UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10‑Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2014

 

Commission file number 001-2979

 

WELLS FARGO & COMPANY

(Exact name of registrant as specified in its charter)

 

                                                  Delaware                                                                                    No. 41-0449260

                                        (State of incorporation)                                                         (I.R.S. Employer Identification No.)

 

420 Montgomery Street, San Francisco, California 94163

(Address of principal executive offices)  (Zip Code)

 

Registrant’s telephone number, including area code:  1-866-249-3302 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

Yes þ             No ¨ 

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

 

Yes þ             No ¨ 

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non‑accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

        Large accelerated filer         þ                                                                                         Accelerated filer  ¨ 

        Non‑accelerated filer           ¨  (Do not check if a smaller reporting company)               Smaller reporting company  ¨ 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

Yes ¨             No þ 

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

                                                                                                                                                         Shares Outstanding

                                                                                                                                                             July 31, 2014

Common stock, $1-2/3 par value                                                                                         5,220,407,047              

 

 

 

 

 

This Quarterly Report, including the Financial Review and the Financial Statements and related Notes, contains forward-looking statements, which may include forecasts of our financial results and condition, expectations for our operations and business, and our assumptions for those forecasts and expectations. Do not unduly rely on forward-looking statements. Actual results may differ materially from our forward-looking statements due to several factors. Factors that could cause our actual results to differ materially from our forward-looking statements are described in this Report, including in the “Forward-Looking Statements” section, and the “Risk Factors” and “Regulation and Supervision” sections of our Annual Report on Form 10-K for the year ended December 31, 2013 (2013 Form 10-K).

 

When we refer to “Wells Fargo,” “the Company,” “we,” “our” or “us” in this Report, we mean Wells Fargo & Company and Subsidiaries (consolidated). When we refer to the “Parent,” we mean Wells Fargo & Company. When we refer to “legacy Wells Fargo,” we mean Wells Fargo excluding Wachovia Corporation (Wachovia). See the Glossary of Acronyms for terms used throughout this Report.

 

Financial Review[1] 

 

Overview

Wells Fargo & Company is a nationwide, diversified, community-based financial services company with $1.6 trillion in assets. Founded in 1852 and headquartered in San Francisco, we provide banking, insurance, investments, mortgage, and consumer and commercial finance through more than 9,000 locations, 12,500 ATMs and the internet (wellsfargo.com), and we have offices in 36 countries to support customers who conduct business in the global economy. With approximately 265,000 active, full-time equivalent team members, we serve one in three households in the United States and rank No. 29 on Fortune’s  2014 rankings of America’s largest corporations. We ranked fourth in assets and first in the market value of our common stock among all U.S. banks at June 30, 2014.  

We use our Vision and Values to guide us toward growth and success. Our vision is to satisfy all our customers’ financial needs, help them succeed financially, be recognized as the premier financial services company in our markets and be one of America’s great companies. Important to our strategy to achieve this vision is to increase the number of our products our customers utilize and to offer them all of the financial products that fulfill their financial needs. Our cross-sell strategy, diversified business model and the breadth of our geographic reach facilitate growth in both strong and weak economic cycles. We can grow by expanding the number of products our current customers have with us, gain new customers in our extended markets, and increase market share in many businesses.

We have six primary values, which are based on our vision and provide the foundation for everything we do. First, we value and support our people as a competitive advantage and strive to attract, develop, retain and motivate the most talented people we can find. Second, we strive for the highest ethical standards with our team members, our customers, our communities and our shareholders. Third, with respect to our customers, we strive to base our decisions and actions on what is right for them in everything we do. Fourth, for team members we strive to build and sustain a diverse and inclusive culture – one where they feel valued and respected for who they are as well as for the skills and experiences they bring to our company. Fifth, we also look to each of our team members to be leaders in establishing, sharing and communicating our vision. Sixth, we strive to make risk management a competitive advantage by working hard to ensure that appropriate controls are in place to reduce risks to our customers, maintain and increase our competitive market position, and protect Wells Fargo’s long-term safety, soundness and reputation.

 

Financial Performance

Wells Fargo net income was $5.7 billion in second quarter 2014 with diluted earnings per share (EPS) of $1.01 as we continued our focus on creating long-term shareholder value through meeting our customers’ financial needs including growing loans and deposits. Our results demonstrated our ability to consistently achieve strong financial performance across a variety of economic and interest-rate environments and the benefit of our diversified business model. Compared with a year ago:

·         our loans increased $29.1 billion, or 4%,  even with the planned runoff in our non-strategic/liquidating portfolios and a $9.7 billion transfer of government guaranteed student loans at the end of the quarter to loans held for sale, and our core loan portfolio grew by $51.3 billion, or 7%; 

·         our deposit franchise continued to generate solid deposit growth, with total deposits up $97.0 billion, or 9%;

·         our credit performance continued to improve with total net charge-offs down $435 million, or 38%, and represented only 35 basis points (annualized) of average loans;

·         noninterest expense was $12.2 billion, down $61 million, while we continued to invest in our businesses including strengthening our risk management infrastructure; and

·         we continued to deepen our solid customer relationships across our company, with Retail Banking cross-sell of 6.17 products per household (May 2014); Wholesale Banking cross-sell of 7.2 products (March 2014); and Wealth, Brokerage and Retirement cross-sell of 10.44 products (May 2014).

 

Balance Sheet and Liquidity

Our balance sheet continued to strengthen in second quarter 2014 with further core loan and deposit growth. We have been able to grow our loans on a year-over-year basis for 12 consecutive quarters (for the past nine quarters year-over-year loan growth has been 3% or greater) despite the planned runoff from our non-strategic/liquidating portfolios. Our non-strategic/liquidating loan portfolios decreased $12.7 billion during the quarter and our core loan portfolio increased $15.1 billion. Our investment securities increased by $8.7 billion during the quarter, which reflected our purchases of U.S. Treasuries and federal agency debt.

Deposit growth remained strong with period-end deposits up $39.4 billion, or 4%, from December 31, 2013. This increase reflected solid growth across both our commercial and consumer businesses. Average deposits have grown while deposit costs have declined for 15  

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consecutive quarters. We grew our primary consumer checking customers by a net 4.6% from a year ago (May 2014 compared with May 2013). Our ability to grow primary customers is important to our results because these customers have more interactions with us, have higher cross-sell and are more than twice as profitable as non-primary customers.

 

Credit Quality

Credit quality continued to improve in second quarter 2014 as losses remained at historically low levels, nonperforming assets (NPAs) continued to decrease and we continued to originate high quality loans, reflecting our long-term risk focus and the benefit from the improved housing market. Net charge-offs were $717 million, or 0.35% (annualized) of average loans, in second quarter 2014, compared with $1.2 billion a year ago (0.58%), a 38% year-over-year decrease in losses. Net losses in our commercial portfolio were only $31 million, or 3 basis points of average commercial loans. Net consumer losses declined to 62 basis points from 101 basis points in second quarter 2013. Our commercial real estate portfolios were in a net recovery position for the sixth consecutive quarter, reflecting our conservative risk discipline and improved market conditions. Losses on our consumer real estate portfolios declined $390 million from a year ago, down 57%. The consumer loss levels reflected the positive momentum in the residential real estate market, with home values improving significantly in many markets, as well as lower default frequency.

Reflecting these improvements in our loan portfolios, our $217 million provision for credit losses this quarter was $435 million less than a year ago. This provision reflected a release of $500 million from the allowance for credit losses, which was equal to the release a year ago. We continue to expect future allowance releases absent a significant deterioration in the economy, but expect a lower level of future releases as the rate of credit improvement slows and the loan portfolio continues to grow.

In addition to lower net charge-offs and provision expense, NPAs also improved and were down $686 million, or 4%, from March 31, 2014, the seventh consecutive quarter of decline. Nonaccrual loans declined $678 million from the prior quarter while foreclosed assets were down $8 million.

 

Capital

We continued to maintain strong capital ratios while returning more capital to shareholders, increasing total equity to $181.5 billion at June 30, 2014, up $5.1 billion from the prior quarter. In second quarter 2014, we increased our common stock dividend by 17% to $0.35 per share and continued to reduce our common share count through the repurchase of 39.4 million common shares and the execution of a $1 billion forward repurchase contract that settled in July 2014 for 19.5 million shares. In addition, in July 2014 we entered into a $1.0 billion forward repurchase contract with an unrelated third party that is expected to settle in fourth quarter 2014 for approximately 21 million shares. We expect our share count to continue to decline in 2014 as a result of anticipated net share repurchases. Our net payout ratio (which is the ratio of (i) common stock dividends and share repurchases less issuances, divided by (ii) net income applicable to common stock) in second quarter 2014 was 66%, in line with our recent guidance of 55-75%.

We believe an important measure of our capital strength is the estimated Common Equity Tier 1 ratio under Basel III, using the Advanced Approach, fully phased-in, which increased to 10.14% in second quarter 2014. 

Our regulatory capital ratios under Basel III (General Approach) remained strong with a total risk-based capital ratio of 15.89%, Tier 1 risk-based capital ratio of 12.72% and Tier 1 leverage ratio of 9.86% at June 30, 2014, compared with 15.71%, 12.63% and 9.84%, respectively, at March 31, 2014. See the “Capital Management” section in this Report for more information regarding our capital, including the calculation of common equity for regulatory purposes.

 

Earnings Performance                                                                                                                                              

Wells Fargo net income for second quarter 2014 was $5.7 billion ($1.01 diluted earnings per common share) compared with $5.5 billion ($0.98) for second quarter 2013. Net income for the first half of 2014 was $11.6 billion ($2.06) compared with $10.7 billion ($1.90) for the same period a year ago. Our  second quarter 2014  earnings reflected continued execution of our business strategy and growth in many of our businesses. The key drivers of our financial performance in the second quarter and first half of 2014 were balanced net interest and fee income, diversified sources of fee income, a diversified loan portfolio and strong underlying credit performance.  

Revenue, the sum of net interest income and noninterest income, was $21.1 billion in second quarter 2014, compared with $21.4 billion in second quarter 2013. Revenue for the first half of 2014 was $41.7 billion, down 2% from the first half of 2013. The decrease in revenue for the second quarter and first half of 2014 from the same periods a year ago was primarily due to a decline in mortgage banking revenue, partially offset by an increase in deposit service charges, trust and investment fees, and market sensitive revenue (net gains from trading activities, debt securities and equity investments). Noninterest income represented 49% of revenue for the second quarter 2014 and first half of 2014 compared with 50% for the same periods a year ago. The drivers of our fee income can differ depending on the interest rate and economic environment. For example, net gains on mortgage loan origination/sales activities were 7% of our fee income in second quarter 2014, down from 23% in the same period a year ago when the refinance market was strong. Other businesses, such as equity investments, brokerage, and mortgage servicing, contributed more to fee income this quarter, demonstrating the benefit of our diversified business model.

 

Net Interest Income

Net interest income is the interest earned on debt securities, loans (including yield-related loan fees) and other interest-earning assets minus the interest paid on deposits, short-term borrowings and long-term debt. The net interest margin is the average yield on earning assets minus the average interest rate paid for deposits and our other sources of funding. Net interest income and the net interest margin are presented on a taxable-equivalent basis in Table 1 to consistently reflect income from taxable and tax-exempt loans and securities based on a 35% federal statutory tax rate.

While the Company believes that it has the ability to increase net interest income over time, net interest income and the net interest margin in any one period can be significantly affected by a variety of factors including the mix and overall size of our earning asset portfolio and the cost of funding those assets. In addition, some sources of interest income, such as resolutions from purchased credit-impaired (PCI) loans, loan prepayment fees and collection of interest on nonaccrual loans, can vary from period to period. Net interest income growth has been challenged during the prolonged low interest rate environment as higher yielding loans and securities runoff have been replaced with lower yielding assets. The pace of this repricing has slowed in recent periods.  

Net interest income on a taxable-equivalent basis was $11.0 billion and $21.8 billion in the second quarter and first half of 2014, up from $10.9 billion and $21.6 billion, respectively, for the same periods a year ago. The net interest margin was 3.15% and 3.17% for the second quarter and first half of 2014, down from 3.47% and 3.48% in the same periods a year ago. The  increase in net interest income in the second quarter and first half of 2014 from the same periods a year ago was largely driven by reduced deposit costs and the maturing of higher yielding long-term debt. Growth in earning assets also improved net interest income as it offset the decrease in earning asset yields. The decline in net interest margin in second quarter and first half of 2014,  compared with the same periods a year ago was primarily driven by higher funding balances, including customer-driven deposit growth and actions we have taken in response to increased regulatory liquidity expectations which raised long-term debt and term deposits. This growth in funding increased cash and federal funds sold and other short-term investments which are dilutive to net interest margin although essentially neutral to net interest income.

Average earning assets increased $138.5 billion in the second quarter and $134.7 billion in  the first half of 2014  from the same periods a year ago, as average federal funds sold and other short-term investments increased $93.3 billion in the second quarter and $92.8 billion in the first half of 2014 from the same periods a year ago, and average investment securities increased $29.1 billion in the second quarter and $30.4 billion in the first half of 2014 from the same periods a year ago. In addition, an increase in commercial and industrial loans contributed to $32.7 billion and $29.9 billion higher average loans in the second quarter and first half of 2014, respectively, compared with the same periods a year ago.

Core deposits are an important low-cost source of funding and affect both net interest income and the net interest margin. Core deposits include noninterest-bearing deposits, interest-bearing checking, savings certificates, market rate and other savings, and certain foreign deposits (Eurodollar sweep balances). Average core deposits rose to $991.7 billion in second quarter 2014 ($982.8 billion in the first half of 2014), compared with $936.1 billion in second quarter 2013 ($931.0 billion in the first half of 2013), and funded 119% of average loans in second quarter 2014 (117% for the first half of 2014), compared with 117% the same period a year ago (117% for the first half of 2013). Average core deposits decreased to 71% of average earning assets in both the second quarter and first half of 2014, compared with 74% in second quarter 2013 and 75% for the first half of 2013. The cost of these deposits has continued to decline due to a sustained low interest rate environment and a shift in our deposit mix from higher cost certificates of deposit to lower yielding checking and savings products. About 96% of our average core deposits are in checking and savings deposits, one of the highest industry percentages.