Wells Fargo & Company — Q3 2013 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2013; financial statements are unaudited. Dollar figures are in U.S. dollars. Wells Fargo is a diversified financial services company with $1.5 trillion in assets and three reported segments: Community Banking, Wholesale Banking, and Wealth, Brokerage and Retirement.
Financial performance and condition
| Metric | Q3 2013 | Comparable period |
|---|---|---|
| Revenue | $20.5 billion | $21.2 billion in Q3 2012, down 3% |
| Net income | $5.6 billion | $4.9 billion in Q3 2012, up 13% |
| Diluted EPS | $0.99 | $0.88 in Q3 2012, up 13% |
| Net interest income | $10.7 billion GAAP; $10.9 billion taxable-equivalent | $10.7 billion GAAP; $10.8 billion taxable-equivalent in Q3 2012 |
| Net interest margin | 3.38% | 3.66% in Q3 2012 |
| Noninterest income | $9.7 billion | $10.6 billion in Q3 2012, down 8% |
| Noninterest expense | $12.1 billion | $12.1 billion in Q3 2012 |
| Efficiency ratio | 59.1% | 57.1% in Q3 2012 |
| Provision for credit losses | $75 million | $1.6 billion in Q3 2012 |
| Net charge-offs | $975 million; 0.48% annualized | $2.4 billion; 1.21% in Q3 2012 |
For the first nine months, net income was $16.3 billion, up 18% year over year, and diluted EPS was $2.89 versus $2.45. Revenue was $63.1 billion, down 2%; net interest margin was 3.44% versus 3.82%. Operating cash flow was $43.2 billion versus $50.2 billion for the first nine months of 2012; investing cash flow was negative $102.8 billion and financing cash flow was positive $56.6 billion. Cash and due from banks declined $2.9 billion during the period to $18.9 billion.
At September 30, total assets were $1.488 trillion, loans $812.3 billion, deposits $1.042 trillion, and total equity $168.8 billion. Long-term debt was $151.2 billion, up from $127.4 billion at December 31, 2012; short-term borrowings were $53.9 billion. Core deposits were $947.8 billion and equaled 117% of loans. Basel I Tier 1 common equity was 10.60%; estimated Basel III Common Equity Tier 1 was 9.56%, above management’s stated 9% target.
Material changes and drivers
- Quarterly earnings rose despite lower revenue, principally because the provision for credit losses fell sharply as credit performance improved. The quarter included a $900 million release from the allowance.
- Mortgage banking income fell 43% year over year to $1.6 billion. Mortgage origination and sale gains declined amid lower refinancing volumes and margins; originations were $80 billion versus $139 billion a year earlier. Growth in fees, including trust, investment, deposit service, and card fees, partly offset the decline.
- Average loans increased 4% year over year to $804.8 billion; period-end loans rose 4% from December 2012. Average core deposits increased 5% year over year. The securities portfolio and short-term investments also grew.
- Credit indicators improved: nonaccrual loans were $16.9 billion versus $20.5 billion at year-end 2012, and nonperforming assets were $20.7 billion versus $24.5 billion. The allowance for credit losses was $15.6 billion, down from $17.5 billion at year-end.
- Net unrealized gains on available-for-sale securities fell to $5.8 billion from $11.9 billion at year-end, primarily reflecting higher long-term interest rates. Total equity nevertheless increased to $168.8 billion.
Outlook, commentary, risks and unusual items
- Management expected further pressure on net interest margin as assets continued repricing in a low-rate environment. It targeted an efficiency ratio of 55%–59% for Q4 2013; Q3 was 59.1%.
- Management expected future allowance releases if favorable conditions continued, absent significant economic deterioration. This is an expectation, not a guarantee.
- Wells Fargo said it was adding to liquidity through low-cost long-term debt and term deposits, with much of the proceeds held in cash and short-term investments. Its core deposit base remained a key funding source.
- The September 2013 FHLMC settlement resolved substantially all repurchase liabilities on loans sold to FHLMC before January 1, 2009. The settlement involved a $746 million cash payment covered by prior accruals. The mortgage repurchase liability was $1.4 billion; reasonably possible losses above that reserve had a stated high end of $1.4 billion.
- Mortgage-servicing and foreclosure matters remain significant. The company reported sufficient earned credits toward the National Mortgage Settlement’s consumer-relief and refinance commitments, subject to monitor review. The refinance program is expected to reduce future interest income by about $1.8 billion over time.
- Legal contingencies include the U.S. FHA insurance litigation and an appealed judgment of approximately $203 million in the debit-card transaction-posting case. The high end of reasonably possible litigation losses above recorded liabilities was $1.0 billion. Management said current information and reserves led it to expect no material adverse effect on consolidated financial position, while noting an unfavorable resolution could materially affect results in a particular period.
- Key sensitivities include interest-rate and mortgage-servicing-right valuations, housing and credit conditions, mortgage repurchase demands, regulatory capital and liquidity requirements, legal and regulatory actions, and cybersecurity. The filing reported no material losses from cyberattacks to date.
Most important facts for investors to verify
- Whether credit quality and allowance releases remain sustainable, and how much earnings growth depends on provision reductions.
- Whether mortgage revenue, origination volumes, servicing economics, and MSR hedging stabilize as rates and refinancing activity change.
- The ultimate mortgage repurchase losses, including outcomes following the FHLMC settlement and any changes in investor demands or appeal recoveries.
- Actual capital and liquidity effects as Basel III, leverage, and liquidity rules take effect; the Basel III ratio in this filing was an estimate.
- Developments in FHA, debit-card posting, and other legal matters, and performance against mortgage-servicing settlement commitments.