Wells Fargo & Company — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. Wells Fargo is a diversified U.S. financial services company operating through Consumer Banking and Lending, Commercial Banking, Corporate and Investment Banking, and Wealth and Investment Management.
Financial performance and condition
| Metric | Q3 2022 | Q3 2021 | Change |
|---|---|---|---|
| Total revenue | $19.5 billion | $18.8 billion | Up 4% |
| Net interest income | $12.1 billion | $8.9 billion | Up 36% |
| Noninterest income | $7.4 billion | $9.9 billion | Down 25% |
| Provision for credit losses | $784 million | Benefit of $1.4 billion | Increased $2.2 billion |
| Noninterest expense | $14.3 billion | $13.3 billion | Up 8% |
| Net income | $3.5 billion | $5.1 billion | Down 31% |
| Diluted EPS | $0.85 | $1.17 | Down 27% |
| Net interest margin, taxable-equivalent | 2.83% | 2.03% | Up 80 bps |
| Efficiency ratio | 73% | 71% | Higher ratio indicates weaker efficiency |
For the first nine months, revenue was $54.1 billion, down 6%; net income was $10.3 billion, down 35%; and diluted EPS was $2.47, down 31%, versus the comparable 2021 period. Net interest income rose 19% to $31.5 billion, but noninterest income fell 27% to $22.6 billion. Nine-month pre-tax, pre-provision profit was $13.0 billion, down 23%.
- Drivers: Higher rates and loan balances supported net interest income. Lower mortgage banking income, investment advisory fees, and equity-security gains weighed on noninterest income. Equity-security impairment charges totaled $389 million in Q3 and $1.4 billion for the nine months.
- Period-end balance sheet: Assets were $1.878 trillion, down from $1.948 trillion at December 31, 2021. Loans were $945.9 billion, up 6%; deposits were $1.398 trillion, down 6%.
- Credit: Loan allowance for credit losses was $13.2 billion, or 1.40% of loans, versus $13.8 billion and 1.54% at year-end 2021. Nonperforming assets were $5.7 billion, down 22% since year-end. Q3 consumer net charge-offs rose to $393 million from $221 million, mainly from auto and credit cards; commercial net charge-offs were $6 million.
- Capital and liquidity: Standardized CET1, the binding ratio, was 10.33%, above the 9.10% requirement and buffers. TLAC was 23.00% versus a 21.50% minimum; LCR was 123% versus a 100% minimum. Total equity was $178.4 billion, down from $190.1 billion at year-end. The nine-month AOCI decline was $12.6 billion, primarily from unrealized losses on available-for-sale debt securities.
- Cash flow and funding: Nine-month operating cash flow was $19.8 billion, investing cash flow was negative $26.6 billion, and financing cash flow was negative $62.0 billion. Cash, cash equivalents, and restricted cash declined to $165.5 billion from $234.2 billion at year-end. Long-term debt was $156.4 billion versus $160.7 billion; short-term borrowings were $48.4 billion versus $34.4 billion. The filing reported approximately $207.5 billion of available FHLB and Federal Reserve borrowing capacity.
- Shareholder returns: The declared common dividend was $0.30 per share for Q3, versus $0.20 a year earlier. The company repurchased 110 million shares for $6.0 billion in the first nine months; Q3 repurchases were limited to employee-plan and deferred-compensation activity.
Material changes, outlook, and risks
- Q3 included $2.0 billion of accruals in operating losses, primarily for historical litigation, customer remediation, and regulatory matters. Total operating losses were $2.2 billion, compared with $540 million a year earlier. Management warned that unresolved matters could cause significant additional expense in coming quarters.
- Mortgage originations fell 59% year over year in Q3 to $21.5 billion; mortgage banking income declined 74% to $324 million. Management also expects actions to limit overdraft-related fees to continue reducing certain deposit fees.
- The Federal Reserve asset cap remained in effect pending regulator satisfaction with required governance, compliance, and operational-risk improvements and third-party reviews. Management said remediation would take multiple years and could face delays; failure to meet regulatory requirements could lead to further penalties or enforcement.
- The high end of reasonably possible legal losses in excess of accrued probable losses was approximately $3.7 billion at September 30, 2022. The company said outcomes are uncertain and a matter could materially affect results in a particular period.
- Management’s credit-loss scenarios incorporated modest growth with near-term elevated inflation in the base case and contractions associated with high inflation, rising rates, and declining property values in downside cases. The filing cautions actual credit losses may exceed the allowance. Office-property exposure and mortgage servicing and repurchase risks are among the disclosed credit concerns.
- No specific earnings or revenue guidance was provided in the supplied filing text. Management described expected sensitivity to interest rates: a modeled +100 bp parallel shift implied a $2.6 billion increase in next-12-month net interest income, while a -100 bp shift implied a $2.5 billion decrease. These simulations depend on assumptions, including deposit repricing and customer behavior, and exclude noninterest impacts.
Important facts for investors to verify
- Whether the unusually large Q3 accruals adequately capture remaining litigation, customer-remediation, and regulatory exposures, and how actual settlements compare with the $3.7 billion possible-loss range above accruals.
- Progress toward satisfying consent orders and lifting the Federal Reserve asset cap, including required third-party reviews and any related business constraints.
- Whether rising consumer charge-offs, economic deterioration, and commercial real-estate conditions require higher provisions or a larger allowance.
- How quickly deposit balances and funding costs respond to higher rates, and whether higher net interest income offsets weaker mortgage, advisory, and other fee income.
- The effect of securities valuation losses, capital distributions, and the October 2022 $10 billion FHLB advances on capital and liquidity after quarter-end.