Wells Fargo Reports Record Quarterly Net Income

Wells Fargo Reports Record Quarterly Net Income

Q2 Net Income of $5.5 Billion; EPS of $0.98, Up 20 Percent from Prior Year

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

• Continued strong financial results:

  • Record Wells Fargo net income of $5.5 billion, up 19 percent from second quarter 2012

  • Record diluted earnings per share of $0.98, up 20 percent

  • Revenue of $21.4 billion, up $89 million

  • Noninterest expense of $12.3 billion, down $142 million

    • 57.3 percent efficiency ratio, improved from 58.2 percent

  • Pre-tax pre-provision profit (PTPP)¹ of $9.1 billion, up 3 percent

  • Return on average assets (ROA) of 1.55 percent, up 14 basis points

  • Return on equity (ROE) of 14.02 percent, up 116 basis points

• Continued loan and deposit growth:

  • Total average loans of $800.2 billion, up $32.0 billion from second quarter 2012

    • Quarter-end loans of $802.0 billion, up $26.8 billion

    • Quarter-end core loans² of $714.4 billion, up $42.3 billion

  • Total average core deposits of $936.1 billion, up $55.5 billion from second quarter 2012

    • Quarter-end core deposits of $941.2 billion, up $59.0 billion

• Significant improvement in credit quality:

  • Net charge-offs of $1.2 billion, down $1.0 billion from second quarter 2012

    • Net charge-off rate of 0.58 percent (annualized), lowest since second quarter 2006³

  • Non-performing assets of $21.1 billion, down $3.8 billion from second quarter 2012

  • $500 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 $15.9 billion from second quarter 2012 to $117.6 billion, with Tier 1 common equity ratio of 10.73 percent under Basel I at June 30, 2013

  • Estimated Tier 1 common equity ratio of 8.54 percent under Basel III capital rules⁶

  • Increased quarterly common stock dividend to $0.30 per share in second quarter 2013

  • Purchased 26.7 million shares of common stock in second quarter 2013 and an additional estimated 13 million shares through a forward repurchase transaction expected to settle in third quarter 2013

Wells Fargo & Company (NYS: WFC) reported record net income of $5.5 billion, or $0.98 per diluted common share, for second quarter 2013, up from $4.6 billion, or $0.82 per share, for second quarter 2012, and up from $5.2 billion, or $0.92 per share, for first quarter 2013. For the first six months of 2013, net income was a record $10.7 billion, or $1.90 per share, compared with $8.9 billion, or $1.57 per share, for the same period in 2012.

"Wells Fargo achieved outstanding results for the second quarter, with our diluted EPS growing for the 14^th consecutive quarter and our returns on assets and equity increasing from second quarter 2012 and first quarter 2013," said Chairman and CEO John Stumpf. "Our results reflected the strength of our diversified business model. Compared with the prior quarter, we grew loans, deposits, and net interest income, and both our efficiency ratio and credit quality improved. Wells Fargo again demonstrated an ability to grow during a dynamic economic and interest rate environment, and we feel very well positioned to continue to perform for our shareholders over the long term."

Chief Financial Officer Tim Sloan said, "Solid performance in the quarter reflected the strength of our broad and diverse franchise. Linked quarter we grew revenue, with higher net interest income as we grew loans and invested in securities. In addition, expenses and net charge-offs were lower in the quarter and we continued to grow capital. Our estimated Tier 1 common equity ratio under the Basel III capital rules adopted July 2, 2013, increased to 8.54 percent this quarter, despite the increase in market interest rates late in the quarter which reduced unrealized security gains and negatively impacted the ratio by 24 basis points. That's a testament to the earnings power of Wells Fargo."

Revenue

Revenue was $21.4 billion, up from $21.3 billion in first quarter 2013. Total revenue increased due to growth in net interest income, while growth in noninterest income fee categories, driven by trust and investment fees, was offset by lower market sensitive revenue⁷ and other income. Businesses generating year-over-year double-digit revenue growth included asset-backed finance, capital markets, corporate banking, credit card, personal credit management, real estate capital markets, retail brokerage, retail sales finance, retirement services, and small business administration loans.

⁷ Includes net gains from trading activities, net gains (losses) on debt securities available for sale and net gains from equity investments.

Net Interest Income

Net interest income in second quarter 2013 increased $251 million on a linked-quarter basis to $10.8 billion largely due to higher interest income from the available-for-sale (AFS) securities portfolio as we purchased $21.1 billion in securities, largely consisting of agency mortgage-backed securities (MBS), during the quarter. The portfolio yield improved as prepayments of existing MBS slowed. In addition, we benefitted modestly from organic growth in consumer and commercial loans and income from purchased credit-impaired (PCI) loan resolutions which mitigated the impact of loan portfolio repricing. Net interest income also improved as deposit and long term funding interest expense declined $74 million, and we benefitted from an additional day in the quarter.

On a linked-quarter basis, the Company's net interest margin declined 2 basis points to 3.46 percent. Linked-quarter deposit growth caused cash and short term investments to grow despite growth in other earning asset categories including loans and AFS securities. Although deposit growth has little impact on net interest income, it is dilutive to net interest margin and accounted for 6 basis points of compression. Approximately 2 basis points of the decline was offset by higher income from variable sources, including PCI loan resolutions and periodic dividends. The net impact of repricing and growth of the balance sheet this quarter also improved net interest margin approximately 2 basis points compared with the first quarter largely due to the benefit of higher AFS securities portfolio income and reduced funding costs.

Noninterest Income

Noninterest income was $10.6 billion, down slightly from first quarter 2013. Fee income was up in many of the Company's core businesses, including solid increases in trust and investment fees, lease income, equity gains, card and other fees, service charges on deposit accounts, and insurance. These increases were more than offset by lower trading income, including lower deferred compensation gains (offset in employee benefits expense), and lower other income, primarily lower income from investments accounted for under the equity method and a first quarter gain on sale of PCI loans.

Mortgage banking noninterest income was $2.8 billion, in line with first quarter 2013. During the second quarter, residential mortgage originations were $112 billion, up slightly from $109 billion in first quarter 2013, however gain on sale margins declined as expected. The Company provided $65 million for mortgage loan repurchase losses, compared with $309 million in first quarter 2013 (included in net gains from mortgage loan origination/sales activities). Net mortgage servicing rights (MSRs) results were $68 million, compared with $129 million in first quarter 2013.

The Company had net unrealized securities gains of $5.1 billion at June 30, 2013, down from $11.2 billion at March 31, 2013, as market interest rates increased late in the quarter.

Noninterest Expense

Noninterest expense declined $145 million from the prior quarter primarily due to lower employee benefits which were seasonally elevated in first quarter 2013. This decline was partially offset by higher salaries, revenue-based incentive compensation, outside professional services, operating losses, and seasonally higher advertising and promotion expense. The efficiency ratio improved to 57.3 percent in second quarter 2013, compared with 58.3 percent in first quarter 2013. The Company expects to continue to operate within its targeted efficiency ratio range of 55 to 59 percent in third quarter 2013.

Loans

Total loans were $802.0 billion at June 30, 2013, up $2.0 billion from March 31, 2013, driven by growth in commercial and industrial, auto, foreign, credit card, and non-conforming first mortgage, partially offset by decreases in junior lien mortgage and commercial real estate mortgage, and a decline of $3.3 billion due to the continued runoff in the liquidating/non-strategic portfolio. Total average loans were $800.2 billion, up $2.2 billion from the prior quarter. The asset-backed finance, commercial banking, corporate banking, credit card, government and institutional banking, mortgage, personal credit management, real estate capital markets, retail brokerage, and retail sales finance portfolios all experienced year-over-year, double-digit growth.

Deposits

Total average deposits were $1.0 trillion, up 9 percent from a year ago and up 10 percent (annualized) from first quarter 2013. Average core deposits were $936.1 billion, up 6 percent from a year ago and up 4 percent (annualized) from first quarter 2013. Average core checking and savings deposits were $883.5 billion, up 8 percent from a year ago and up 6 percent (annualized) from first quarter 2013. Average mortgage escrow deposits increased to $39.6 billion, compared with $35.4 billion a year ago and $38.8 billion in first quarter 2013. Average core checking and savings deposits were 94 percent of average core deposits. The average deposit cost for second quarter 2013 improved to 14 basis points, compared with 15 basis points in the prior quarter and 19 basis points a year ago. Average core deposits were 117 percent of average loans, up slightly from first quarter 2013.

Capital

Capital increased in the second quarter, with Tier 1 common equity of $117.6 billion under Basel I, or 10.73 percent of risk-weighted assets, compared with 10.08 percent in second quarter 2012 and 10.39 percent in first quarter 2013. Under the Basel III capital rules adopted July 2, 2013, the Tier 1 common equity ratio was an estimated 8.54 percent.⁸ In second quarter 2013, the Company purchased 26.7 million shares of its common stock and an additional estimated 13 million shares through a forward repurchase transaction expected to settle in third quarter 2013. The Company also increased its quarterly common stock dividend to $0.30 per share, up from $0.22 a year ago.

⁸ Estimated based on management's interpretation of final rules adopted July 2, 2013, by the Federal Reserve Board establishing a new comprehensive capital framework for U.S. banking organizations that would implement the Basel III capital framework and certain provisions of the Dodd-Frank Act.

Credit Quality

"Credit performance was very strong in the second quarter with improvement in all key metrics," said Chief Risk Officer Mike Loughlin. "Credit losses were $1.2 billion in second quarter 2013, compared with $2.2 billion in second quarter 2012, representing a 48 percent year-over-year improvement. The quarterly loss rate fell to 0.58 percent with commercial losses of only 5 basis points and consumer losses of 1.01 percent. The consumer loss levels have improved rapidly due primarily to the positive momentum in the residential real estate market, with home prices improving faster and in more markets than expected. Nonperforming assets declined by $1.8 billion, or 8 percent from last quarter. We released $500 million from the allowance for credit losses in the second quarter, reflecting improvement in home prices and credit performance. We continue to expect future reserve releases absent a significant deterioration in the economic environment," said Loughlin.

Net Loan Charge-offs

Net loan charge-offs improved to $1.2 billion in second quarter 2013, or 58 basis points of average loans, compared with $1.4 billion in first quarter 2013, or 72 basis points of average loans.