Wells Fargo Reports Record Quarterly Net Income

Wells Fargo Reports Record Quarterly Net Income

Q1 Net Income of $5.2 Billion; EPS of $0.92, Up 23 Percent from Prior Year

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

• Continued strong financial results:

  • Record Wells Fargo net income of $5.2 billion, up 22 percent from first quarter 2012

  • Record diluted earnings per share of $0.92, up 23 percent

  • Revenue of $21.3 billion, compared with $21.6 billion

  • Noninterest expense of $12.4 billion, down $593 million

    • 58.3 percent efficiency ratio, improved from 60.1 percent

  • Pre-tax pre-provision profit (PTPP)¹ of $8.9 billion, up 2 percent

  • Return on average assets (ROA) of 1.49 percent, up 18 basis points

  • Return on equity (ROE) of 13.59 percent, up 145 basis points

• Continued loan and deposit growth:

  • Total average loans of $798.1 billion, up $29.5 billion from first quarter 2012

    • Quarter-end loans of $800.0 billion, up $33.4 billion

    • Quarter-end core loans² of $709.1 billion, up $50.8 billion

  • Total average core deposits of $925.9 billion, up $55.4 billion from first quarter 2012

    • Quarter-end core deposits of $939.9 billion, up $51.2 billion

• Continued improvement in credit quality:

  • Net charge-offs of $1.4 billion, a decline of $976 million from first quarter 2012

    • Net charge-off rate of 0.72 percent (annualized), lowest since second quarter 2006³

  • Non-performing assets of $22.9 billion, down $3.8 billion from first quarter 2012

  • $200 million (pre-tax) reserve release⁴ due to continued strong credit performance

• Strengthened capital levels; increased dividends and continued share repurchases:

  • Tier 1 common equity⁵ under Basel I increased $14.1 billion from first quarter 2012 to $113.6 billion, with Tier 1 common equity ratio of 10.38 percent under Basel I at March 31, 2013

  • Estimated Tier 1 common equity ratio of 8.39 percent under current Basel III capital proposals⁶

  • Increased quarterly common stock dividend to $0.25 per share in first quarter 2013 and purchased approximately 17 million shares of common stock

  • Received a non-objection to 2013 Capital Plan under the Comprehensive Capital Analysis and Review (CCAR), which included a dividend rate of $0.30 per share for second quarter 2013, subject to Board approval. The 2013 plan also included an increase in common stock repurchase activity compared with actual repurchases in 2012.

Wells Fargo & Company (NYS: WFC) reported record net income of $5.2 billion, or $0.92 per diluted common share, for first quarter 2013, up from $4.2 billion, or $0.75 per share, for first quarter 2012, and up from $5.1 billion, or $0.91 per share, for fourth quarter 2012.

"Wells Fargo delivered outstanding first quarter 2013 results for our shareholders," said Chairman and CEO John Stumpf. "Quarterly earnings and EPS increased at double-digit rates compared with first quarter 2012, while loans and deposits demonstrated continued growth in a challenging economic environment. In addition, expenses continued to decline as we improved efficiency across the franchise, and returns on assets and equity increased and remained among the highest in our industry. Capital levels remained strong and we were very pleased to increase our dividend to $0.25 per common share in first quarter 2013 and to receive a non-objection to our 2013 Capital Plan which will allow us to return even more capital to shareholders in the year ahead. Our success in the quarter, as always, was driven by helping our customers succeed financially, and I am very proud of the dedication and hard work of our team members."

"Our company earned $5.2 billion in first quarter 2013, the highest quarterly profit in our history—another milestone demonstrating how Wells Fargo's diversified business model continued to produce outstanding results," said Chief Financial Officer Tim Sloan. "This is our 13^th consecutive quarter of EPS growth and 8^th consecutive quarter of record EPS. Average loans and deposits increased in the quarter, expenses were lower, and credit metrics improved with the net charge-off ratio down to the lowest level since second quarter 2006."³

Revenue

Revenue was $21.3 billion in first quarter 2013, compared with $21.9 billion in fourth quarter 2012, and pre-tax pre-provision profit was $8.9 billion. "Revenue was down linked quarter largely due to the absence of the higher than average equity gains we recognized last quarter, the expected cyclicality in the mortgage business, and two fewer days in the quarter, which had a negative impact on both net interest income and noninterest income linked quarter trends," said Sloan. "We continue to be pleased with the revenue growth in many of our core businesses, as evidenced by the strong year-over-year growth in brokerage advisory and commission fees, investment banking, card fees, and deposit service charges, all of which were up over 10 percent. That's the benefit of our diversified business model and among the many drivers of our continued success."

Net Interest Income

Net interest income in first quarter 2013 declined $144 million on a linked-quarter basis to $10.5 billion largely due to two fewer days compared with fourth quarter 2012. Apart from this impact, net interest income was essentially unchanged. Interest income from the available-for-sale (AFS) securities portfolio increased modestly as we opportunistically purchased $17.8 billion in federal agency mortgage-backed securities (MBS) during periods of higher interest rates in the first quarter. The benefit of these purchases outweighed the impact of continued runoff of higher yielding securities within the portfolio. In addition, organic growth in consumer and commercial loans and the retention of $3.4 billion in high-quality, conforming first real estate mortgages in the first quarter largely offset reduced income from portfolio repricing. The decline in interest income was partially offset by a $64 million decrease in deposit and long term funding interest expense.

On a linked-quarter basis, the Company's net interest margin declined 8 basis points to 3.48 percent. Approximately 3 basis points of the decline was due to lower income from variable sources, including purchased credit-impaired (PCI) loan resolutions and periodic dividends. Linked-quarter deposit growth caused cash and short term investments to remain elevated. Although these short-term balances have little impact on net interest income, they are dilutive to net interest margin and accounted for 3 basis points of compression. Net of growth in loans and AFS securities, ongoing repricing of the balance sheet in the current low interest rate environment reduced net interest margin approximately 2 basis points compared with the fourth quarter.

Noninterest Income

Noninterest income was $10.8 billion, compared with $11.3 billion in fourth quarter 2012. The decline was primarily driven by lower mortgage banking revenue as well as reduced gains on equity investments, which were elevated in the fourth quarter. These declines were partially offset by stronger retail brokerage transaction revenue and asset-based fees, and higher trading gains and insurance revenue.

Mortgage banking noninterest income was $2.8 billion, down $274 million from fourth quarter 2012. During the first quarter, the Company retained on balance sheet 1-4 family conforming first mortgage loans of $3.4 billion, forgoing approximately $112 million of 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 $309 million for mortgage loan repurchase losses, compared with $379 million in fourth quarter 2012 (included in net gains from mortgage loan origination/sales activities). Net mortgage servicing rights (MSRs) results were $129 million, down from $220 million in fourth quarter 2012, due primarily to MSR valuation adjustments made in the first quarter for the impact of improving housing prices on estimated prepayment speeds.

The Company had net unrealized securities gains of $11.2 billion at March 31, 2013, compared with $11.9 billion at December 31, 2012. Period-end AFS securities balances increased $13.0 billion.

Noninterest Expense

Noninterest expense declined $496 million from the prior quarter primarily due to lower operating losses associated with the Independent Foreclosure Review settlement and a $250 million charitable contribution to the Wells Fargo Foundation in the fourth quarter. This quarter's expenses included approximately $460 million of seasonally higher personnel expenses and approximately $103 million of higher deferred compensation, which was offset in trading revenue. The Company continued to operate within its targeted efficiency ratio range of 55 to 59 percent, with a ratio of 58.3 percent in first quarter 2013, compared with 58.8 percent in fourth quarter 2012. The Company expects second quarter 2013 expenses to decline from first quarter 2013 and to remain within the target efficiency range.

Income Taxes

The Company's effective income tax rate was 31.9 percent for first quarter 2013. The rate included the benefit associated with the realization for tax purposes of a previously written-down investment. Absent additional discrete benefits in 2013, the Company expects the effective income tax rate for the full year 2013 to be higher than the effective income tax rate for first quarter 2013.

Loans

Total loans were $800.0 billion at March 31, 2013, up $392 million from December 31, 2012. Included in this growth was $3.4 billion of 1-4 family conforming first mortgage production retained on the balance sheet, and a decrease of $3.7 billion due to the continued runoff in the liquidating/non-strategic portfolio. Total average loans were $798.1 billion, up $10.9 billion from prior quarter. The asset-backed finance, commercial banking, corporate banking, credit card, government and institutional banking, mortgage, retail brokerage, real estate capital markets, and retail sales finance portfolios all experienced year-over-year, double-digit growth.

Deposits

Total average deposits were $986.2 billion, up 8 percent from a year ago and up 4 percent (annualized) from fourth quarter 2012. Average core deposits were $925.9 billion, up 6 percent from a year ago and down slightly from fourth quarter 2012. Average core checking and savings deposits were $870.6 billion, up 8 percent from a year ago and down 1 percent (annualized) from fourth quarter 2012. Average mortgage escrow deposits were $38.8 billion, compared with $33.0 billion a year ago and $42.2 billion in fourth quarter 2012. Average core checking and savings deposits were 94 percent of average core deposits, compared with 94 percent in the prior quarter and 93 percent a year ago. The average deposit cost for first quarter 2013 was 15 basis points, compared with 16 basis points in fourth quarter 2012. Average core deposits were 116 percent of average loans, down slightly from fourth quarter 2012.

Capital

Capital increased in the first quarter, with Tier 1 common equity of $113.6 billion under Basel I, or 10.38 percent of risk-weighted assets, compared with 9.98 percent in first quarter 2012 and 10.12 percent in fourth quarter 2012. The Tier I common equity ratio under Basel I was negatively impacted by approximately 25 basis points in the first quarter by the implementation of the Federal Reserve's Market Risk Final Rule, commonly known as "Basel 2.5," which became effective on January 1, 2013. Under current Basel III proposals, the Tier I common equity ratio was an estimated 8.39 percent.⁷ Our estimate of Basel III ratios is not impacted by the Market Risk Final Rule, as its impact has historically been included in our calculations.

In the first quarter, the Company purchased approximately 17 million shares of its common stock and paid a quarterly common stock dividend of $0.25 per share.

On March 14, 2013, the Company received a non-objection to its 2013 Capital Plan under the Comprehensive Capital Analysis and Review (CCAR), which included a dividend rate of $0.30 per share for second quarter 2013, subject to Board approval. The 2013 plan also included an increase in common stock repurchase activity compared with actual repurchases in 2012.

⁷ 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.

Credit Quality

"Credit quality continued to improve in the quarter, and in several of our portfolios the performance was particularly strong," said Chief Risk Officer Mike Loughlin. "Credit losses were $1.4 billion in first quarter 2013, compared with $2.1 billion in fourth quarter 2012, an improvement of 32 percent. Additionally, the loss rate of 0.72 percent was the lowest level since second quarter 2006.³ Nonperforming assets declined by $1.6 billion, or 7 percent, from fourth quarter 2012. As a result of the continued positive improvement to credit performance, we released $200 million from the allowance for credit losses in the first quarter. We continue to expect future reserve releases in 2013 absent a significant deterioration in the economic environment," said Loughlin.

Net Loan Charge-offs

Net loan charge-offs improved to $1.4 billion in first quarter 2013, or 72 basis points of average loans, compared with $2.1 billion in fourth quarter 2012, or 105 basis points of average loans. On a linked-quarter basis, net loan charge-offs improved by $662 million, or 33 basis points of average loans. Net charge-offs in fourth quarter 2012 included $321 million in charge-offs, or 16 basis points, resulting from adjustments associated with the OCC guidance⁸ on loans discharged in bankruptcy.

⁸ Office of the Comptroller of the Currency update to Bank Accounting Advisory Series issued third quarter 2012 (OCC guidance), which requires consumer loans discharged in bankruptcy to be placed on nonaccrual status and written down to net realizable collateral value, regardless of their delinquency status.