Wells Fargo & Company — Q1 2015 Form 10-Q
Reporting period: Quarter ended March 31, 2015; comparisons are primarily with Q1 2014, and balance-sheet comparisons with December 31, 2014. Wells Fargo is a diversified U.S. financial-services company reporting Community Banking, Wholesale Banking, and Wealth, Brokerage and Retirement.
Financial results and position
| Metric | Q1 2015 / March 31, 2015 | Comparable period |
|---|---|---|
| Total revenue | $21.28 billion | $20.63 billion, Q1 2014 (+3%) |
| Net interest income | $10.99 billion; taxable-equivalent $11.23 billion | $10.62 billion GAAP; taxable-equivalent $10.83 billion |
| Net interest margin | 2.95% | 3.20%, Q1 2014 |
| Noninterest income | $10.29 billion | $10.01 billion, Q1 2014 (+3%) |
| Noninterest expense | $12.51 billion | $11.95 billion, Q1 2014 (+5%) |
| Net income / diluted EPS | $5.80 billion / $1.04 | $5.89 billion / $1.05, Q1 2014 |
| Efficiency ratio | 58.8% | 57.9%, Q1 2014 |
| Average loans / period-end loans | $863.3 billion / $861.2 billion | Average loans +5% year over year; period-end loans +4% |
| Deposits | $1.197 trillion | $1.168 trillion at year-end 2014; +9% year over year |
| Total assets / total equity | $1.738 trillion / $190.0 billion | Assets +3% and equity +3% versus year-end 2014 |
| Long-term debt / short-term borrowings | $183.3 billion / $77.7 billion | At March 31, 2015 |
Return on average assets was 1.38% and return on average common equity was 13.17%. The declared common dividend was $0.35 per share. Pre-tax, pre-provision profit was $8.77 billion, approximately flat year over year.
Cash flow: Operating activities provided $2.52 billion, investing activities used $42.92 billion, and financing activities provided $40.63 billion. Cash and due from banks increased $222 million to $19.79 billion. Investing outflows chiefly reflected growth in short-term investments and securities; financing inflows included deposit and short-term borrowing growth.
Liquidity and capital: Unencumbered primary liquidity was $373.3 billion, up from $321.1 billion at year-end. Core deposits were $1.087 trillion, or 126% of loans. Basel III Standardized Approach CET1 was 10.69% (11.04% at year-end, with a change in RWA approach affecting comparability); estimated fully phased-in Advanced Approach CET1 was 10.48%. The company reported a 9.48% Tier 1 leverage ratio and stated the company and insured banks were well-capitalized.
Material changes and drivers
- Revenue rose 3% year over year, mainly on higher net interest income and trust, investment, card, mortgage origination, and debt-security income. Net interest income increased with earning-asset growth and lower funding costs, while net interest margin fell 25 basis points as liquidity-related funding and lower-yielding assets diluted margin.
- Net income declined 2% and diluted EPS declined 1%. Higher noninterest expense—particularly compensation and operating losses—offset revenue growth. Operating losses were $295 million, up 86%, primarily reflecting higher litigation accruals.
- Net charge-offs improved to $708 million, or 0.33% of average loans, from $825 million, or 0.41%, a year earlier. Nonperforming assets fell 4% from year-end to $14.84 billion. The allowance for credit losses was $13.01 billion, or 1.51% of loans.
- The credit-loss provision was $608 million, versus $325 million a year earlier, despite a $100 million allowance release in Q1 2015; the prior-year release was $500 million. Thus, the year-over-year provision increase reflected a smaller release as well as portfolio and segment-level factors.
- Core loans grew $914 million during the quarter, while non-strategic and liquidating loans declined $2.23 billion. Securities increased $11.8 billion, largely from purchases of Treasuries and agency mortgage-backed securities.
- Segment net income was $3.67 billion in Community Banking (-5%), $1.80 billion in Wholesale Banking (+3%), and $561 million in Wealth, Brokerage and Retirement (+18%).
Outlook, commentary, and risks
- Management expected the full-year 2015 efficiency ratio to remain within its 55%–59% target range. Absent further discrete tax benefits, it expected the full-year effective tax rate to be higher than Q1’s 28.2%.
- The Federal Reserve did not object to the 2015 capital plan. The plan proposed a Q2 common dividend of $0.375 per share, approved by the Board on April 28, 2015; management also expected share repurchases to continue through the rest of 2015. Q1 repurchases totaled 48.4 million shares for $2.6 billion.
- Management said higher interest rates would benefit net interest income over time, but lower-rate scenarios were unfavorable to earnings over the 24-month simulation horizon. Outcomes depend on the rate path, funding mix, mortgage activity, and MSR valuations.
- On April 10, 2015, Wells Fargo announced an agreement to buy approximately $9 billion of performing commercial real estate mortgage loans from GE Capital and to provide $4 billion of secured financing to Blackstone Mortgage Trust; closings were expected in Q2 and Q3.
- Key exposures include mortgage servicing and repurchase obligations, legacy Pick-a-Pay and other liquidating loans, litigation, regulatory and compliance costs, cybersecurity and operational risks, interest-rate sensitivity, and possible deterioration in economic or housing conditions. The high end of reasonably possible litigation losses above recorded liability was approximately $1.2 billion; the high end of reasonably possible mortgage repurchase losses above the recorded liability was $936 million. Management cautioned that unfavorable developments could materially affect results in a particular period.
- Management reported effective disclosure controls as of March 31, 2015, and no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether loan and deposit growth, including core-loan growth, continues to offset runoff in liquidating portfolios and the pressure on net interest margin.
- Whether compensation, litigation accruals, and other operating costs remain consistent with the full-year efficiency-ratio target.
- Credit-loss trends and allowance adequacy, especially in residential real estate, junior liens, commercial lending, and legacy PCI/Pick-a-Pay portfolios.
- Capital and liquidity after planned dividends, repurchases, regulatory implementation, and the announced commercial real estate transactions.
- Updates to litigation and mortgage repurchase exposures, including the distinction between recorded liabilities and reasonably possible additional losses.