $2.10 billion, Corporate and Investment Banking fell to $1.26 billion from $1.56 billion, and Wealth and Investment Management rose to $465 million from $419 million.
- Capital declined in part due to $6.0 billion of common-share repurchases and $5.1 billion of after-tax other comprehensive loss, predominantly unrealized losses on available-for-sale debt securities as rates rose. Wells Fargo declared a $0.25 per-share dividend, versus $0.10 a year earlier.
Outlook, risks and unusual items
- The filing provides no specific numerical earnings or revenue guidance. Management identifies future net interest income, expenses, credit quality, capital and distributions as forward-looking matters, subject to substantial uncertainty.
- The Federal Reserve asset cap remains a constraint on business management: the company says it managed deposits and other activity under the cap, including lower Corporate and Investment Banking deposits. Regulatory consent-order work is ongoing and expected to take multiple years; delays or failure to meet requirements could lead to penalties or further restrictions.
- Wells Fargo reported $2.8 billion as the high end of reasonably possible legal losses in excess of accrued probable and estimable losses. The company said ultimate outcomes are uncertain and could materially affect results in a particular period, although it did not expect the matters, based on information then available, to materially affect consolidated financial condition.
- Notable legal and regulatory matters include the OCC’s $250 million penalty assessed in 2021, continuing customer-remediation matters, and open investigations and litigation. The filing also describes a new OCC consent order concerning Home Lending loss-mitigation practices.
- Risks highlighted include inflation, the Ukraine conflict and related sanctions, COVID-19 effects, interest-rate and market movements, mortgage origination and servicing exposures, customer remediation, operational and cyber risks, and regulatory requirements.
- Interest-rate simulations estimated that an instantaneous parallel +100-basis-point shift would increase net interest income by $5.7 billion over the following 12 months, while a −100-basis-point shift would reduce it by $6.1 billion. These are scenario estimates, not guidance, and exclude noninterest income and expense effects.
- The company transferred $14.7 billion of available-for-sale securities to held-to-maturity during the quarter. Combined available-for-sale and held-to-maturity securities had $20.8 billion of net unrealized losses at quarter-end, largely associated with higher rates and wider credit spreads.
- Wells Fargo issued $8.1 billion of long-term debt in April 2022. It also announced changes intended to help consumer customers avoid overdraft-related fees, which it expected to reduce certain deposit-related fees for the rest of 2022.
Most important facts for investors to verify
- Progress toward satisfying consent orders, the continuing asset-cap constraint, and the scale and timing of customer remediation costs.
- Whether revenue can stabilize as mortgage activity slows, and whether higher rates translate into net interest income growth after deposit pricing and customer behavior.
- Credit trends under persistent inflation and geopolitical stress, including consumer delinquencies, auto losses, commercial real estate exposures, and the adequacy of the $12.7 billion loan allowance.
- Capital effects from securities valuation changes, risk-weighted-asset growth, share repurchases, and regulatory capital requirements.
- Developments in legal matters and whether actual losses exceed accruals; the disclosed $2.8 billion figure is a possible-loss range estimate above accruals, not an expected payment.
- Reported cash-flow movements in the context of bank balance-sheet activity, and the continued availability of liquidity sources, including the 119% LCR and approximately $213.7 billion of available borrowing capacity.