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Wells Fargo Reports $6.0 Billion in Quarterly Net Income; Diluted EPS of $1.13

October 12, 2018

SAN FRANCISCO--(BUSINESS WIRE)--Oct 12, 2018--Wells Fargo & Company (NYSE:WFC):

Financial results: Net income of $6.0 billion, compared with $4.5 billion in third quarter 2017Diluted earnings per share (EPS) of $1.13, compared with $0.83 Third quarter 2018 included the redemption of our Series J Preferred Stock, which reduced diluted EPS by $0.03 per shareRevenue of $21.9 billion, up from $21.8 billion Net interest income of $12.6 billion, up $123 million, or 1 percentNoninterest income of $9.4 billion, down $31 millionNoninterest expense of $13.8 billion, down $588 million, or 4 percentAverage deposits of $1.3 trillion, down $40.0 billion, or 3 percentAverage loans of $939.5 billion, down $12.9 billion, or 1 percentReturn on assets (ROA) of 1.27 percent, return on equity (ROE) of 12.04 percent, and return on average tangible common equity (ROTCE) of 14.33 percent 1 Credit quality: Provision expense of $580 million, down $137 million, or 19 percent, from third quarter 2017 Net charge-offs decreased $37 million to $680 million, or 0.29 percent of average loans (annualized)Reserve release 2 of $100 millionNonaccrual loans of $7.1 billion, down $1.6 billion, or 18 percent Strong capital position while returning more capital to shareholders:. Common Equity Tier 1 ratio (fully phased-in) of 11.9 percent 3Returned $8.9 billion to shareholders through common stock dividends and net share repurchases, which more than doubled from $4.0 billion in third quarter 2017 Net share repurchases of $6.8 billion, which more than tripled from $2.0 billionPeriod-end common shares outstanding down 216.3 million shares, or 4 percentQuarterly common stock dividend of $0.43 per share, up 10 percent from $0.39 per share

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 September 30, 2018, 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 $6.0 billion, or $1.13 per diluted common share, for third quarter 2018, compared with $4.5 billion, or $0.83 per share, for third quarter 2017, and $5.2 billion, or $0.98 per share, for second quarter 2018.

Chief Executive Officer Tim Sloan said, “In the third quarter, we continued to make progress in our efforts to build a better Wells Fargo with a specific focus on our six goals: risk management, customer service, team member engagement, innovation, corporate citizenship and shareholder value. We are strengthening how we manage risk and have made enhancements to our risk management framework. We also continued to make progress on customer remediation, which is an important step in our efforts to rebuild trust. In addition, to better serve our customers and help them succeed financially, we launched Control Tower SM, a digital experience that simplifies our customers’ online financial lives, and our new Propel ® Card, one of the richest no-annual-fee credit cards in the industry. Furthermore, our ongoing efforts in corporate citizenship and building stronger communities were recognized in a recent survey on corporate giving by the Chronicle of Philanthropy, which ranked the Wells Fargo Foundation as the No.2 corporate cash giver in the United States. Our focus on shareholder value included progress on our expense savings initiatives, and we returned a record $8.9 billion to shareholders through net common stock repurchases and dividends in the third quarter. I’m confident that our efforts to transform Wells Fargo position us for long-term success.”

Chief Financial Officer John Shrewsberry said, “Wells Fargo reported $6.0 billion of net income in the third quarter. Revenue increased and noninterest expense declined both linked quarter and year-over-year. Our positive operating leverage reflected the benefit of the transformational changes we are making at Wells Fargo, including our focus on reducing expenses. In addition, we saw positive business trends in the third quarter, including growth in primary consumer checking customers, increased debit and credit card usage, and higher year-over-year loan originations in auto, small business, home equity and personal loans and lines. Credit performance and capital levels remained strong. Our commitment to returning more capital to shareholders was demonstrated by an increase in net common share repurchases, which more than tripled from a year ago, and a higher common stock dividend.”

Net Interest Income

Net interest income in the third quarter was $12.6 billion, up $31 million from second quarter 2018. Net interest margin was 2.94 percent, up 1 basis point from the prior quarter.

Noninterest Income

Noninterest income in the third quarter was $9.4 billion, up $357 million from second quarter 2018. Third quarter noninterest income included higher other income, market sensitive revenue 4, mortgage banking fees, service charges on deposit accounts, and card fees, partially offset by lower trust and investment fees.

Mortgage banking income was $846 million, up from $770 million in second quarter 2018. The production margin on residential held-for-sale mortgage loan originations 5 increased to 0.97 percent, from 0.77 percent in the second quarter, primarily due to an improvement in secondary market conditions. Residential mortgage loan originations were $46 billion, down from $50 billion in the second quarter. Net mortgage servicing income was $390 million, down from $406 million in the second quarter. Market sensitive revenue was $631 million, up from $527 million in second quarter 2018, predominantly due to higher net gains from equity securities on lower other-than-temporary impairment (OTTI). Other income was $466 million, compared with $323 million in the second quarter. Third quarter results included a $638 million gain from sales of $1.7 billion of purchased credit-impaired (PCI) Pick-a-Pay loans, compared with a $479 million gain from sales of $1.3 billion of PCI Pick-a-Pay loans in second quarter 2018.

Noninterest Expense

Noninterest expense in the third quarter declined $219 million from the prior quarter to $13.8 billion, predominantly due to lower commission and incentive compensation, outside professional services and charitable donations expense. These decreases were partially offset by higher employee benefits, equipment and contract services expense. The efficiency ratio was 62.7 percent in third quarter 2018, compared with 64.9 percent in the second quarter.

Third quarter 2018 operating losses were $605 million, driven primarily by remediation expense for a variety of matters, including an additional $241 million accrual for previously disclosed issues related to automobile collateral protection insurance (CPI).

Income Taxes

The Company’s effective income tax rate was 20.1 percent for third quarter 2018 and included net discrete income tax expense related to the re-measurement of our initial estimates for the impacts of the Tax Cuts & Jobs Act recognized in fourth quarter 2017. The effective income tax rate in second quarter 2018 was 25.9 percent and included net discrete income tax expense of $481 million mostly related to state income taxes. The Company currently expects the effective income tax rate in fourth quarter 2018 to be approximately 19 percent, excluding the impact of any future discrete items.

Loans

Total average loans were $939.5 billion in the third quarter, down $4.6 billion from the second quarter. Period-end loan balances were $942.3 billion at September 30, 2018, down $2.0 billion from June 30, 2018. Commercial loans were down $1.2 billion compared with June 30, 2018, predominantly due to a $2.8 billion decline in commercial real estate loans, partially offset by $1.5 billion of growth in commercial and industrial loans. Consumer loans decreased $746 million from the prior quarter, driven by:

a $1.6 billion decline in automobile loans due to expected continued runoff, as well as the reclassification of the remaining $374 million of Reliable Financial Services Inc. auto loans to held for sale a $1.2 billion decline in junior lien mortgage loans as payoffs continued to exceed originations these decreases were partially offset by: a $1.3 billion increase in 1-4 family first mortgage loans, as nonconforming mortgage loan originations were partially offset by payoffs and $1.7 billion of sales of PCI Pick-a-Pay mortgage loansa $1.1 billion increase in credit card loans

Additionally, $249 million of nonconforming mortgage loan originations that would have otherwise been included in 1-4 family first mortgage loan outstandings were designated as held for sale in third quarter 2018 in anticipation of the future issuance of residential mortgage-backed securities (RMBS).

Debt and Equity Securities

Debt securities include available-for-sale and held-to-maturity debt securities, as well as debt securities held for trading. Debt securities were $472.3 billion at September 30, 2018, down $3.2 billion from the second quarter, predominantly due to a net decrease in available-for-sale debt securities, as approximately $14.3 billion of purchases, primarily federal agency mortgage-backed securities (MBS) in the available-for-sale portfolio, were more than offset by runoff and sales.

Net unrealized losses on available-for-sale debt securities were $3.8 billion at September 30, 2018, compared with net unrealized losses of $2.4 billion at June 30, 2018, predominantly due to higher interest rates.

Equity securities include marketable and non-marketable equity securities, as well as equity securities held for trading. Equity securities were $61.8 billion at September 30, 2018, up $4.3 billion from the second quarter, largely due to an increase in equity securities held for trading due to stronger customer activity.

Deposits

Total average deposits for third quarter 2018 were $1.3 trillion, down $5.0 billion from the prior quarter, as consumers continued to move excess liquidity to higher-rate alternatives. The average deposit cost for third quarter 2018 was 47 basis points, up 7 basis points from the prior quarter and 21 basis points from a year ago, primarily driven by an increase in Wholesale Banking and Wealth and Investment Management deposit rates.

Capital

Capital in the third quarter continued to exceed our internal target, with a Common Equity Tier 1 ratio (fully phased-in) of 11.9 percent 3, down from 12.0 percent in the prior quarter. In third quarter 2018, the Company repurchased 146.5 million shares of its common stock, which reduced period-end common shares outstanding by 137.5 million. The Company paid a quarterly common stock dividend of $0.43 per share.

The Company redeemed its 8.00% Non-Cumulative Perpetual Class A Preferred Stock, Series J, on September 17, 2018, which reduced diluted earnings per common share in third quarter 2018 by $0.03 per share as a result of eliminating the purchase accounting discount recorded on these shares at the time of the Wachovia acquisition.

Credit Quality

Net Loan Charge-offs

The quarterly loss rate in the third quarter was 0.29 percent (annualized), compared with 0.26 percent in the prior quarter and 0.30 percent a year ago. Commercial and consumer losses were 0.12 percent and 0.47 percent, respectively. Total credit losses were $680 million in third quarter 2018, up $78 million from second quarter 2018. Commercial losses were up $85 million driven by higher commercial and industrial loan charge-offs and lower recoveries, while consumer losses decreased $7 million.

Nonperforming Assets

Nonperforming assets decreased $410 million, or 5 percent, from second quarter 2018 to $7.6 billion. Nonaccrual loans decreased $433 million from second quarter 2018 to $7.1 billion reflecting both lower consumer and commercial nonaccruals.

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