The FINANCIAL — Wells Fargo & Company reported net income of $4.6 billion, or $0.84 per diluted common share, for third quarter 2017, compared with $5.6 billion, or $1.03 per share, for third quarter 2016, and $5.8 billion, or $1.07 per share, for second quarter 2017.
Chief Executive Officer Tim Sloan said, “Over the past year we have made fundamental changes to transform Wells Fargo as part of our effort to rebuild trust and build a better bank. While our financial performance in the third quarter included the impact of a litigation accrual for previously disclosed, pre-crisis mortgage-related regulatory investigations, I am proud of the commitment of our 268,000 team members who put our customers first. We saw total average deposit growth; loan growth in our residential mortgage, credit card and subscription finance portfolios; as well as higher assets under management in Wealth and Investment Management. We also continued to invest in customer-focused innovation and have begun the rollout of our online mortgage application and “Intuitive Investor,” our online platform for digital investing and professional advice. We’re also committed to helping our communities recover from the devastation of the recent hurricanes by providing payment relief and proactively waiving fees for impacted customers, and our foundation donated $2.6 million for hurricane relief efforts.”
Chief Financial Officer John Shrewsberry said, “Wells Fargo reported $4.6 billion of net income in the third quarter, which included the impact of the $1 billion, or $(0.20) per share, discrete litigation accrual. We continued to see good credit performance and our liquidity and capital remained exceptionally strong. During the quarter, our first under our 2017 Capital Plan, we returned $4.0 billion to shareholders through common stock dividends and net share repurchases, up from $3.4 billion in the second quarter. We remain committed to our target of $2 billion of expense reductions by the end of 2018 which will be reinvested in the business and an additional $2 billion by the end of 2019 intended to go to the bottom line.”
Net Interest Income
Net interest income in third quarter 2017 was $12.5 billion, in line with second quarter 2017, as the impacts of lower investment portfolio yields driven by accelerated prepayments and lower average loan balances were offset by the impact of one additional day and a modest benefit from all other growth and repricing.
Net interest margin was 2.87 percent, down 3 basis points from second quarter 2017. The impacts of lower investment portfolio yields driven by accelerated prepayments, lower average loan balances, growth in average deposits, and growth in trading assets and related funding were partially offset by lower average long-term debt and a modest benefit from all other growth and repricing.
Noninterest Income
Noninterest income in the third quarter was $9.5 billion, compared with $9.7 billion in second quarter 2017. Third quarter noninterest income reflected lower mortgage banking and other income, partially offset by higher market sensitive revenue3.
Mortgage banking noninterest income was $1.0 billion, compared with $1.1 billion in second quarter 2017. Residential mortgage loan originations were $59 billion in the third quarter, up from $56 billion in the second quarter. The production margin on residential held-for-sale mortgage loan originations4 was 1.24 percent, consistent with the second quarter. Mortgage servicing income was $309 million in the third quarter, down from $400 million in the second quarter, primarily due to higher unreimbursed servicing costs.
Other income was $97 million, compared with $249 million in the second quarter. Second quarter 2017 included a $309 million gain on the sale of a Pick-a-Pay purchased credit-impaired (PCI) loan portfolio. Third quarter 2017 included a net hedge ineffectiveness gain of $93 million, up from $21 million in the prior quarter.
Noninterest Expense
Noninterest expense in the third quarter was $14.4 billion, compared with $13.5 billion in the prior quarter. Third quarter expenses included operating losses of $1.3 billion, which included the $1 billion litigation accrual for previously disclosed mortgage-related regulatory investigations. This increase in noninterest expense was partially offset by lower charitable donations, outside professional services, employee benefits, and travel and entertainment expenses. The efficiency ratio was 65.5 percent in third quarter 2017, which included a 456 basis point impact from the $1 billion litigation accrual.
Income Taxes
The Company’s effective income tax rate was 32.4 percent for third quarter 2017, and included net discrete tax expense totaling $186 million, primarily resulting from the non-deductible treatment of the $1 billion litigation accrual, partially offset by discrete tax benefits arising from favorable resolutions of prior period matters with certain state tax authorities.
Loans
Total average loans were $952.3 billion in the third quarter, down $4.5 billion from the second quarter. Period-end loan balances were $951.9 billion at September 30, 2017, down $5.6 billion from June 30, 2017. Consumer loans increased $201 million from the prior quarter as growth in real estate 1-4 family first mortgage loans and consumer credit card loans was largely offset by expected declines in automobile loans and the legacy junior lien mortgage portfolio. Commercial loans were down $5.8 billion from June 30, 2017 reflecting paydowns and continued underwriting discipline.
Investment Securities
Investment securities were $414.6 billion at September 30, 2017, up $5.0 billion from the second quarter, as approximately $31.2 billion of purchases, mostly federal agency mortgage-backed securities (MBS) in the available-for-sale portfolio, were partially offset by run-off and sales.
Net unrealized gains on available-for-sale securities were $1.8 billion at September 30, 2017, compared with $1.1 billion at June 30, 2017, primarily due to tighter credit and agency MBS spreads during the quarter.
Deposits
Total average deposits for third quarter 2017 were $1.3 trillion, up $5.2 billion from the prior quarter. The average deposit cost for third quarter 2017 was 26 basis points, up 5 basis points from the prior quarter and 15 basis points from a year ago, primarily driven by an increase in commercial and Wealth and Investment Management deposit rates.
Capital
Capital levels remained strong in the third quarter, with a Common Equity Tier 1 ratio (fully phased-in) of 11.8 percent2, compared with 11.6 percent in the prior quarter. In third quarter 2017, the Company repurchased 49.0 million shares of its common stock, which reduced period-end common shares outstanding by 38.9 million. The Company paid a quarterly common stock dividend of $0.39 per share, up from $0.38 per share a year ago.
Credit Quality
“Credit results remained strong in the third quarter,” said Chief Risk Officer Mike Loughlin. “The loan portfolio continued to perform well, led by strong performance in consumer real estate and continued solid performance in the commercial portfolio. Separately, while it is still early in the process, we have reviewed our portfolio for potential losses from recent hurricanes and have reflected that initial estimate in our allowance. After accounting for all these factors, the allowance for credit losses in the third quarter remained relatively unchanged from the second quarter.”
Net Loan Charge-offs
The quarterly loss rate was 0.30 percent (annualized), compared with 0.27 percent in the prior quarter. Commercial and consumer losses were 0.09 percent and 0.53 percent, respectively. Credit losses were $717 million in third quarter 2017, up $62 million from second quarter 2017. Commercial losses were up $38 million on higher losses in the commercial and industrial portfolio. Consumer losses increased $24 million as higher automobile losses from typically low second quarter levels more than offset lower credit card losses.
Allowance for Credit Losses
The allowance for credit losses, including the allowance for unfunded commitments, totaled $12.1 billion at September 30, 2017, in line with June 30, 2017. The third quarter 2017 allowance for credit losses reflected strong credit performance due to continued improvement in consumer real estate as well as strength in the commercial loan portfolio, including improvement in the oil and gas portfolio. These factors were offset by $450 million for coverage of our preliminary estimate of potential hurricane-related losses. The allowance coverage for total loans of 1.27 percent was stable from second quarter 2017. The allowance covered 4.3 times annualized third quarter net charge-offs, compared with 4.6 times in the prior quarter. The allowance coverage for nonaccrual loans was 141 percent at September 30, 2017, compared with 134 percent at June 30, 2017. The Company believes the allowance was appropriate for losses inherent in the loan portfolio at September 30, 2017.
Community Banking reported net income of $2.2 billion, down $764 million, or 26 percent, from second quarter 2017, and included the $1 billion litigation accrual (not tax-deductible) for previously disclosed mortgage-related regulatory investigations. Revenue of $12.1 billion decreased $229 million, or 2 percent, from second quarter 2017, primarily due to a gain on the sale of a Pick-a-Pay PCI loan portfolio in the prior quarter. The decline in revenue from the second quarter was also driven by lower mortgage banking revenue, partially offset by higher net interest income and the favorable accounting impact of net hedge ineffectiveness. Noninterest expense increased $611 million, or 8 percent, compared with second quarter 2017, due to higher operating losses and personnel expense, partially offset by lower charitable donations, lower professional services expense and the favorable impact of updated intra-segment allocations to Wholesale Banking and Wealth and Investment Management for regulatory, risk, cyber and technology expenses. The provision for credit losses increased $27 million from the prior quarter.
Net income was down $1.0 billion, or 31 percent, from third quarter 2016, and included the $1 billion litigation accrual (not tax-deductible) for previously disclosed mortgage-related regulatory investigations. Revenue decreased $327 million, or 3 percent, compared with a year ago due to lower mortgage banking revenue and deposit service charges, partially offset by higher net interest income and market sensitive revenue. Noninterest expense increased $881 million, or 13 percent, from a year ago due to higher operating losses, higher professional services expense and the favorable impact of updated intra-segment allocations to Wholesale Banking and Wealth and Investment Management for regulatory, risk, cyber and technology expenses, according to Wells Fargo.
Retail Banking and Consumer Payments, Virtual Solutions and Innovation
With nearly 400,000 branch customer experience surveys completed during the third quarter, ‘Loyalty’ and ‘Overall Satisfaction with Most Recent Visit’ scores declined in September after our announcement of the expanded third party account review, which followed post-sales practice settlement highs for ‘Loyalty’ in July of 58.8 percent and ‘Overall Satisfaction with Most Recent Visit’ in August of 78.2 percent
5,927 retail bank branches as of the end of third quarter 2017, reflecting 145 branch consolidations year-to-date through September 30, 2017
Wells Fargo was the nation’s #1 SBA 7(a) lender in dollars and units for full year 20175
Primary consumer checking customers6,7down 0.2 percent year-over-year
Debit card point-of-sale purchase volume8 of $80.0 billion in third quarter, up 5 percent year-over-year
Credit card point-of-sale purchase volume of $18.2 billion in third quarter, up 4 percent year-over-year
Credit card penetration in retail banking households of 45.4 percent9
27.8 million digital (online and mobile) active customers, including 20.9 million mobile active users7,10
According to BI Intelligence’s Mobile Banking Competitive Edge study, Wells Fargo scored top marks in the transfers, wallets, and security categories of our scorecard, and ranked first overall
For the fourth consecutive time, Dynatrace (formerly Keynote) ranked Wells Fargo #1 overall in online performance (August 2017)
In Javelin Strategy’s recent 2017 Account Safety in Banking Scorecard, Wells Fargo was recognized as a leader in fraud prevention, detection, and resolution
Home Lending
Originations of $59 billion, up from $56 billion in prior quarter
Applications of $73 billion, down from $83 billion in prior quarter
Application pipeline of $29 billion at quarter end, down from $34 billion at June 30, 2017
Automobile originations of $4.3 billion in third quarter, down 6 percent from prior quarter and down 47 percent from prior year, as proactive steps to tighten underwriting standards resulted in lower origination volume
Wholesale Banking reported net income of $2.0 billion, down $342 million, or 14 percent, from second quarter 2017 which included a tax benefit resulting from our agreement to sell Wells Fargo Insurance Services USA and related businesses. Revenue of $7.1 billion increased $134 million, or 2 percent, from the prior quarter. Net interest income increased $75 million, or 2 percent, on higher trading related income and one additional business day in the quarter. Noninterest income increased $59 million, or 2 percent, on higher gains on equity investments and debt securities. Noninterest expense increased $170 million, or 4 percent, from the prior quarter reflecting updated intra-segment allocations from Community Banking for regulatory, risk, cyber and technology expenses. The provision for credit losses increased $134 million from the prior quarter, primarily due to a reserve release in the second quarter as well as higher losses in the third quarter.
Net income of $2.0 billion was in line with third quarter 2016. Revenue decreased $62 million, or 1 percent, from third quarter 2016, as higher net interest income was more than offset by lower noninterest income. Net interest income increased $291 million, or 7 percent, from third quarter 2016 on deposit and loan growth, including the GE Capital portfolio acquisitions in the second half of 2016, as well as the impact of rising interest rates. Noninterest income decreased $353 million, or 11 percent, from a year ago primarily due to lower customer accommodation trading and lower commercial mortgage banking results. Noninterest expense increased $128 million, or 3 percent, from a year ago reflecting updated intra-segment allocations from Community Banking for regulatory, risk, cyber and technology expenses. The provision for credit losses decreased $88 million from a year ago primarily due to improvements in the oil and gas portfolio.
Launched CEO Mobile Token which allows Treasury Management customers a secure, convenient way to provide secondary authentication anytime they need to complete a transaction (August 2017)
Wealth and Investment Management reported net income of $710 million, up $28 million, or 4 percent, from second quarter 2017. Revenue of $4.2 billion increased $64 million from the prior quarter, primarily due to higher net interest income, asset-based fees, and gains on deferred compensation plan investments (offset in employee benefits expense), partially offset by lower transaction revenue. Noninterest expense increased $31 million, or 1 percent, from the prior quarter, reflecting updated intra-segment allocations from Community Banking for regulatory, risk, cyber and technology expenses and higher deferred compensation plan expense (offset in trading revenue).
Net income was up $33 million, or 5 percent, from third quarter 2016. Revenue increased $147 million, or 4 percent, from a year ago primarily driven by higher net interest income and asset-based fees, partially offset by lower transaction revenue. Noninterest expense increased $107 million, or 4 percent, from a year ago, reflecting updated intra-segment allocations from Community Banking for regulatory, risk, cyber and technology expenses and higher personnel expense, partially offset by lower professional services expense.
WIM total client assets reached a record-high of $1.9 trillion, up 8 percent from a year ago, driven by higher market valuations and continued positive net flows
Third quarter 2017 average closed referred investment assets (referrals resulting from the WIM/Community Banking partnership) were down 12 percent from the prior quarter
Retail Brokerage
Client assets of $1.6 trillion, up 9 percent from prior year
Advisory assets of $522 billion, up 14 percent from prior year, primarily driven by higher market valuations and positive net flows
Strong loan growth, with average balances up 10 percent from prior year largely due to continued growth in non-conforming mortgage loans
Wealth Management
Client assets of $241 billion, up 5 percent from prior year
Average loan balances up 4 percent from prior year primarily driven by continued growth in non-conforming mortgage loans
Asset Management
Total assets under management of $496 billion, flat from prior year as equity and money market net outflows were offset by higher market valuations, positive fixed income net flows and assets acquired during the prior year
Retirement
IRA assets of $400 billion, up 6 percent from prior year
Institutional Retirement plan assets of $387 billion, up 11 percent from prior year
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