The FINANCIAL — Wells Fargo & Company reported net income of $5.8 billion, or $1.05 per diluted common share, for third quarter 2015, compared with $5.7 billion, or $1.02 per share, for third quarter 2014, and $5.7 billion, or $1.03 per share, for second quarter 2015.
“Wells Fargo’s strong third quarter results reflected the ability of our diversified business model to generate consistent financial performance in an uneven economic environment while continuing to meet our customers’ financial needs,” said Chairman and CEO John Stumpf. “Compared with a year ago, we grew loans, deposits and capital, and returned more capital to shareholders through dividends and share buybacks. Our balance sheet and credit results remained strong and our 265,000 team members continue to focus on helping our customers succeed financially.”
Chief Financial Officer John Shrewsberry said, “Wells Fargo reported a solid $5.8 billion of net income for the third quarter. Revenue increased on both a linked quarter and year over year basis, on growth in both net interest income and noninterest income. We generated positive operating leverage in the quarter, as our expenses declined, and we remained within our targeted efficiency ratio range. Our return on equity and return on assets also remained within our targeted ranges, and we increased our net payout ratio5 to shareholders to 60 percent from 54 percent in second quarter.”
Net Interest Income
Net interest income increased $187 million from second quarter 2015 to $11.5 billion, primarily driven by growth in investment securities and loans, including the full quarter benefit of the GE Capital loan purchase and related financing transaction that settled late in the second quarter. The third quarter also included one additional day, accounting for approximately one third of the increase in net interest income relative to the second quarter. These benefits were partially offset by reduced income from variable sources including purchased credit-impaired (PCI) loan recoveries, periodic dividends, and loan fees included in interest income.
Net interest margin was 2.96 percent, down 1 basis point from second quarter 2015. Balance sheet growth and repricing, driven by securities purchases and higher loan balances, improved the net interest margin by approximately 5 basis points linked-quarter. These benefits were offset by growth in customer deposits, which had a minimal impact to net interest income, but was dilutive to the net interest margin by 3 basis points, and by lower income from variable sources, which reduced the margin by 3 basis points, according to Wells Fargo.
Noninterest Income
Noninterest income was $10.4 billion, up from $10.0 billion in second quarter 2015, driven by higher equity investment gains, deposit service charges, lease income and card fees. Other noninterest income was also higher in the quarter, primarily due to the impact of lower interest rates on our debt hedging results. Offsetting this growth were lower gains from trading activities, driven by lower deferred compensation plan investment results (largely offset in employee benefits expense), debt securities gains, trust and investment fees, and seasonally lower crop insurance fees.
Mortgage banking noninterest income was $1.6 billion, down $116 million from second quarter. During the third quarter, residential mortgage originations were $55 billion, down $7 billion linked quarter. The production margin on residential held-for-sale mortgage originations6 was 1.88 percent, compared with 1.75 percent in second quarter. Net mortgage servicing rights (MSRs) results were $253 million, compared with $107 million in second quarter 2015.
Noninterest Expense
Noninterest expense declined $70 million from the prior quarter to $12.4 billion, primarily due to lower deferred compensation expense in employee benefits. This decline was partially offset by a $126 million contribution to the Wells Fargo Foundation, higher salaries expense, and increased project-related outside professional services expense. The efficiency ratio improved to 56.7 percent in third quarter 2015, compared with 58.5 percent in the prior quarter. The Company expects to operate at the higher end of its targeted efficiency ratio range of 55 to 59 percent for full year 2015.
Loans
Total loans were $903.2 billion at September 30, 2015, up $14.8 billion from June 30, 2015. Growth was broad- based and was driven by commercial and industrial, and 1-4 family first mortgage loans. Core loan growth was $17.1 billion, as non-strategic/liquidating portfolios declined $2.3 billion in the quarter. Total average loans were $895.1 billion in the third quarter, up $24.6 billion from the prior quarter, and included the benefit of the GE Capital loan purchase and related financing transaction that settled late in the second quarter.
Investment Securities
Investment securities were $345.1 billion at September 30, 2015, up $4.3 billion from second quarter. Purchases of approximately $19 billion (primarily federal agency mortgage-backed securities and U.S. Treasury securities), were partially offset by maturities, amortization and sales.
Net unrealized available-for-sale securities gains of $4.9 billion at September 30, 2015, declined from $5.7 billion at June 30, 2015, as the benefit of lower interest rates was offset by reductions arising from realized gains (both debt and equity), and widening credit spreads.
Deposits
Total average deposits for third quarter 2015 were $1.2 trillion, up 6 percent from a year ago and up 5 percent (annualized) from second quarter 2015, driven by both commercial and consumer growth. The average deposit cost for third quarter 2015 was 8 basis points, which was down 2 basis points from a year ago and flat compared with the prior quarter.
Capital
Capital levels remained strong in the third quarter, with Common Equity Tier 1 under Basel III (fully phased-in) of $141.9 billion. The Common Equity Tier 1 ratio under Basel III (fully phased-in) was 10.7 percent4. In third quarter 2015, the Company purchased 51.7 million shares of its common stock. The Company also paid a quarterly common stock dividend of $0.375 per share, up from $0.35 per share a year ago.
Credit Quality
“Credit performance remained strong during the quarter,” said Chief Risk Officer Mike Loughlin. “The quarterly loss rate (annualized) remained low at 0.31 percent and nonperforming assets declined by $1.1 billion, or 30 percent (annualized), from the prior quarter driven by lower nonaccrual loans. The allowance for credit losses in the third quarter remained flat (no reserve release) as continued credit quality improvements in the residential real estate portfolio were offset by higher commercial reserves reflecting deterioration in the energy sector. Future allowance levels may increase or decrease based on a variety of factors, including loan growth, portfolio performance and general economic conditions.”
Net Loan Charge-offs
The quarterly loss rate (annualized) of 0.31 percent included commercial losses of 0.08 percent and consumer losses of 0.53 percent. Credit losses were $703 million in third quarter 2015, compared with $650 million in the second quarter, an 8 percent increase, primarily driven by a seasonal increase in the auto portfolio.
Nonperforming Assets
Nonperforming assets declined by $1.1 billion from second quarter 2015 to $13.3 billion. Nonaccrual loans decreased $906 million to $11.5 billion on improvements in several loan categories, including a $718 million decline in consumer real estate. Foreclosed assets were $1.8 billion, down from $2.0 billion in second quarter 2015.
Loans 90 Days or More Past Due and Still Accruing
Loans 90 days or more past due and still accruing (excluding government insured/guaranteed) totaled $872 million at September 30, 2015, up from $756 million at June 30, 2015. Loans 90 days or more past due and still accruing with repayments insured by the Federal Housing Administration (FHA) or predominantly guaranteed by the Department of Veterans Affairs (VA) for mortgages and the U.S. Department of Education for student loans under the Federal Family Education Loan Program were $13.5 billion at September 30, 2015, down from $14.4 billion at June 30, 2015.
Allowance for Credit Losses
The allowance for credit losses, including the allowance for unfunded commitments, totaled $12.6 billion at September 30, 2015, unchanged from June 30, 2015. The allowance coverage to total loans was 1.39 percent, compared with 1.42 percent in second quarter 2015. The allowance covered 4.5 times annualized third quarter net charge-offs, compared with 4.8 times in the prior quarter. The allowance coverage to nonaccrual loans was 109 percent at September 30, 2015, compared with 101 percent at June 30, 2015. “We believe the allowance was appropriate for losses inherent in the loan portfolio at September 30, 2015,” said Loughlin.
Business Segment Performance
Wells Fargo defines its operating segments by product type and customer segment. Effective third quarter 2015, we realigned our asset management business from Wholesale Banking to Wealth and Investment Management (WIM) (formerly Wealth, Brokerage and Retirement) and realigned our reinsurance business from WIM and our strategic auto investments from Community Banking to Wholesale Banking. Results for these operating segments were revised for prior periods to reflect the impact of these realignments.
Community Banking reported net income of $3.7 billion, up $336 million, or 10 percent, from second quarter 2015. Revenue of $13.6 billion increased $973 million, or 8 percent, from second quarter 2015 due to gains from sale of equity investments, as well as higher net interest income, deposit service charges, and other income, partially offset by lower mortgage banking fees. Noninterest expense increased $58 million, or 1 percent, primarily due to a donation to the Wells Fargo Foundation, partially offset by lower advertising costs and operating losses. The provision for credit losses increased $295 million from the prior quarter primarily due to the absence of a reserve release in the quarter.
Net income was up $225 million, or 7 percent, from third quarter 2014. Revenue was up $807 million, or 6 percent, compared with a year ago due to higher net interest income, market sensitive revenue, primarily gains from sale of equity investments, debit and credit card fees, and trust and investment fees. Noninterest expense increased
$170 million, or 2 percent, from a year ago driven by higher personnel costs and a donation to the Wells Fargo Foundation, partially offset by lower foreclosed assets and travel and entertainment expenses. The provision for credit losses increased $193 million from a year ago as the $74 million improvement in net charge-offs was more than offset by a $267 million lower reserve release.
Regional Banking
•Retail banking
◦Primary consumer checking customers7 up 5.8 percent year-over-year8
◦Retail Bank household cross-sell ratio of 6.13 products per household, compared with 6.15 year-over- year8,9
•Small Business/Business Banking
◦Primary business checking customers7 up 5.0 percent year-over-year8
◦Combined Business Direct credit card, lines of credit and loan product solutions (primarily under $100,000 sold through our retail banking stores) were up 6 percent in the first nine months of 2015, compared with the same period in the prior year
◦For the 13th consecutive year, America’s #1 small business lender (in both loans under $100,000 and under $1 million) and #1 lender to small businesses in low- and moderate-income areas (2014 CRA data, released August 2015)
◦For seventh consecutive year, Wells Fargo was nation’s #1 SBA 7(a) small business lender in dollars, and #1 in units for the first time in the full-year results10
•Online and Mobile Banking
◦26.3 million active online customers, up 8 percent year-over-year8
◦16.0 million active mobile customers, up 17 percent year-over-year8
◦#1 ranking in Keynote’s Small Business Banking Scorecard; best in “Functionality” (August 2015)
Consumer Lending Group
•Home Lending
◦Originations of $55 billion, down from $62 billion in prior quarter
◦Applications of $73 billion, down from $81 billion in prior quarter
◦Application pipeline of $34 billion at quarter end, down from $38 billion at June 30, 2015
•Consumer Credit
◦Credit card penetration in retail banking households rose to 42.9 percent8, up from 39.7 percent in prior year
◦Auto originations of $8.3 billion in third quarter, up 2 percent from prior quarter and 10 percent from prior year
Wholesale Banking reported net income of $1.8 billion, down $263 million, or 13 percent, from second quarter 2015. Revenue of $5.6 billion decreased $292 million, or 5 percent, from prior quarter. Net interest income increased $13 million, as the benefit of strong broad-based loan growth and higher other earning assets were largely offset by lower loan resolutions. Noninterest income decreased $305 million, or 11 percent, due to lower gains on equity fund investments and debt securities related to higher other-than-temporary impairment on energy sector investments, mortgage banking fees in real estate capital markets, investment banking fees, trading revenues and seasonally lower insurance fees. Noninterest expense increased $1 million as lower variable compensation expenses were more than offset by higher operating losses. The provision for credit losses increased $103 million from prior quarter due to the absence of a reserve release and increased net charge-offs.
Net income was down $157 million, or 8 percent, from third quarter 2014. Revenue decreased $97 million, or 2 percent, from third quarter 2014 as $67 million, or 2 percent, growth in net interest income related to strong loan and deposit growth was more than offset by lower noninterest income. Noninterest income declined $164 million, or 6 percent, on lower gains on equity investments and lower mortgage banking and commercial real estate brokerage fees. Noninterest expense increased $39 million, or 1 percent, from a year ago primarily due to higher personnel expenses related to growth initiatives, compliance, and regulatory requirements, as well as increased operating losses. The provision for credit losses increased $130 million from a year ago.
•Average loans increased 15 percent in third quarter 2015, compared with third quarter 2014, on broad-based growth, including the benefit from loan acquisitions, with growth in asset-backed finance, capital finance, commercial banking, commercial real estate, corporate banking, equipment finance, government and institutional banking, and real estate capital markets
•Cross-sell of 7.3 products per relationship, up 0.1 from third quarter 201411
•Treasury management revenue up 9 percent from third quarter 2014
Wealth and Investment Management (WIM) reported net income of $606 million, up $20 million, or 3 percent, from second quarter 2015. Revenue of $3.9 billion decreased $98 million, or 2 percent, from the prior quarter, primarily driven by lower gains on deferred compensation plan investments (offset in compensation expense), asset-based fees and transaction revenue, partially offset by higher net interest income. Noninterest expense decreased $129 million, or 4 percent, from the prior quarter, primarily due to lower personnel expenses driven by lower deferred compensation plan expense (offset in trading revenue), and lower operating losses reflecting decreased litigation accruals. The reversal of the provision for credit losses decreased $4 million from second quarter 2015.
Net income was up $56 million, or 10 percent, from third quarter 2014. Revenue increased $73 million, or 2 percent, from a year ago on growth in net interest income, partially offset by lower gains on deferred
compensation plan investments (offset in compensation expense). Noninterest expense decreased $36 million, or 1 percent, from a year ago, primarily due to lower personnel expenses driven by lower deferred compensation plan expense (offset in trading revenue), partially offset by higher non-personnel expenses. The reversal of the provision for credit losses decreased $19 million from a year ago due to the absence of a reserve release in the quarter.
Retail Brokerage
•Client assets of $1.4 trillion, down 4 percent from prior year
•Managed account assets of $409 billion, flat compared with prior year
•Strong loan growth, with average balances up 26 percent from prior year largely due to growth in non- conforming mortgage loans and security-based lending
Wealth Management
•Client assets of $218 billion, down 1 percent from prior year
•Average loan balances up 13 percent over prior year primarily driven by growth in non-conforming mortgage loans, commercial loans and security-based lending
Retirement
•IRA assets of $344 billion, down 3 percent from prior year
•Institutional Retirement plan assets of $330 billion, down 2 percent from prior year
Asset Management
•Total assets under management of $480 billion, down $4 billion from third quarter 2014 as fixed income net client inflows were more than offset by equity and stable value outflows
Brokerage and Wealth cross-sell ratio of 10.52 products per household, up from 10.44 a year ago.
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