Wells Fargo & Company — Q3 2011 Form 10-Q
Business context and reporting period. Diversified U.S. financial services company reporting for the quarter and nine months ended September 30, 2011. The filing was signed November 8, 2011. Results cover Community Banking, Wholesale Banking, and Wealth, Brokerage and Retirement.
Key financial metrics
Amounts are in U.S. dollars; “bn” means billion and “m” means million.
| Metric | Q3 2011 | Comparable period / change |
|---|---|---|
| Wells Fargo net income | $4.055bn | Up 21% year over year; $3.948bn in Q2 2011 |
| Net income applicable to common stock | $3.839bn | Up 22% year over year |
| Diluted earnings per common share | $0.72 | $0.60 a year earlier |
| Total revenue | $19.628bn | Down 6% year over year and 4% from Q2 |
| Net interest income | $10.542bn | Down 5% year over year |
| Net interest margin | 3.84% | 4.25% a year earlier; 4.01% in Q2 |
| Noninterest income | $9.086bn | Down 7% year over year |
| Noninterest expense | $11.677bn | Down 5% year over year |
| Efficiency ratio | 59.5% | 58.7% a year earlier; 61.2% in Q2 |
| Provision for credit losses | $1.811bn | $3.445bn a year earlier |
For the first nine months, net income was $11.762bn, up 31%; revenue was $60.343bn, down 5%; and diluted EPS was $2.09 versus $1.60. Net income growth primarily reflected lower credit-loss provisions and lower expenses, more than offsetting weaker revenue.
- Cash flow, nine months: Operating cash flow was $37.789bn, investing cash flow was negative $51.769bn, and financing cash flow was $16.250bn. Cash and due from banks increased $2.270bn to $18.314bn.
- Balance sheet at September 30: Assets were $1.305tn; loans were $760.106bn; securities available for sale were $207.176bn. Deposits totaled $895.428bn, up 6% from year-end 2010. Long-term debt was $133.214bn, down from $156.983bn; short-term borrowings were $50.775bn.
- Credit: Net charge-offs were $2.611bn, or 1.37% of average loans, versus $4.095bn, or 2.14%, a year earlier. Nonperforming assets were $26.844bn, down from $27.906bn at Q2. The allowance for credit losses was $20.372bn, or 2.68% of loans.
- Capital and returns: Total equity was $139.244bn. Tier 1 capital, total capital, and Tier 1 leverage ratios were 11.26%, 14.86%, and 8.97%; the Basel I Tier 1 common equity ratio was 9.34%. ROA was 1.26% and ROE was 11.86%. The common dividend was $0.12 per share.
Material changes versus comparable periods
- Q3 revenue declined year over year, principally from lower net interest income, mortgage banking income, and trading revenue. Net interest margin fell 41 basis points year over year as higher-yielding assets repriced and deposit growth was invested partly in lower-yielding short-term assets.
- Mortgage banking income fell 27% to $1.833bn; mortgage origination and sale gains fell 60% to $803m. Trading recorded a $442m net loss versus a $470m gain a year earlier, including a $377m loss on a legacy Wachovia position.
- Credit quality improved: Q3 marked the seventh consecutive quarterly decline in net charge-offs and the fourth consecutive quarterly decline in nonperforming assets. The allowance declined from $23.463bn at year-end 2010.
- Average core deposits rose 8% year over year to $836.845bn. Period-end loans were up 1% from year-end 2010, while non-strategic and liquidating loans fell $16.8bn to $116.5bn.
- Segment net income rose year over year: Community Banking 20%, Wholesale Banking 20%, and Wealth, Brokerage and Retirement 14%.
Outlook, management commentary, risks and unusual items
- Management targeted quarterly noninterest expense of approximately $11bn by Q4 2012 through its Compass cost initiative. It expected Q4 2011 expenses to be higher than Q3, citing mortgage pipeline costs, integration expenses, and year-end seasonality.
- Absent significant economic deterioration, management expected further allowance releases. It also expected the October 2011 redemption of $5.8bn of trust preferred securities, with an average coupon of 8.45%, to benefit Q4 net interest income.
- Final debit-card interchange rules were estimated to reduce quarterly after-tax earnings by approximately $250m from Q4 2011 before mitigation; management expected business changes could offset at least half over time.
- Mortgage repurchase liability was $1.194bn. The high end of reasonably possible losses above that liability was estimated at $1.9bn. Q3 additions to the liability were $390m, including $371m from revised estimates of losses on prior-period loan sales.
- The high end of reasonably possible litigation losses above recorded liabilities was $1.6bn. Management said it did not expect pending matters to materially affect consolidated financial position, while noting an unfavorable resolution could materially affect results in a particular period.
- Federal Reserve and OCC consent orders require improvements to mortgage servicing and foreclosure practices; no civil money penalties had been assessed at filing. Related compliance and servicing costs could rise. Moody’s downgraded the Parent’s supported long-term senior debt rating in September and maintained a negative outlook.
- Other risks include a weak or worsening economy and housing market, European sovereign debt stress, interest-rate and market volatility, regulatory changes and capital requirements, mortgage servicing and foreclosure matters, loan repurchases, and operational or cybersecurity incidents. Basel III and potential systemically important bank surcharges remained subject to rulemaking.
- Wachovia retail store conversions were complete after the October North Carolina conversion; remaining integration work was expected to finish in Q1 2012. A $271m gain on redemption of an investment-fund interest and the $377m legacy trading loss were notable Q3 items.
Most important facts for investors to verify
- Whether falling net interest margin and revenue stabilize, and whether deposit growth can be deployed at adequate yields.
- Whether credit improvement and anticipated reserve releases continue, particularly in commercial real estate, home equity, and Wachovia-acquired PCI portfolios.
- Whether mortgage repurchase demands, servicing costs, consent-order remediation, and litigation exposures remain within recorded reserves and disclosed possible-loss ranges.
- Whether the $11bn quarterly expense target by Q4 2012 is achievable, given expected near-term expense variability and integration spending.
- How final capital rules, the debt-rating outlook, and debit interchange changes affect capital, funding costs, and earnings.
- Reconcile reported EPS: the summary data gives diluted EPS of $0.72, while the income statement separately reports basic EPS of $0.73. The filing text does not explain this difference in the provided excerpt.