Wells Fargo Reports $6.2 Billion in Quarterly Net Income; Diluted EPS of $1.30

SAN FRANCISCO–(BUSINESS WIRE)–Wells Fargo & Company (NYSE:WFC):

• Financial results:
  • Net income of $6.2 billion, compared with $5.2 billion in second quarter 2018
  • Diluted earnings per share (EPS) of $1.30, compared with $0.98
  • Revenue of $21.6 billion
    • Net interest income of $12.1 billion, down $446 million
    • Noninterest income of $9.5 billion, up $477 million
  • Noninterest expense of $13.4 billion, down $533 million
  • Average deposits of $1.3 trillion, down $2.4 billion
  • Average loans of $947.5 billion, up $3.4 billion
  • Return on assets (ROA) of 1.31%, return on equity (ROE) of 13.26%, and return on average tangible common equity (ROTCE) of 15.78%¹
• Credit quality:
  • Provision expense of $503 million, up $51 million from second quarter 2018
    • Net charge-offs of $653 million, up $51 million
      • Net charge-offs of 0.28% of average loans (annualized), up from 0.26%
    • Reserve release² of $150 million, equal to the amount released in second quarter 2018
  • Nonaccrual loans of $5.9 billion, down $1.2 billion, or 17%
• Strong capital position while returning more capital to shareholders:
  • Returned $6.1 billion to shareholders through common stock dividends and net share repurchases, up 52% from $4.0 billion in second quarter 2018
  • Common Equity Tier 1 ratio (fully phased-in) of 12.0%³, which continued to exceed both the regulatory minimum of 9% and our current internal target of 10%
  • Received a non-objection to the Company’s 2019 Capital Plan submission from the Federal Reserve
    • As part of the plan, the Company expects to increase its third quarter 2019 common stock dividend to $0.51 per share from $0.45 per share, subject to approval by the Company’s Board of Directors. The plan also includes up to $23.1 billion of gross common stock repurchases, subject to management discretion, for the four-quarter period from third quarter 2019 through second quarter 2020.

Financial results reported in this document are preliminary. Final financial results and other disclosures will be reported in our Quarterly Report on Form 10-Q for the quarter ended June 30, 2019, and may differ materially from the results and disclosures in this document due to, among other things, the completion of final review procedures, the occurrence of subsequent events, or the discovery of additional information.

Wells Fargo & Company (NYSE:WFC) reported net income of $6.2 billion, or $1.30 per diluted common share, for second quarter 2019, compared with $5.2 billion, or $0.98 per share, for second quarter 2018, and $5.9 billion, or $1.20 per share, for first quarter 2019.

Interim Chief Executive Officer Allen Parker said, “In second quarter 2019, we recorded strong earnings and continued to make progress on our top priorities: focusing on our customers and team members; meeting the expectations of our regulators; and continuing the important transformation of our Company. The commitment of our team members to provide outstanding customer service was reflected in higher customer experience survey scores from our branches, continued growth in primary consumer checking customers, and an increase in referred investment assets as a result of the partnership between our Wealth and Investment Management team and our Community Banking team. During the second quarter, we formed a new Strategic Execution and Operations Office that will focus on achieving operational excellence across our businesses to enable us to execute more effectively on our regulatory priorities and further drive our transformation. Finally, our recent CCAR results demonstrated the strength of our diversified business model, our strong capital position, our sound financial risk management, and our commitment to return excess capital to our shareholders in a prudent manner. I’m confident that all our stakeholders will benefit from the transformational changes we are implementing as we work to build the most customer-focused, efficient, and innovative Wells Fargo ever.”

Chief Financial Officer John Shrewsberry said, “Wells Fargo reported $6.2 billion of net income in the second quarter and diluted earnings per share of $1.30. We grew period-end loans and deposits, as well as pre-tax pre-provision profit, compared with the first quarter and a year ago. Our credit quality remained solid with net charge-offs near historic lows. Additionally, our strong capital position was reflected in our 2019 Capital Plan, which includes an increase in our quarterly common stock dividend rate in third quarter 2019 to $0.51 per share from $0.45 per share, subject to board approval, as well as up to $23.1 billion of gross common stock repurchases during the four-quarter period beginning in third quarter 2019. ”

Net Interest Income

Net interest income in the second quarter was $12.1 billion, down $216 million from first quarter 2019, driven by balance sheet mix and repricing, including the impacts of higher deposit costs and the lower interest rate environment, as well as higher mortgage-backed securities (MBS) premium amortization, partially offset by the benefit of one additional day in the quarter.

The net interest margin was 2.82%, down 9 basis points from the prior quarter due to balance sheet mix and repricing, including the impacts of higher deposit costs and the lower interest rate environment, as well as higher MBS premium amortization.

Noninterest Income

Noninterest income in the second quarter was $9.5 billion, up $191 million from first quarter 2019. Second quarter noninterest income included higher trust and investment fees, other income, services charges on deposit accounts, and card fees, partially offset by lower market sensitive revenue⁴.

• Service charges on deposit accounts were $1.2 billion, up from $1.1 billion in first quarter 2019, due to seasonally lower fees and higher fee waivers in the first quarter, as well as higher treasury management fees in the second quarter.
• Trust and investment fees were $3.6 billion, up from $3.4 billion in first quarter 2019, driven by higher asset-based fees on retail brokerage advisory assets reflecting higher market valuations at March 31, 2019, and higher investment banking fees on increased debt and equity underwriting.
• Card fees were $1.0 billion, up from a seasonally lower first quarter of $944 million.
• Mortgage banking income was $758 million, up from $708 million in first quarter 2019. Net mortgage servicing income was $277 million, down from $364 million in the first quarter primarily due to the impact of lower interest rates including higher loan payoffs. The production margin on residential held-for-sale mortgage loan originations⁵ decreased to 0.98% from 1.05% in the first quarter. Residential held-for-sale mortgage loan originations increased in the second quarter to $33 billion from $22 billion in the first quarter, primarily due to seasonality, as well as lower mortgage loan interest rates in the second quarter.
• Market sensitive revenue⁴ was $871 million, down from $1.3 billion in first quarter 2019, and included lower net gains from equity securities driven by a $258 million decrease in deferred compensation plan investment results in the second quarter (largely offset by lower employee benefits expense). Net gains from trading activities decreased $128 million compared with the prior quarter, driven by lower credit trading results. Net gains from debt securities decreased $105 million compared with the prior quarter, which included gains related to the sale of non-agency residential mortgage-backed securities.
• Other income was $744 million and included a $721 million gain from the sale of $1.9 billion of Pick-a-Pay purchased credit-impaired (PCI) loans.

Noninterest Expense

Noninterest expense in the second quarter declined $467 million from the prior quarter to $13.4 billion, predominantly due to a decline in employee benefits expense and incentive compensation expense, which were seasonally elevated in the first quarter, as well as a $243 million decrease in deferred compensation expense (largely offset by lower net gains from equity securities). These decreases were partially offset by higher outside professional and contract services, salary, and advertising and promotion expense. The efficiency ratio was 62.3% in second quarter 2019, compared with 64.4% in the first quarter.

Income Taxes

The Company’s effective income tax rate was 17.3% for second quarter 2019. The effective income tax rate in first quarter 2019 was 13.1% and included net discrete income tax benefits of $297 million related mostly to the results of U.S. federal and state income tax examinations and the accounting for stock compensation activity. The Company currently expects the effective income tax rate for the remainder of 2019 to be approximately 18%, excluding the impact of any unanticipated discrete items.

Loans

Average loans were $947.5 billion in the second quarter, down $2.6 billion from the first quarter. Period-end loan balances were $949.9 billion at June 30, 2019, up $1.6 billion from March 31, 2019. Commercial loans were flat compared with March 31, 2019. Consumer loans increased $1.6 billion from the prior quarter, reflecting the following:

• Real estate 1-4 family first mortgage loans increased $1.9 billion, as $19.8 billion of held-for-investment mortgage loan originations were partially offset by paydowns, the sale of $1.9 billion of Pick-a-Pay PCI loans, and the reclassification of $1.8 billion of mortgage loans to held for sale
• Real estate 1-4 family junior lien mortgage loans decreased $1.0 billion, as paydowns continued to exceed originations
• Credit card loans increased $541 million, up from a seasonally lower first quarter
• Automobile loans increased $751 million, as originations of $6.3 billion outpaced paydowns, resulting in linked-quarter growth for the first time since third quarter 2016

Debt and Equity Securities

Debt securities include available-for-sale and held-to-maturity debt securities, as well as debt securities held for trading. Period-end debt securities were $482.1 billion at June 30, 2019, down $1.4 billion from the first quarter, predominantly due to a net decrease in available-for-sale debt securities. Debt securities purchases of approximately $15.9 billion, predominantly federal agency MBS in the available-for-sale portfolio, were more than offset by runoff and sales.

Net unrealized gains on available-for-sale debt securities were $2.5 billion at June 30, 2019, compared with $853 million at March 31, 2019, primarily due to lower long-term interest rates in the second quarter.

Period-end equity securities, which include marketable and non-marketable equity securities, as well as equity securities held for trading, were $61.5 billion at June 30, 2019, up $3.1 billion from the first quarter.

Deposits

Total average deposits for second quarter 2019 were $1.3 trillion, up $6.9 billion from the prior quarter primarily due to higher retail banking deposits reflecting increased promotional activity, partially offset by lower Wealth and Investment Management deposits. The average deposit cost for second quarter 2019 was 70 basis points, up 5 basis points from the prior quarter and 30 basis points from a year ago.

Capital

The Company’s Common Equity Tier 1 ratio (fully phased-in) was 12.0%³ and continued to exceed both the regulatory minimum of 9% and our current internal target of 10%. In second quarter 2019, the Company repurchased 104.9 million shares of its common stock, which, net of issuances, reduced period-end common shares outstanding by 92.4 million. The Company paid a quarterly common stock dividend of $0.45 per share.

In June 2019, the Company received a non-objection to its 2019 Capital Plan from the Federal Reserve. As part of the plan, the Company expects to increase its third quarter 2019 common stock dividend to $0.51 per share, subject to approval by the Company’s Board of Directors. The plan also includes up to $23.1 billion of gross common stock repurchases, subject to management discretion, for the four-quarter period from third quarter 2019 through second quarter 2020. In addition, the Company may consider redemptions or repurchases of other capital securities as part of the plan.

As of June 30, 2019, our eligible external total loss absorbing capacity (TLAC) as a percentage of total risk-weighted assets was 24.1%⁶, compared with the required minimum of 22.0%.

Credit Quality

Net Loan Charge-offs

The quarterly loss rate in the second quarter was 0.28% (annualized), down from 0.30% in the prior quarter, and up from 0.26% a year ago. Commercial and consumer losses were 0.13% and 0.45%, respectively. Total credit losses were $653 million in second quarter 2019, down $42 million from first quarter 2019. Commercial losses increased $20 million, while consumer losses decreased $62 million primarily due to lower automobile losses.

Nonperforming Assets

Nonperforming assets decreased $1.0 billion, or 14%, from first quarter 2019 to $6.3 billion. Nonaccrual loans decreased $983 million from first quarter 2019 to $5.9 billion. Commercial nonaccrual loans decreased $327 million driven by reductions in the commercial and industrial portfolio reflecting broad-based improvement across industry sectors. Consumer nonaccrual loans decreased $656 million driven by lower nonaccruals in the real estate 1-4 family first mortgage portfolio, which included a $373 million decline related to the reclassification of $1.8 billion of mortgage loans to held for sale.

Allowance for Credit Losses

The allowance for credit losses, including the allowance for unfunded commitments, totaled $10.6 billion at June 30, 2019, down $218 million from March 31, 2019. Second quarter 2019 included a $150 million reserve release² primarily driven by strong overall credit portfolio performance. The allowance coverage for total loans was 1.12%, compared with 1.14% in first quarter 2019. The allowance covered 4.0 times annualized second quarter net charge-offs, compared with 3.8 times in the prior quarter. The allowance coverage for nonaccrual loans was 179% at June 30, 2019, compared with 157% at March 31, 2019.

Business Segment Performance

Wells Fargo defines its operating segments by product type and customer segment. Segment net income for each of the three business segments was:

Community Banking offers a complete line of diversified financial products and services for consumers and small businesses including checking and savings accounts, credit and debit cards, and automobile, student, mortgage, home equity and small business lending, as well as referrals to Wholesale Banking and Wealth and Investment Management business partners. The Community Banking segment also includes the results of our Corporate Treasury activities net of allocations (including funds transfer pricing, capital, liquidity and certain corporate expenses) in support of the other operating segments and results of investments in our affiliated venture capital and private equity partnerships.

Second Quarter 2019 vs. First Quarter 2019

• Net income of $3.1 billion, up $324 million, or 11%
• Revenue was $11.8 billion, flat compared with the prior quarter, as higher service charges on deposit accounts, card fees, and other income were predominantly offset by lower net interest income, and lower market sensitive revenue⁴ reflecting lower deferred compensation plan investment results (largely offset by lower employee benefits expense)
• Noninterest expense of $7.2 billion decreased $477 million, or 6%, predominantly driven by lower personnel expense, which was seasonally elevated in the first quarter, as well as lower deferred compensation expense (largely offset by lower net gains from equity securities), partially offset by higher advertising and promotion expense
• Provision for credit losses decreased $231 million, primarily due to credit improvement in the automobile and consumer real estate portfolios

Second Quarter 2019 vs. Second Quarter 2018

• Net income was up $651 million, or 26%, driven by net discrete tax expense of $481 million in second quarter 2018
• Revenue was flat compared with a year ago, as lower net interest income was offset by higher gains from sales of Pick-a-Pay PCI loans and higher service charges on deposit accounts
• Noninterest expense decreased $78 million, or 1%, driven by lower core deposit and other intangibles amortization, FDIC expense, and operating losses, partially offset by higher personnel, equipment, and advertising and promotion expense

Business Metrics and Highlights

• Primary consumer checking customers^7,8 of 24.3 million, up 1.3% from a year ago. The sale of 52 branches and $1.8 billion of deposits which closed in fourth quarter 2018 reduced the growth rate by 0.4%
• Branch customer experience surveys completed during second quarter 2019 reflected higher scores from the previous quarter, with both ‘Customer Loyalty’ and ‘Overall Satisfaction with Most Recent Visit’ scores reaching their highest level in more than three years
• Debit card point-of-sale purchase volume⁹ of $93.2 billion in the second quarter, up 6% year-over-year
• General purpose credit card point-of-sale purchase volume of $20.4 billion in the second quarter, up 6% year-over-year
• 30.0 million digital (online and mobile) active customers, including 23.7 million mobile active customers^8,10
• 5,442 retail bank branches as of the end of second quarter 2019, reflecting 78 branch consolidations in the first half of 2019
• Home Lending
  • Originations of $53 billion, up from $33 billion in the prior quarter, primarily due to seasonality, as well as lower mortgage loan interest rates
    • Originations of loans held-for-sale and loans held-for-investment were $33 billion and $20 billion, respectively
  • Production margin on residential held-for-sale mortgage loan originations⁵ of 0.98%, down from 1.05% in the prior quarter
  • Applications of $90 billion, up from $64 billion in the prior quarter, driven primarily by sea

Contacts

Media

Ancel Martinez, 415-222-3858

[email protected]

or

Investor Relations

John M. Campbell, 415-396-0523

[email protected]

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