Wells Fargo Reports Record Quarterly Net Income

Wells Fargo Reports Record Quarterly Net Income

Q3 Net Income of $4.9 billion; EPS of $0.88, Up 22 Percent from Prior Year

SAN FRANCISCO--(BUSINESS WIRE)-- Wells Fargo & Company (NYS: WFC) :

  • Continued strong financial results:
    • Record Wells Fargo net income of $4.9 billion, up 27 percent (annualized) from prior quarter
    • Record diluted earnings per common share of $0.88, up 29 percent (annualized) from prior quarter
    • Pre-tax pre-provision profit (PTPP)1 of $9.1 billion, up 9 percent (annualized) from prior quarter
    • Revenue of $21.2 billion, compared with $21.3 billion in prior quarter
    • Noninterest expense of $12.1 billion, down $285 million from prior quarter; 57.1 percent efficiency ratio
    • Return on average assets (ROA) of 1.45 percent, up 4 basis points from prior quarter
    • Return on equity (ROE) of 13.38 percent, up 52 basis points from prior quarter
  • Strong deposit and loan growth:
    • Total average core checking and savings deposits up $16.9 billion from prior quarter
    • Total loans of $782.6 billion, up $7.4 billion from prior quarter
    • Core loan portfolio up $11.9 billion from prior quarter2
  • Maintained strong capital position:
    • Tier 1 common equity3 under Basel I increased $4.1 billion to $105.8 billion, with Tier 1 common equity ratio of 10.06 percent under Basel I at September 30, 2012. Estimated Tier 1 common equity ratio of 8.02 percent under current Basel III capital proposals4
    • Purchased approximately 17 million shares of common stock in third quarter 2012 and an additional estimated 9 million shares through a forward repurchase transaction expected to settle in fourth quarter 2012
  • Solid underlying credit quality:
    • Net charge-offs of $2.4 billion, or 1.21 percent (annualized) of average loans, including $567 million of net charge-offs from the implementation of newly issued regulatory guidance5
    • Excluding the impact of the OCC guidance, net charge-offs of $1.8 billion or 0.92 percent (annualized) of average loans
    • Provision for credit losses was $767 million lower than net loan charge-offs due to two factors:
      • $567 million increase in net loan charge-offs from the implementation of the OCC guidance (fully covered by loan loss reserves)
      • $200 million (pre-tax) reserve release due to continued strong underlying credit performance, compared with $400 million in prior quarter

1 See footnote (2) in SUMMARY FINANCIAL DATA table for more information on pre-tax pre-provision profit.

2 See table in Loans section for more information on core and non-strategic/liquidating loan portfolios.

3 See tables on TIER 1 COMMON EQUITYfor more information on Tier 1 common equity.

4 Estimated based on management's current interpretation of the Basel III capital rules proposed by federal banking agencies in notices of proposed rulemaking announced in June 2012. The proposed rules and interpretations and assumptions used in estimating Basel III calculations are subject to change depending on final promulgation of Basel III capital rules.

5 Office of the Comptroller of the Currency update to Bank Accounting Advisory Series issued third quarter 2012 (OCC guidance) which requires write-down of performing consumer loans restructured in bankruptcy to collateral value. See Credit Quality section including footnote 6, for additional information regarding the implementation of the OCC guidance and its effect on our third quarter credit metrics.


Selected Financial Information

 Quarter ended

Sept. 30,

 June 30, 

Sept. 30,

  2012  2012 2011
Diluted earnings per common share$ 0.880.820.72
Wells Fargo net income (in billions)4.944.624.06
Return on assets (ROA)1.45%1.411.26
Return on equity (ROE)13.3812.8611.86
Asset Quality
Net charge-offs as a % of avg. total loans1.211.151.37
Allowance as a % of total loans2.272.412.68
Allowance as a % of annualized net charge-offs190211197
Revenue (in billions)$ 21.2121.2919.63
Efficiency ratio57.158.259.5
Average loans (in billions)776.7768.2754.5
Average core deposits (in billions)895.4880.6836.8

Net interest margin


Wells Fargo & Company (NYS: WFC) reported record net income of $4.9 billion, or $0.88 per diluted common share, for third quarter 2012, up from $4.1 billion, or $0.72 per share, for third quarter 2011, and up from $4.6 billion, or $0.82 per share, for second quarter 2012. For the first nine months of 2012, net income was $13.8 billion, or $2.45 per share, compared with $11.8 billion, or $2.09 per share, a year ago.

"Through the efforts of our more than 265,000 team members, we've now achieved six consecutive quarters of record net income and EPS," said Chairman and CEO John Stumpf. "By focusing on earning all of our customers' business and providing outstanding service, we continued to generate growth across our diversified set of businesses. In the third quarter, core loans grew by $11.9 billion and we saw continued strength in our mortgage and deposit businesses. We remained diligent in managing costs and continued to have strong underlying credit performance as our loss mitigation efforts and the low interest rate environment helped improve affordability for our customers."

Chief Financial Officer Tim Sloan added, "Our third quarter results demonstrated that the Company's business model continues to serve shareholders well. Our performance reflected an ongoing focus on measures that drive value over the long-term, including increased PTPP, positive operating leverage, and solid ROA and ROE. In addition, our efficiency ratio of 57.1 percent in the third quarter improved compared with second quarter and remained within our 55 to 59 percent targeted range. While the economic and interest rate environments continue to present challenges for us and our industry, our diversified model and focus on our customers continued to produce strong quarterly results."


Revenue was $21.2 billion in the third quarter, compared with $21.3 billion in second quarter 2012, as approximately $300 million of higher noninterest income was more than offset by lower net interest income. Businesses generating linked-quarter revenue growth included asset backed finance, asset management, brokerage services, commercial mortgage servicing, credit card, dealer services, debit card, equity funds, personal credit management, real estate capital markets, retail sales finance, retirement services, and small business administration loans.

Net Interest Income

Net interest income was $10.7 billion in third quarter, down from $11.0 billion in second quarter 2012. The decline in net interest income was largely driven by lower income from variable sources, such as fee income and purchased credit-impaired (PCI) loan resolutions which were elevated in the second quarter. In addition, income from the available-for-sale (AFS) securities portfolio declined as the pace of mortgage-backed securities (MBS) pay-downs increased in response to lower interest rates, and we replaced a large portion of the run-off with lower yielding, but shorter duration securities. The income impact of lower levels of long-term securities purchases was partially offset by our retention of $9.8 billion of high-quality, conforming first real estate mortgages.

On a linked-quarter basis, our net interest margin declined 25 basis points to 3.66 percent, driven by three primary items. First, the impact of lower income from variable sources described above caused a decline of approximately 10 basis points. Second, given our cautious stance on investment portfolio growth in the current low rate environment, deposit growth of $23 billion (10 percent annualized) caused cash and short term investments to increase, diluting the margin by approximately 7 basis points. Finally, the impact of lower rates, both in terms of run-off and new activity, reduced the margin by 8 basis points, with approximately 6 basis points of the decline from the AFS portfolio and approximately 2 basis points from the loan portfolios.

Noninterest Income

Noninterest income was $10.6 billion, up from $10.3 billion in second quarter 2012. The increase was driven by a $252 million increase in market sensitive revenue, primarily trading gains including deferred compensation plan investments offset in employee benefits expense. The Company also benefitted from increases in deposit service charges, trust and investment fees, and card fees. Insurance declined $108 million due to seasonally lower insurance revenue, with a related decline in insurance commission expense.

Mortgage banking noninterest income was $2.8 billion, down $86 million from second quarter 2012, on $139 billion of originations, compared with $131 billion of originations in second quarter. During the third quarter, the Company retained on balance sheet 1-4 family conforming first mortgage loans, forgoing approximately $200 million of fee revenue that could have been generated had the loans been originated for sale during the quarter along with other agency conforming loan production. The Company provided $462 million for mortgage loan repurchase losses, compared with $669 million in second quarter (included in net gains from mortgage loan origination/sales activities). Net mortgage servicing rights (MSRs) results were $142 million, compared with $377 million in second quarter due to MSR valuation adjustments made in the third quarter for increased servicing and foreclosure costs. The ratio of MSRs to related loans serviced for others was at a historical low of 63 basis points and the average note rate on the servicing portfolio was 4.87 percent. The unclosed pipeline at September 30, 2012 was $97 billion, compared with $102 billion at June 30, 2012.

The Company had net unrealized securities gains of $12.4 billion at September 30, 2012, compared with $9.5 billion at June 30, 2012. Period-end securities available for sale balances increased $2.5 billion.

Noninterest Expense

Noninterest expense declined $285 million in the quarter to $12.1 billion, compared with $12.4 billion in second quarter 2012. The decline in noninterest expense was due primarily to $243 million of lower operating losses, $112 million of seasonally lower insurance commissions, $104 million of lower severance expense, and our third consecutive quarterly reduction in foreclosed asset expense, down $42 million from prior quarter. The expense improvements were partially offset by higher deferred compensation expense of $152 million offset in noninterest income and by increases in occupancy and advertising costs. The Company's efficiency ratio improved to 57.1 percent from 58.2 percent in second quarter 2012 and 59.5 percent in third quarter 2011, and the Company is well positioned to remain within its targeted range of 55 to 59 percent in the fourth quarter.


Total loans were $782.6 billion at September 30, 2012, up $7.4 billion from $775.2 billion at June 30, 2012. Included in this growth was $9.8 billion of 1-4 family conforming first mortgage production retained on the balance sheet. In addition, there was growth in auto, credit card, private student lending, and commercial and industrial (C&I) loan balances. The growth in core loan portfolios more than offset the reduction in the non-strategic/liquidating portfolios, which declined $4.5 billion in the quarter.

 September 30, 2012 June 30, 2012
(in millions) Core Liquidating (1) Total Core Liquidating (1) Total
Commercial$348,696 3,836 352,532349,774 4,278 354,052
Consumer  335,278 94,820 430,098 322,297 98,850 421,147
Total loans $683,974 98,656 782,630 672,071 103,128 775,199
Change from prior quarter: $11,903 (4,472) 7,431 13,782 (5,104) 8,678

(1) See NON-STRATEGIC AND LIQUIDATING LOAN PORTFOLIOS table for additional information on non-strategic/liquidating loan portfolios. Management believes that the above information provides useful disclosure regarding the Company's ongoing loan portfolios.



Average core deposits were $895.4 billion, up 7 percent from a year ago and up 7 percent (annualized) from second quarter 2012. Average core checking and savings deposits were $837.2 billion, up 9 percent from a year ago and up 8 percent (annualized) from second quarter 2012. Average mortgage escrow deposits were $40.0 billion, compared with $28.3 billion a year ago and $35.4 billion in second quarter 2012. Average core checking and savings deposits were 94 percent of average core deposits, up from 93 percent in the prior quarter and 92 percent a year ago. The average deposit cost for third quarter 2012 was 18 basis points, compared with 19 basis points in second quarter 2012. Average core deposits were 115 percent of average loans, up slightly from second quarter 2012.


Capital increased in the third quarter, with Tier 1 common equity reaching $105.8 billion under Basel I, or 10.06 percent of risk-weighted assets. The third quarter ratio reflected refinements to the risk weighting of certain unused lending commitments that provide for the ability to issue standby letters of credit, which reduced the ratio by 32 basis points. This refinement did not affect our estimated Tier 1 common equity ratio under Basel III capital proposals, which rose to 8.02 percent at the end of the quarter.

In third quarter, the Company purchased approximately 17 million shares of its common stock and an additional estimated 9 million shares through a forward repurchase transaction expected to settle in fourth quarter 2012, and paid a quarterly common stock dividend of $0.22 per share.

 Sept. 30, June 30, Sept. 30,
(as a percent of total risk-weighted assets) 2012  2012 2011
Ratios under Basel I (1):
Tier 1 common equity (2)



Tier 1 capital11.6611.6911.26
Tier 1 leverage9.459.258.97
(1) September 30, 2012, ratios are preliminary.
(2) See tables on TIER 1 COMMON EQUITY for more information on Tier 1 common equity.

Credit Quality

"Underlying credit quality continued to show improvement in the third quarter, as the overall financial condition of businesses and consumers strengthened, the housing market in many areas of the nation improved, and we continued to work to reduce problem assets and make new, high quality loans," said Chief Risk Officer Mike Loughlin.

Reported credit metrics for the quarter were affected by the implementation in third quarter of the OCC guidance, which affected consumer loans where the borrower's obligation to us has been discharged in bankruptcy and the borrower has not reaffirmed the debt. As of September 30, 2012, only 8 percent of loans within this category were 30 days or more past due. Implementation of the OCC guidance affected nonperforming loans and net charge-offs as follows:

  • $1.4 billion reclassification of performing consumer loans to nonaccrual status, consisting of $1.0 billion of first mortgages, $262 million of junior liens and $155 million of auto loans
  • $567 million increase in net loan charge-offs, fully covered by loan loss reserves

"Excluding the impact of the OCC guidance, we saw improvement in charge-offs, recoveries, and nonperforming assets. Early stage delinquencies remained relatively stable from prior quarter. Absent significant deterioration in the economy, we continue to expect future reserve releases," said Loughlin.

Net Loan Charge-offs

Net loan charge-offs, summarized in the table below, were $2.4 billion in third quarter 2012 or 121 basis points of average loans. Excluding the $567 million in charge-offs resulting from implementation of the OCC guidance, net charge-offs were $1.8 billion or 92 basis points with commercial losses of $217 million, or 24 basis points, and consumer losses of $1.6 billion or 148 basis points6.

6 Management believes that the presentation in this news release of information excluding the impact of the OCC guidance provides useful disclosure regarding the underlying credit quality of the Company's loan portfolios.

Net Loan Charge-Offs 


Quarter ended

  September 30, 2012   June 30, 2012   March 31, 2012
 As a  As a  As a
Net loan% of Net loan% of Net loan% of
($ in millions) offs loans (1)   offs loans (1)   offs loans (1)
Commercial and industrial$1310.29%$2490.58%$2560.62


Real estate mortgage540.21810.31460.17
Real estate construction10.03170.40671.43
Lease financing10.03--20.06
Foreign  300.29 110.11 140.14
Total commercial  2170.24 3580.42 3850.45
Real estate 1-4 family first mortgage6731.157431.307911.39
Real estate 1-4 family junior lien mortgage1,0365.176893.387633.62
Credit card2123.672404.372424.40
Other revolving credit and installment  2201.00 1700.79 2140.99
Total consumer  2,1412.01 1,8421.76 2,0101.91
Total $2,3581.21%$2,2001.15%$2,3951.25


(1) Quarterly net charge-offs as a percentage of average loans are annualized. See explanation in PURCHASED CREDIT-IMPAIRED (PCI) LOANS section of the accounting for purchased credit-impaired (PCI) loans and the impact on selected financial ratios.

Nonperforming Assets

Nonperforming assets increased by $368 million in the quarter including a $1.4 billion increase in nonperforming loans resulting from implementation of the OCC guidance, ending the quarter at $25.3 billion, compared with $24.9 billion in second quarter 2012. Nonaccrual loans increased to $21.0 billion from $20.6 billion in second quarter; however, apart from implementing the OCC guidance, total commercial and consumer nonaccrual loans declined in the quarter by $975 million. Foreclosed assets were $4.2 billion, down from $4.3 billion in second quarter 2012.


Nonperforming Assets (Nonaccrual Loans and Foreclosed Assets)

  September 30, 2012 June 30, 2012  March 31, 2012
  As a  As a  As a
% of% of% of
($ in millions) balances loans  balances loans  balances loans
Commercial and industrial$1,4040.79%$1,5490.87%$1,7261.02%
Real estate mortgage
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