Wells Fargo & Company — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. Wells Fargo is a diversified financial-services company. The Board had appointed C. Allen Parker interim CEO and president in March; the search for a permanent CEO was ongoing.
Key financial results
| Metric | Q2 2019 | Comparable period / change |
|---|---|---|
| Revenue | $21.6 billion | Essentially flat year over year; net interest income fell $446 million while noninterest income rose $477 million |
| Net income | $6.2 billion | Up 20% from Q2 2018 |
| Net income applicable to common stock | $5.8 billion | Up 22% year over year |
| Diluted EPS | $1.30 | $0.98 in Q2 2018 |
| Net interest margin | 2.82% | Down 11 basis points year over year |
| Noninterest expense | $13.4 billion | Down 4%; efficiency ratio improved to 62.3% from 64.9% |
| Credit provision | $503 million | $452 million in Q2 2018 |
| Net charge-offs | $653 million; 0.28% annualized | $602 million; 0.26% in Q2 2018 |
For the first half, revenue was $43.2 billion versus $43.5 billion, net income was $12.1 billion versus $10.3 billion, and diluted EPS was $2.50 versus $1.94. First-half provision for credit losses increased to $1.35 billion from $643 million.
Balance sheet, liquidity and capital
- At June 30, assets were $1.923 trillion, loans $949.9 billion, deposits $1.288 trillion, and total equity $200.0 billion. Loans were down $3.2 billion from year-end 2018; deposits were up $2.3 billion.
- Cash, cash equivalents and restricted cash totaled $164.4 billion, down $8.9 billion from year-end. The company reported a 121% average quarterly liquidity coverage ratio, above the 100% minimum.
- Short-term borrowings were $115.3 billion and long-term debt was $241.5 billion. Long-term debt increased $12.4 billion from year-end; first-half issuance was $33.1 billion.
- Fully phased-in CET1 was 11.97%, above the company’s 10% internal target. The supplementary leverage ratio was 7.7%; eligible external TLAC was 24.09% of risk-weighted assets versus a 22.0% minimum.
- Common dividends declared were $0.45 per share for Q2. The company repurchased 104.9 million shares for $4.9 billion during the quarter and returned $6.1 billion to shareholders through dividends and net repurchases.
Cash flow, six months ended June 30
- Operating cash flow was $7.3 billion, compared with $14.4 billion in first-half 2018.
- Investing activities used $19.7 billion, versus providing $10.7 billion in first-half 2018.
- Financing activities provided $3.6 billion, versus using $77.6 billion. The prior-year period included a $67.1 billion net decrease in deposits.
- Cash, cash equivalents and restricted cash decreased $8.9 billion over the half-year to $164.4 billion.
Material changes and drivers
- Lower net interest income and margin reflected balance-sheet mix and repricing, higher funding costs, and lower variable interest income. Average deposit cost rose 30 basis points year over year to 70 basis points.
- Noninterest income increased 5% in Q2, led by equity-security gains and higher other income; trust and investment fees and mortgage servicing income declined. Q2 other income included $721 million of gains on sales of Pick-a-Pay purchased credit-impaired loans.
- Lower expenses reflected reduced operating losses, remediation costs, amortization of legacy intangibles and deposit assessments. First-half 2018 expenses included an $800 million litigation accrual related to CFPB and OCC consent orders.
- Credit indicators were mixed: nonaccrual loans fell 17% year over year to $5.9 billion, but Q2 net charge-offs increased, principally in commercial and industrial and credit-card portfolios. The allowance for credit losses was $10.6 billion, or 1.12% of loans.
Outlook, risks and unusual items
- Regulatory asset cap: The Federal Reserve’s 2018 consent order caps consolidated assets at the December 31, 2017 level until required governance, compliance and operational-risk improvements are completed and accepted. Assets were below the cap at Q2 end; the order remains in effect.
- Customer remediation and litigation: Reviews and remediation involving retail sales practices, auto lending and insurance products, deposit accounts, fiduciary fees, foreign exchange, and mortgage modification practices remained ongoing. The high end of reasonably possible legal losses in excess of accrued probable losses was approximately $3.9 billion at June 30; actual outcomes could exceed accruals.
- Institutional Retirement and Trust sale: The sale closed July 1, after quarter-end. Wells Fargo expected to recognize an approximately $1.1 billion pretax gain in Q3. The company will provide transition services for up to 24 months; related transition revenue is expected to approximate expenses and may decline as assets transfer.
- Capital returns: On July 23, the Board raised the quarterly common dividend to $0.51 per share and authorized up to $23.1 billion of gross common-stock repurchases for Q3 2019 through Q2 2020, subject to management discretion and regulatory conditions.
- CECL: Wells Fargo expected to adopt the current expected credit loss standard in Q1 2020 and estimated, based on its June portfolio and then-current assumptions, an approximately $1.5 billion decrease in the loan allowance at adoption. The estimate remained subject to refinement and economic conditions.
- Other material uncertainties include interest-rate and mortgage-servicing-rights sensitivity, economic and credit conditions, regulatory restrictions, cyber and operational risks, and the transition away from LIBOR.
Important facts for investors to verify
- Progress toward lifting the Federal Reserve asset cap and completing required third-party reviews.
- Future net interest margin, deposit pricing and balances, and the impact of changing rates on earnings and mortgage servicing rights.
- Credit trends, including commercial and industrial charge-offs, credit-card losses, and the adequacy of the allowance.
- Developments in customer remediation and litigation, including exposure beyond accrued reserves and the status of significant proceedings.
- Realization and Q3 recognition of the IRT sale gain, and the effect of the sale on ongoing wealth-management revenue.
- Final CECL adoption impact, dividend and repurchase execution, and regulatory approval or constraints on capital distributions.