Friday, 3 May 2024

Wells Fargo reports $5.5 billion in Q1 2016 net income

 

SAN FRANCISCO – Wells Fargo & Company reported net income of $5.5 billion, or $0.99 per diluted common share, for first quarter 2016, compared with $5.8 billion, or $1.04 per share, for first quarter 2015, and $5.6 billion, or $1.00 per share, for fourth quarter 2015.

Chairman and CEO John Stumpf said, “Wells Fargo's first quarter results reflected the benefit of our diversified business model as we managed challenges presented by a volatile operating environment for our industry. We again generated solid growth in the fundamental drivers of long-term value creation: loans, deposits and capital. We also completed two important acquisitions from GE Capital, which are great additions to our company and demonstrate the benefit of our strong financial position. We remain focused on meeting the financial needs of our consumer and business customers, and I believe we are well positioned for the future.”

Chief Financial Officer John Shrewsberry added, “Our first quarter results demonstrated an ability to produce consistent revenue and net income across economic and interest rate cycles. While challenges in the energy industry and persistent low rates impacted our bottom line, our diversified business model was again beneficial to our results. We were disciplined in deploying liquidity into investment securities in the quarter, with gross purchases well below recent quarters. This was partially responsible for the $30 billion increase in our federal funds and shortterm investment balances compared with the prior quarter. Our capital remained very strong with Common Equity Tier 1 (fully phased-in) of $142.7 billion. Our net payout ratio was 60% in the quarter, as we returned $3.0 billion to shareholders through common stock dividends and net share repurchases."

  

Net Interest Income

Net interest income in first quarter 2016 increased $79 million from fourth quarter 2015 to $11.7 billion. This increase was driven largely by earning asset growth, including a partial quarter impact from the assets acquired from GE Capital, the benefit of the fourth quarter increase in the federal funds rate and disciplined deposit pricing. These increases to net interest income were partially offset by reduced income from variable sources, including periodic dividends and loans fees, and one less day in the quarter. Net interest margin was 2.90 percent, down 2 basis points from fourth quarter 2015. Income from variable sources reduced the net interest margin by approximately 2 basis points linked-quarter. All other growth, mix and repricing was essentially neutral to net interest margin.

Noninterest Income
Noninterest income in the first quarter was $10.5 billion, up from $10.0 billion in fourth quarter 2015, primarily due to a $381 million gain from the previously announced sale of our crop insurance business (included in other noninterest income) and the impact of lower interest rates and currency movements on hedging results (hedge ineffectiveness) of $379 million, driven by long-term debt. Noninterest income also reflected increases in lease income, which includes operating leases acquired in the GE Capital transactions, and trading gains, reflecting higher customer accommodation trading results in all market businesses. These increases were partially offset by lower gains from equity investments and debt securities, and declines in trust and investment fees, mortgage banking fee income, and commercial real estate brokerage commissions.

Trust and investment fees were $3.4 billion, down $126 million from the prior quarter, primarily due to lower investment banking fees and lower retail brokerage transaction activity and asset-based fees reflecting lower market valuations.

Mortgage banking noninterest income was $1.6 billion, down $62 million from fourth quarter 2015, primarily driven by a decrease in mortgage originations and production margins in the first quarter, partially offset by higher servicing income. Residential mortgage loan originations were $44 billion in the first quarter, down $3 billion linked quarter. The production margin on residential held-for-sale mortgage loan originations was 1.68 percent, compared with 1.83 percent in fourth quarter. Net servicing income was $850 million, compared with $730 million in fourth quarter.

Noninterest Expense
Noninterest expense in the first quarter was $13.0 billion, compared with $12.6 billion in fourth quarter 2015. First quarter expenses included seasonally higher employee benefits and incentive compensation, as well as an increase in operating lease expense due to the leases acquired in the GE Capital transactions. These higher expenses were offset by lower outside professional services, equipment and advertising, which typically decline in first quarter, and lower operating losses. The efficiency ratio was 58.7 percent in first quarter 2016, compared with 58.4 percent in the prior quarter. The Company currently expects to operate at the higher end of its targeted efficiency ratio range of 55 to 59 percent for full year 2016.

Loans
Total loans were $947.3 billion at March 31, 2016, up $30.7 billion, or 3 percent, from December 31, 2015, including $24.9 billion from the GE Capital acquisitions. First quarter organic loan growth included commercial and industrial, real estate mortgage, real estate construction, lease financing, real estate 1-4 family first mortgage and automobile. Total average loans were $927.2 billion in the first quarter, up $14.9 billion from the prior quarter, and included an $8.8 billion impact from the GE Capital acquisitions.

Investment Securities
Investment securities were $334.9 billion at March 31, 2016, down $12.7 billion from fourth quarter, as a result of securities sales, runoff and modest securities purchases.

Net unrealized available-for-sale securities gains of $3.5 billion at March 31, 2016, increased from $3.0 billion at December 31, 2015, primarily due to a decline in interest rates.

Deposits
Total average deposits for first quarter 2016 were $1.2 trillion, up 4 percent from a year ago, driven by both commercial and consumer growth. The average deposit cost for first quarter 2016 was 10 basis points, up 1 basis point from a year ago and up 2 basis points from the prior quarter. The increase in deposits reflected strong consumer and small business growth, in part due to seasonally higher balances.

Capital
Capital levels remained strong in the first quarter, with Common Equity Tier 1 (fully phased-in) (CET1) of $142.7 billion, or 10.6 percent3, compared with 10.8 percent in the prior quarter. The decline in the CET1 ratio was primarily driven by the deployment of capital to support the growth in assets from the GE Capital acquisitions in the quarter. In first quarter 2016, the Company repurchased 51.7 million shares of its common stock, which reduced period-end common shares outstanding by 16.2 million shares after taking into account seasonal common stock issuances to employee benefit plans. The Company paid a quarterly common stock dividend of $0.375 per share, up from $0.35 per share a year ago.

Credit Quality
“Solid overall credit results continued in the first quarter," said Chief Risk Officer Mike Loughlin. "The quarterly loss rate remained low at 0.38 percent (annualized). While substantially all of the loan portfolio continues to perform well, the oil and gas portfolio remains under significant stress due to low prices and excess leverage in this industry. The increases in losses and nonperforming loans in the first quarter were primarily due to continued challenges in this portfolio. The allowance for credit losses in the first quarter reflected a reserve build of $200 million as higher commercial reserves reflecting continued deterioration within the oil and gas portfolio were partially offset by continued credit quality improvements in the residential real estate portfolio. Future allowance levels will be based on a variety of factors, including loan growth, portfolio performance and general economic
conditions.”

Net Loan Charge-offs
The quarterly loss rate of 0.38 percent (annualized) reflected commercial losses of 0.20 percent and consumer losses of 0.57 percent. Credit losses were $886 million in first quarter 2016, compared with $831 million in fourth quarter 2015, due to higher oil and gas portfolio losses.

Nonperforming Assets
Nonperforming assets increased by $706 million from fourth quarter 2015 to $13.5 billion. Nonaccrual loans increased $852 million from fourth quarter to $12.2 billion driven by a $1.1 billion increase in the oil and gas portfolio and the addition of $343 million of nonaccrual loans from the GE Capital acquisitions. The increase in nonaccrual loans was partially offset by a $684 million decline in consumer real estate nonaccrual loans, partly due to a sale, as well as a $76 million decline in commercial real estate nonaccrual loans. Foreclosed assets were $1.3 billion, down from $1.4 billion in fourth 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 $803 million at March 31, 2016, down from $981 million at December 31, 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 mortgage loans and the U.S. Department of Education for student loans under the Federal Family Education Loan Program were $12.3 billion at March 31, 2016, down from $13.4 billion at December 31, 2015.

Allowance for Credit Losses
The allowance for credit losses, including the allowance for unfunded commitments, totaled $12.7 billion at March 31, 2016, compared with $12.5 billion at December 31, 2015. The allowance coverage for total loans was 1.34 percent, compared with 1.37 percent in fourth quarter 2015, as loans and leases acquired from GE Capital were recorded at fair value under the purchase method of accounting which fully reflects life-of-loan expected credit losses. The allowance covered 3.6 times annualized first quarter net charge-offs, compared with 3.8 times in the prior quarter. The allowance coverage for nonaccrual loans was 104 percent at March 31, 2016, compared with 110 percent at December 31, 2015. “We believe the allowance was appropriate for losses inherent in the loan portfolio at March 31, 2016,” said Loughlin.

Business Segment Performance
Wells Fargo defines its operating segments by product type and customer segment. Segment net income for each of the three business segments was:

Community Banking offers a complete line of diversified financial products and services for consumers and small businesses including checking and savings accounts, credit and debit cards, and auto, student, and small business lending. Community Banking also offers investment, insurance and trust services in 39 states and D.C., and mortgage and home equity loans in all 50 states and D.C. through its Regional Banking and Wells Fargo
Home Lending business units.

Community Banking reported net income of $3.3 billion, up $127 million, or 4 percent, from fourth quarter 2015. Revenue of $12.6 billion increased $284 million, or 2 percent, from fourth quarter 2015 due to higher net interest income and other income (hedging ineffectiveness, driven by long-term debt hedging results), partially offset by lower equity investment gains, and lower gains on deferred compensation plan investments (offset in employee benefits expense). Noninterest expense was down 1 percent, compared with fourth quarter 2015, due to lower project-related expense, equipment expense, operating losses, and deferred compensation plan expense (offset in trading revenue), partially offset by seasonally higher personnel expense. The provision for credit losses increased $16 million from the prior quarter.

Net income was down $251 million, or 7 percent, from first quarter 2015. First quarter 2015 results included a discrete tax benefit of $359 million. Revenue was up $503 million, or 4 percent, compared with a year ago due to higher net interest income, mortgage banking fees, deposit service charges, and debit and credit card fees, partially offset by lower market sensitive revenue, primarily gains on equity investments and trading activities, and lower trust and investment fees. Noninterest expense increased $245 million, or 4 percent, from a year ago driven by higher operating losses and personnel expenses, partially offset by lower foreclosed assets expense. The provision for credit losses increased $62 million from a year ago primarily due to an allowance build compared with a reserve release in first quarter 2015.

Regional Banking
• Retail Banking

• Digital Banking

Consumer Lending Group
• Home Lending

• Consumer Credit

Wholesale Banking provides financial solutions to businesses across the United States and globally with annual sales generally in excess of $5 million. Products and businesses include Business Banking, Middle Market Commercial Banking, Government and Institutional Banking, Corporate Banking, Commercial Real Estate, Treasury Management, Wells Fargo Capital Finance, Insurance, International, Real Estate Capital Markets, Commercial Mortgage Servicing, Corporate Trust, Equipment Finance, Wells Fargo Securities, Principal Investments and Asset Backed Finance.

Wholesale Banking reported net income of $1.9 billion, down $183 million, or 9 percent, from fourth quarter 2015. Revenue of $7.0 billion increased $399 million, or 6 percent, from prior quarter and included the acquisitions of GE Railcar Services (closed 1/1/16) and GE Capital’s North American Commercial Distribution Finance and Vendor Finance businesses (closed 3/1/16). Net interest income increased $37 million, or 1 percent, as broad-based loan growth, including the GE Capital acquisitions, and increased trading-related revenue was partially offset by lower deposits. Noninterest income increased $362 million, or 13 percent, as the gain on sale of the crop insurance business, strong customer accommodation trading results and the GE Capital acquisitions were partially offset by lower results in commercial real estate businesses and lower investment banking fees and gains on equity fund investments. Noninterest expense increased $477 million, or 14 percent, from prior quarter due to the GE Capital acquisitions as well as seasonally higher personnel expenses, increased foreclosed asset expenses and seasonally higher insurance commissions. The provision for credit losses increased $237 million from the prior quarter, primarily due to higher loan losses in the oil and gas portfolio. 

Net income was down $53 million from first quarter 2015. Revenue increased $549 million, or 9 percent, from first quarter 2015, on $311 million higher net interest income related to strong loan growth as well as the GE Capital acquisitions and $238 million higher noninterest income. Noninterest income increased due to the GE Capital acquisitions, the gain related to the sale of the crop insurance business and higher treasury management fees, partially offset by lower investment banking fees and lower gains on debt securities and trading assets. Noninterest expense increased $350 million, or 10 percent, from a year ago primarily due to the GE Capital acquisitions and higher personnel expenses related to growth initiatives, compliance, and regulatory requirements. The provision for credit losses increased $414 million from a year ago due to increased loan losses primarily related to the oil and gas portfolio. The first quarter 2015 results included a $39 million reserve release.

Wealth and Investment Management (WIM) provides a full range of personalized wealth management, investment and retirement products and services to clients across U.S. based businesses including Wells Fargo Advisors, The Private Bank, Abbot Downing, Wells Fargo Institutional Retirement and Trust, and Wells Fargo Asset Management. We deliver financial planning, private banking, credit, investment management and fiduciary services to high-net worth and ultra-high-net worth individuals and families. We also serve customers’ brokerage needs, supply retirement and trust services to institutional clients and provide investment management capabilities delivered to global institutional clients through separate accounts and the Wells Fargo Funds.

Wealth and Investment Management reported net income of $512 million, down $83 million, or 14 percent, from fourth quarter 2015. Revenue of $3.9 billion decreased $93 million, or 2 percent, from the prior quarter, primarily due to lower brokerage transaction revenue, asset-based fees, and gains on deferred compensation plan investments (offset in employee benefits expense), partially offset by higher net interest income. Noninterest expense increased $44 million, or 1 percent, from the prior quarter, driven primarily by seasonally higher personnel expenses, partially offset by lower non-personnel expenses, broker commissions, and deferred compensation plan expense (offset in trading revenue). The provision for credit losses was down $8 million from fourth quarter 2015. 

Net income was down $17 million, or 3 percent, from first quarter 2015. Revenue decreased $122 million, or 3 percent, from a year ago primarily driven by lower asset-based fees and brokerage transaction revenue, partially offset by higher net interest income. Noninterest expense decreased $80 million, or 3 percent, from a year ago, primarily due to lower broker commissions and operating losses, partially offset by higher other personnel expenses. The provision for credit losses decreased $11 million from a year ago.

Retail Brokerage
• Client assets of $1.4 trillion, down 2 percent from prior year
• Advisory assets of $428 billion, down 1 percent from prior year, as lower market valuations were partially offset by net flows
• Strong loan growth, with average balances up 22 percent from prior year largely due to continued growth in non-conforming mortgage loans and security-based lending

Wealth Management
• Client assets of $225 billion, down 1 percent from prior year
• Average loan balances up 9 percent over prior year primarily driven by continued growth in non-conforming mortgage loans and security-based lending

Retirement
• IRA assets of $357 billion, down 2 percent from prior year
• Institutional Retirement plan assets of $331 billion, down 5 percent from prior year

Asset Management
• Total assets under management of $481 billion, down 2 percent from prior year due to equity outflows and lower market valuations, partially offset by favorable fixed income and money market net client inflows WIM cross-sell ratio of 10.55 products per household, up from 10.44 a year ago

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