10-QPeriod: Q2 FY2018

WELLS FARGO & COMPANY/MN Quarterly Report for Q2 Ended Jun 30, 2018

Filed August 3, 2018For Securities:WFCWFC-PDWFC-PCWFC-PYWFC-PAWFC-PLWFCNPWFC-PZ

Summary

Wells Fargo & Company reported a net income of $5.2 billion for the second quarter of 2018, a decrease from $5.9 billion in the same period last year, with diluted earnings per share at $0.98 compared to $1.08 a year ago. This decline was partly due to $481 million in net discrete income tax expense related to state income taxes. Total revenue was $21.6 billion, down 3% from the prior year, with net interest income showing a modest 1% increase while noninterest income declined by 8%. The company continued to return capital to shareholders, repurchasing $4.0 billion in common stock dividends and net share repurchases. Despite an ongoing asset cap imposed by the Federal Reserve, Wells Fargo maintained strong capital and liquidity positions, with its Common Equity Tier 1 ratio at 11.98%, above its internal target. The report highlights the company's ongoing efforts to rebuild trust following past sales practice issues, with substantial remediation accruals and customer outreach programs. Significant consent orders with regulatory bodies, including the Federal Reserve, CFPB, and OCC, are discussed, outlining plans for enhanced governance and operational risk management. The company anticipates operating under the asset cap through early 2019. Despite these challenges, the credit quality remained solid, with net charge-offs at 0.26% of average loans and nonperforming assets at their lowest level since 2008.

Financial Statements
Beta
Revenue$21.55B
Interest Expense$3.47B
Net Income$5.19B
EPS (Basic)$0.98
EPS (Diluted)$0.98
Shares Outstanding (Basic)4.87B
Shares Outstanding (Diluted)4.90B

Key Highlights

  • 1Net income decreased to $5.2 billion from $5.9 billion in Q2 2017, with EPS falling to $0.98 from $1.08.
  • 2Total revenue declined by 3% year-over-year to $21.6 billion, driven by an 8% drop in noninterest income, partially offset by a 1% increase in net interest income.
  • 3The Common Equity Tier 1 (CET1) ratio remained strong at 11.98%, exceeding the company's internal target.
  • 4Average assets and loans decreased by 2% and 1% respectively compared to the prior year.
  • 5The company returned $4.0 billion to shareholders through dividends and share repurchases, marking the 12th consecutive quarter of returning over $3 billion.
  • 6Operating losses increased significantly, driven by higher remediation accruals for previously disclosed matters.
  • 7Wells Fargo is operating under an asset cap imposed by the Federal Reserve, limiting total consolidated assets to the level as of December 31, 2017, with plans to operate under the cap through early 2019.

Frequently Asked Questions

The Federal Reserve's consent order limits Wells Fargo's total consolidated assets to the level as of December 31, 2017. This cap, measured on a two-quarter daily average basis, is in place until third-party reviews of enhanced governance and operational risk management plans are completed and approved. The company expects to operate under this asset cap through the first part of 2019.

Total revenue was $21.6 billion, down 3% compared to $22.2 billion in the second quarter of 2017. Net interest income increased by 1% to $12.7 billion, while noninterest income decreased by 8% to $9.0 billion. The decline in noninterest income was primarily due to lower mortgage banking income and insurance income.

Wells Fargo maintained a strong capital position, with its Common Equity Tier 1 (CET1) ratio at 11.98%, which is above its internal target. The company returned $4.0 billion to shareholders in the second quarter of 2018 through common stock dividends and net share repurchases, continuing a trend of returning over $3 billion per quarter.

Wells Fargo is addressing several significant consent orders and investigations. These include the Federal Reserve's order regarding governance and risk management, and consent orders with the CFPB and OCC totaling $1 billion in penalties for issues related to its compliance risk management program, automobile collateral protection insurance, and mortgage interest rate lock extensions. The company is actively engaged in remediation efforts and submitting plans to regulatory agencies to address these matters.