Wells Fargo Reports $5.7 Billion in Net Income

Wells Fargo amp; Company (NYSE:WFC) reported net income of $5.7 billion, or
$1.01 per diluted common share, for second quarter 2014, up from $5.5
billion, or $0.98 per share, for second quarter 2013. For the first six
months of 2014, net income was $11.6 billion, or $2.06 per share, up
from $10.7 billion, or $1.90 per share, for the same period in 2013.

“Our strong results in the second quarter reflected the benefit of our
diversified business model and our long-term focus on meeting the
financial needs of our customers,” said Chairman and CEO John Stumpf.
“By continuing to serve customers we grew loans, increased deposits and
deepened our relationships. Our results also reflected strong credit
quality driven by an improved economy, especially the housing market,
and our continued risk discipline. We are committed to both maintaining
strong capital levels and returning more capital to our shareholders. In
the second quarter we increased our common stock dividend 17 percent and
repurchased 39.4 million shares. We remain dedicated to building
long-term shareholder value, and I am optimistic about the future as we
continue to focus on meeting the needs of our consumer, small business
and commercial customers.”

Chief Financial Officer John Shrewsberry said, “The primary drivers of
Wells Fargo’s business remained strong in the second quarter, with
broad-based loan growth, increased deposit balances, and improved credit
quality. Revenue increased linked quarter as the Company grew both net
interest income and noninterest income, a reflection of Wells Fargo’s
diversified business model. These solid fundamental business results led
to an increase in pre-tax income linked quarter. Net income was down as
the Company’s effective tax rate was lower in the first quarter due to a
$423 million discrete tax benefit.”

Revenue

Revenue was $21.1 billion, up from $20.6 billion in first quarter 2014,
reflecting increases in both net interest income and noninterest income.
Several businesses generated linked-quarter growth, including capital
markets, corporate banking, commercial real estate, corporate trust,
debit card, personal lines and loans, merchant services, and retail
brokerage.

Net Interest Income

Net interest income in second quarter 2014 increased $176 million on a
linked-quarter basis to $10.8 billion driven by organic growth in
commercial and consumer loans and higher mortgages held for sale and
trading assets. Approximately one-third of the increase resulted from
the benefit of one additional business day in the quarter. Interest
income from variable sources, including purchased credit-impaired (PCI)
loan resolutions and periodic dividends, also improved slightly linked
quarter.

Net interest margin was 3.15 percent, down 5 basis points from first
quarter 2014 as strong customer driven deposit growth contributed to
higher cash and short-term investment balances. This deposit growth was
essentially neutral to net interest income, but had the effect of
diluting net interest margin approximately 5 basis points. Liquidity
funding actions taken to meet regulatory expectations also diluted the
margin by 1 basis point, but with minimal impact to net income. Higher
interest income from variable sources contributed 1 basis point to the
change in net interest margin linked quarter. The net impact of all
other balance sheet growth and repricing was essentially flat from first
quarter.

Noninterest Income

Noninterest income in the second quarter was $10.3 billion, up from
$10.0 billion in the prior quarter. Growth was broad-based and was
driven by increases in mortgage banking, trust and investment fees,
deposit service charges, and card fees. These increases were partially
offset by a decline in market sensitive revenue5, mainly
equity gains.

Trust and investment fees were $3.6 billion, up $197 million from first
quarter on higher investment banking and brokerage advisory, commissions
and other fees. Investment banking fees increased $164 million linked
quarter on broad-based growth. Brokerage advisory, commissions and other
fees were up $39 million from the prior quarter as asset-based fees
increased due to higher market valuations and net customer flows.

Mortgage banking noninterest income was $1.7 billion, up $213 million
from first quarter. During the second quarter, residential mortgage
originations were $47 billion, up $11 billion linked quarter, while the
gain on sale margin was 1.41 percent, compared with 1.61 percent in
first quarter. Net mortgage servicing rights (MSRs) results were
$475 million, compared with $407 million in first quarter 2014.

5 Consists of net gains from trading activities, debt
securities and equity investments.

Noninterest Expense

Noninterest expense increased $246 million from the prior quarter to
$12.2 billion, as a decline in seasonally-elevated compensation and
benefits costs from first quarter 2014 was offset by higher
revenue-based incentive compensation, increased salary expense due to
annual merit increases and the impact of one additional day in the
quarter, an $84 million linked-quarter increase in deferred compensation
benefit costs (offset in revenue) and a $205 million linked-quarter
increase in operating losses largely due to litigation accruals.
Expenses in the quarter also included higher outside professional
services and advertising expenses, which are typically lower in the
first quarter. The efficiency ratio was 57.9 percent in second quarter
2014, in line with first quarter 2014. The Company expects to operate
within its targeted efficiency ratio range of 55 to 59 percent in third
quarter 2014.

Income Taxes

The Company’s effective income tax rate was 33.4 percent for second
quarter 2014, compared with 27.9 percent in the prior quarter. The tax
rate for the first quarter included a net $423 million discrete tax
benefit primarily from a reduction in the reserve for uncertain tax
positions due to the resolution of prior period matters.

Loans

Total loans were $828.9 billion at June 30, 2014, up $2.5 billion from
March 31, 2014, driven by broad-based growth in commercial and
industrial, automobile, credit card, 1-4 family first mortgage and
commercial real estate loans. This growth was reduced by the transfer to
loans held for sale at the end of the quarter of $9.7 billion of
government guaranteed student loans, which were previously included in
the Company’s non-strategic/liquidating loan portfolio. Excluding this
transfer, total loans would have been up $12.2 billion, or 6 percent
(annualized), from first quarter. Core loan growth was $15.1 billion, as
non-strategic/liquidating portfolios declined $12.7 billion in the
quarter, including the $9.7 billion transfer. Average total loans were
$831.0 billion, up $7.3 billion from the prior quarter, mainly
reflecting growth in commercial and industrial, automobile and
commercial real estate.


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