Wells Fargo Reports Record Quarterly Net Income
Wells Fargo Reports Record Quarterly Net Income
Q3 Net Income of $5.6 Billion; EPS of $0.99, Up 13 Percent from Prior Year
- Continued strong financial results:
- Record Wells Fargo net income of $5.6 billion, up 13 percent from third quarter 2012
- Record diluted earnings per share of $0.99, up 13 percent
- Revenue of $20.5 billion, compared with $21.2 billion
- Noninterest expense of $12.1 billion, down $10 million
- Return on average assets (ROA) of 1.53 percent, up 8 basis points
- Return on equity (ROE) of 14.07 percent, up 69 basis points
- Strong loan and deposit growth:
- Total average loans of $804.8 billion, up $28.0 billion from third quarter 2012
- Quarter-end loans of $812.3 billion, up $29.7 billion
- Quarter-end core loans1 of $728.2 billion, up $44.2 billion
- Added $5.2 billion from U.K. and U.S. commercial real estate (CRE) acquisitions
- Total average core deposits of $940.3 billion, up $44.9 billion
- Quarter-end core deposits of $947.8 billion, up $46.7 billion
- Continued improvement in credit quality:
- Net charge-offs of $975 million, down $1.4 billion from third quarter 2012
- Net charge-off rate of 0.48 percent (annualized), compared with 1.21 percent
- Nonperforming assets of $20.7 billion, down $4.6 billion
- $900 million reserve release2 due to continued strong credit performance and improved housing market
- Net charge-offs of $975 million, down $1.4 billion from third quarter 2012
- Strengthened capital levels:
- Tier 1 common equity3 under Basel I increased $14.5 billion from third quarter 2012 to $120.3 billion, with Tier 1 common equity ratio of 10.64 percent under Basel I at September 30, 2013
- Estimated Tier 1 common equity ratio of 9.54 percent under Basel III capital rules4
- Period end common stock share count declined 28.4 million from second quarter 2013 reflecting 50.9 million of purchases in the quarter
- Purchased an additional estimated 9.8 million shares through a forward repurchase transaction expected to settle in fourth quarter 2013
|1||See table in Loans section for more information on core and non-strategic/liquidating loan portfolios.|
|2||Reserve release represents the amount by which net charge-offs exceed the provision for credit losses.|
See tables on TIER 1 COMMON EQUITY for more information on Tier 1 common equity.
|4||Estimated based on management's interpretation of final rules adopted July 2, 2013, by the Federal Reserve Board establishing a new comprehensive capital framework for U.S. banking organizations that would implement the Basel III capital framework and certain provisions of the Dodd-Frank Act.|
|Selected Financial Information|
|Diluted earnings per common share||$||0.99||0.98||0.88|
|Wells Fargo net income (in billions)||5.58||5.52||4.94|
|Return on assets (ROA)||1.53||%||1.55||1.45|
|Return on equity (ROE)||14.07||14.02||13.38|
|Net charge-offs (annualized) as a % of avg. total loans||0.48||0.58||1.21|
|Allowance for credit losses as a % of total loans||1.93||2.07||2.27|
|Allowance for credit losses as a % of annualized net charge-offs||405||360||190|
|Revenue (in billions)||$||20.5||21.4||21.2|
|Average loans (in billions)||$||804.8||800.2||776.7|
|Average core deposits (in billions)||940.3||936.1||895.4|
|Net interest margin||3.38||%||3.46||3.66|
Wells Fargo & Company (NYS: WFC) reported record net income of $5.6 billion, or $0.99 per diluted common share, for third quarter 2013, up from $4.9 billion, or $0.88 per share, for third quarter 2012, and up from $5.5 billion, or $0.98 per share, for second quarter 2013. For the first nine months of 2013, net income was a record $16.3 billion, or $2.89 per share, compared with $13.8 billion, or $2.45 per share, for the same period in 2012.
"Wells Fargo continued to demonstrate strong and consistent financial performance in the third quarter," said Chairman and CEO John Stumpf. "As our economy continues to transition to higher interest rates, our diversified business model and strong risk discipline contributed to record earnings per share along with continued strength in return on assets, return on equity and capital. The improvement in the housing market has been beneficial to our customers and significantly contributed to our broad-based credit improvement in the quarter. We also deepened relationships, resulting in increases in cross-sell across the Company. As we look forward, we remain well positioned to meet the needs of our customers and to perform for our shareholders."
Chief Financial Officer Tim Sloan said, "This was a solid quarter for Wells Fargo. As expected, mortgage banking revenue was lower in the quarter as the recent increases in interest rates reduced refinance volume, but this impact was partially offset by improved credit and lower expenses. Year-over-year, we had strong loan growth, double-digit increases in noninterest income across many of our businesses and continued to build capital and return more to shareholders through dividends and share buybacks."
Revenue was $20.5 billion, compared with $21.4 billion in second quarter 2013. With net interest income stable, revenue declined primarily from lower mortgage banking revenue and trust and investment fees, partially offset by higher market sensitive revenue5 and other income. Businesses generating year-over-year double-digit revenue growth included credit card, personal credit management, retail sales finance and retirement services.
|5||Consists of 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 remained strong in third quarter 2013 at $10.7 billion, essentially unchanged from second quarter 2013. Net interest income benefitted from available-for-sale (AFS) securities portfolio purchases, which consisted largely of agency mortgage-backed securities (MBS), lower funding costs, organic growth in commercial and consumer loans, commercial real estate loan acquisitions, and one additional business day in the quarter. These benefits were offset by lower interest income from mortgages held for sale and reduced income from variable sources, such as purchased credit-impaired (PCI) loan resolutions and periodic dividends.
The Company's net interest margin declined 8 basis points from the prior quarter to 3.38 percent. Deposit and long-term debt growth and a decline in mortgages held for sale caused cash and short term investments to increase 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 customer driven deposit growth accounted for 3 basis points of compression. Liquidity-related issuances in the quarter, both term deposits and long-term debt, diluted the margin by approximately 3 basis points. Separately, the net impact of balance sheet repricing and growth also diluted the net interest margin by 1 basis point, while lower income from variable sources, including PCI loan resolutions and periodic dividends, led to another 1 basis point of compression.
Noninterest income was $9.7 billion, compared with $10.6 billion in second quarter 2013, driven primarily by lower mortgage refinance volume and reduced gain on sale margins. Trust and investment fees declined in the quarter due to reduced investment banking revenue and seasonally lower retail brokerage commissions. These declines were partially offset by increases in debt and equity gains, mortgage banking servicing income and trading revenue.
Mortgage banking noninterest income was $1.6 billion, down from $2.8 billion in second quarter 2013. During the third quarter, residential mortgage originations were $80 billion, down from $112 billion in second quarter 2013. The Company provided $28 million for mortgage loan repurchase losses, compared with $65 million in second quarter 2013 (included in net gains from mortgage loan origination/sales activities). As previously announced, the Company reached an agreement with the Federal Home Loan Mortgage Corporation (Freddie Mac) on September 27, 2013, that resolved substantially all repurchase liabilities related to loans sold to Freddie Mac prior to January 1, 2009. The agreement was covered through mortgage loan repurchase accruals established in prior periods. Net mortgage servicing rights (MSRs) results were $26 million, compared with $68 million in second quarter 2013.
The Company had net unrealized securities gains of $5.8 billion at September 30, 2013, up from $5.1 billion at June 30, 2013.
Noninterest expense declined $153 million from the prior quarter to $12.1 billion, as higher mortgage-related severance expense and deferred compensation costs (offset in revenue) were more than offset by lower incentive compensation (including mortgage-related), reduced litigation accruals and seasonally lower crop insurance commissions. The efficiency ratio was 59.1 percent in third quarter 2013, compared with 57.3 percent in second quarter 2013. The Company expects to operate within its targeted efficiency ratio range of 55 to 59 percent in fourth quarter 2013.
The Company's effective tax rate was 31.9 percent and 33.4 percent for third quarter 2013 and 2012, respectively. The lower effective tax rate in third quarter 2013 reflected a net reduction in the reserve for uncertain tax positions primarily due to settlements with tax authorities regarding certain cross border transactions.
Total loans were $812.3 billion at September 30, 2013, up $10.4 billion from June 30, 2013. Third quarter loan growth included $5.2 billion of CRE portfolio acquisitions consisting of $4.0 billion of U.K. CRE loans classified within foreign loans and $1.2 billion within commercial real estate mortgage. Growth in the commercial and industrial, real estate 1-4 family first mortgage, credit card, and auto portfolios more than offset the reduction in the non-strategic/liquidating portfolios. Total average loans were $804.8 billion, up $4.5 billion from the prior quarter. The asset-backed finance, corporate banking, credit card, equipment finance, government and institutional banking, mortgage portfolios, personal credit management, retail brokerage, and retail sales finance portfolios all experienced year-over-year double-digit growth.
|September 30, 2013||June 30, 2013|
|(in millions)||Core||Liquidating (1)||Total||Core||Liquidating (1)||Total|
|Change from prior quarter:||$||13,777||(3,426||)||10,351||5,335||(3,327||)||2,008|
(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.
Total average deposits were $1.0 trillion, up 8 percent from a year ago and up 6 percent (annualized) from second quarter 2013. Average core deposits were $940.3 billion, up 5 percent from a year ago and up 2 percent (annualized) from second quarter 2013. Average core checking and savings deposits were $892.9 billion, up 7 percent from a year ago and up 4 percent (annualized) from second quarter 2013. Average mortgage escrow deposits decreased to $34.7 billion, compared with $40.0 billion a year ago and $39.6 billion in second quarter 2013. Average core checking and savings deposits were 95 percent of average core deposits. The average deposit cost for third quarter 2013 improved to 12 basis points, compared with 14 basis points in the prior quarter and 18 basis points a year ago. Average core deposits were 117 percent of average loans, unchanged from second quarter 2013.
Capital remained strong in the third quarter, with Tier 1 common equity of $120.3 billion under Basel I, or 10.64 percent of risk-weighted assets, compared with 9.92 percent in third quarter 2012 and 10.71 percent in second quarter 2013. Under Basel III capital rules, the Tier 1 common equity ratio was an estimated 9.54 percent.6 In third quarter 2013, the Company purchased 50.9 million shares of its common stock and an additional estimated 9.8 million shares through a forward repurchase transaction expected to settle in fourth quarter 2013. The Company also paid a quarterly common stock dividend of $0.30 per share, up from $0.22 a year ago.
|6||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.|
|June 30,||Sept. 30,|
|(as a percent of total risk-weighted assets)||2013||2013||2012|
|Ratios under Basel I (1):|
|Tier 1 common equity (2)||10.64||%||10.71||9.92|
|Tier 1 capital||12.15||12.12||11.50|
|Tier 1 leverage||9.76||9.63||9.40|
(1) September 30, 2013, ratios are preliminary.
(2) See table on TIER 1 COMMON EQUITY for more information on Tier 1 common equity.
"Credit performance continued to be very strong in the third quarter. Loss levels improved from the second quarter and were at historically low levels," said Chief Risk Officer Mike Loughlin. "Credit losses were $975 million in third quarter 2013, compared with $2.4 billion in third quarter 2012, representing a 59 percent year-over-year improvement. The quarterly loss rate fell to 0.48 percent with commercial losses of only 2 basis points and consumer losses of 0.86 percent. The consumer loss levels continued to benefit from the improvement in the residential real estate market, with home prices and market fundamentals improving faster and in more markets than forecasted. Nonperforming assets declined by $360 million, or 7 percent (annualized) from last quarter. We released $900 million from the allowance for credit losses in the third quarter, reflecting improvement in home prices and credit performance. Given these favorable conditions, we continue to expect future reserve releases absent a significant deterioration in the economic environment."
Net Loan Charge-offs
Net loan charge-offs improved to $975 million in third quarter 2013, or 48 basis points of average loans, compared with $1.2 billion in second quarter 2013, or 58 basis points of average loans.
|Net Loan Charge-Offs|
|Sept. 30, 2013||June 30, 2013||Mar. 31, 2013|
|As a||As a||As a|
|Net loan||% of||Net loan||% of||Net loan||% of|
|($ in millions)||offs||loans (1)||offs||loans (1)||offs||loans (1)|
|Commercial and industrial||$||58||0.12||%||$||77||0.17||%||$||93||0.20||%|
|Real estate mortgage||(20||)||(0.08||)||(5||)||(0.02||)||29||0.11|
|Real estate construction||(17||)||(0.41||)|
|Real estate 1-4 family first mortgage||242||0.38||328||0.52||429||0.69|
|Real estate 1-4 family junior lien mortgage||275||1.58||359||2.02||449||2.46|
|Other revolving credit and installment||154||1.46||145||1.38||140||1.37|
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