Wells Fargo & Company — Q1 2017 Form 10-Q
Business context and reporting period. The filing covers the quarter ended March 31, 2017. Wells Fargo is a diversified U.S. financial services company operating through Community Banking, Wholesale Banking, and Wealth and Investment Management. It reported $1.95 trillion in assets and approximately 273,000 full-time-equivalent team members.
Financial results and condition
| Metric | Q1 2017 | Comparable period / change |
|---|---|---|
| Wells Fargo net income | $5.457 billion | $5.462 billion in Q1 2016 |
| Net income applicable to common stock | $5.056 billion | $5.085 billion in Q1 2016 |
| Diluted EPS | $1.00 | $0.99 in Q1 2016 |
| Total revenue | $22.002 billion | Down 1% year over year |
| Net interest income | $12.300 billion | $11.667 billion in Q1 2016; taxable-equivalent NIM was 2.87% versus 2.90% |
| Noninterest income | $9.702 billion | $10.528 billion in Q1 2016 |
| Noninterest expense | $13.792 billion | Up 6% year over year; efficiency ratio 62.7% versus 58.7% |
| Provision for credit losses | $605 million | $1.086 billion in Q1 2016 |
| Cash flow | Operating $13.191 billion; investing $(29.273) billion; financing $15.051 billion | Cash and due from banks ended at $19.698 billion |
| Assets / loans / deposits | $1.952 trillion / $958.405 billion / $1.325 trillion | Loans down $9.2 billion and deposits up $19.4 billion from year-end 2016 |
| Long-term debt / total equity | $256.468 billion / $202.489 billion | Long-term debt up $1.4 billion; equity up $2.0 billion from year-end |
| Capital | Fully phased-in CET1: 11.23% under the Standardized Approach; fully phased-in SLR: 7.7% | Transition-requirements CET1 ratio: 11.52% |
Primary liquidity sources totaled $507.3 billion, including $462.2 billion unencumbered. The allowance for credit losses was $12.287 billion, or 1.28% of total loans. Net charge-offs were $805 million, an annualized 0.34% of average loans. Nonperforming assets were $10.664 billion, or 1.11% of loans.
Material changes versus comparable periods
- Net interest income rose 5% year over year, supported by higher interest income and growth in commercial lending and investment securities; net interest margin edged down to 2.87%.
- Revenue declined 1%, mainly from lower mortgage banking and other noninterest income. Q1 2017 included a $193 million net hedge-ineffectiveness loss, versus a $379 million gain in Q1 2016; the prior-year period also included crop-insurance sale income.
- Expenses increased 6%, including higher personnel, professional-services, FDIC assessment, and operating-lease costs. Management said the efficiency ratio was expected to remain elevated.
- Credit performance improved overall: net charge-offs fell from $886 million and the provision declined from $1.086 billion. Commercial improvement, particularly in oil and gas, offset higher consumer loss rates in credit cards and auto lending.
- Average loans increased 4% and average deposits increased 7% year over year. At quarter-end, total loans declined from December 2016, while deposits rose.
- Community Banking net income fell 9% year over year; Wholesale Banking rose 10%; Wealth and Investment Management rose 22%.
Outlook, commentary, risks, contingencies, and unusual items
- Management described rebuilding trust following retail sales-practices misconduct as its top priority. Actions included governance and oversight changes, executive compensation clawbacks, customer remediation efforts, and a $142 million class-action settlement agreement subject to court approval.
- The OCC downgraded Wells Fargo’s Community Reinvestment Act rating to “Needs to Improve.” The filing says this restricts certain nonbank activities and can require prior regulatory approval for specified actions.
- Wells Fargo reported ongoing government inquiries and multiple civil, shareholder, and employment lawsuits related to sales practices. The high end of reasonably possible litigation losses in excess of accrued probable losses was approximately $2.0 billion; actual losses could exceed estimates.
- The company expects to continue share repurchases during 2017, subject to regulatory, legal, capital, market, and other conditions. It repurchased 53.1 million shares in Q1 for $2.9 billion and entered into a $750 million forward repurchase contract in April, expected to settle in Q3.
- Interest-rate simulations indicate net interest income could benefit modestly from higher rates and decline under lower-rate scenarios; outcomes depend on assumptions including deposit mix, repricing, and mortgage behavior.
- Other material risks include mortgage-servicing and repurchase claims, consumer and commercial credit deterioration, interest-rate and market exposure, cybersecurity and operational risks, regulatory changes, and capital/liquidity requirements. The company said it had not experienced material losses from cyberattacks.
- Wells Fargo stated that its disclosure controls were effective as of March 31, 2017, and there was no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether customer remediation and sales-practices reforms restore trust, and the eventual cost and scope of related investigations and litigation.
- Whether the $2.0 billion excess reasonably possible litigation-loss estimate, the $142 million settlement, and recorded reserves change as cases progress.
- Whether expense growth and the elevated efficiency ratio improve, and whether revenue pressure in mortgage banking persists.
- Whether credit trends remain favorable, especially in credit cards, auto, oil and gas, and the legacy Pick-a-Pay mortgage portfolio; assess allowance adequacy against changing conditions.
- How deposit pricing, interest rates, mortgage prepayments, and mortgage-servicing-right valuations affect future net interest income and earnings.
- Regulatory developments, including the CRA rating consequences, resolution-plan requirements, capital actions, and constraints on future dividends and repurchases.