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Summary

  • Revenues decreased by 1% from a year ago but increased 2% from last quarter.
  • Diluted earnings per share increased 3% from last year but dropped 4% from last quarter.
  • Tangible book value increased a whopping 10% from last year and 2% from last quarter.

The last time I wrote about Wells Fargo & Co. (NYSE:WFC) I stated:

"I like the stock but won't be buying any of it this week, and will choose to wait until I see it report. If the stock drops on earnings but estimates are beaten, I'll definitely pounce on it." Since that article was published the stock is down 1.45% while the S&P 500 (NYSEARCA:SPY) is up 0.19%. Wells is a bank holding company which operates in three segments: Community Banking, Wholesale Banking and Wealth, Brokerage and Retirement.

The company reported earnings before the market opened on 11Jul14 and on the surface the results were mediocre with the company reporting earnings of $1.01 per share (in-line with estimates) on revenue of $21.06 billion (beating estimates by $240 million). The stock decreased 0.62% the day it reported earnings and what I'd like to do at this time is delve into the weeds and pick out some highlights from different portions of the report to see if the stock is worth buying at the present time.

Segment Revenue

Community Banking

2Q14

1Q14

2Q13

Q/Q

Y/Y

Total revenue

$12,606

$12,593

$12,942

0%

-3%

Provision for credit losses

$279

$419

$763

-33%

-63%

Noninterest expense

$7,020

$6,774

$7,213

4%

-3%

Net income

$3,431

$3,844

$3,245

-11%

6%

Community Banking is the segment which includes Regional Banking, Diversified Products, and the Consumer Deposits groups, as well as Wells Fargo Customer Connection. This segment of the company accounts for 57% of the company's total revenues. What I noticed right off the bat is that provision for credit losses decreased by 63% from last year and decreased 33% from the previous quarter. The decrease in this number was primarily due to a decrease in lower consumer real estate losses. Everything else in this segment seemed pedestrian to me.

Wholesale Banking

2Q14

1Q14

2Q13

Q/Q

Y/Y

Total revenue

$5,946

$5,580

$6,135

7%

-3%

Reversal Provision for credit losses

$(49)

$(93)

$(118)

47%

58%

Noninterest expense

$3,203

$3,215

$3,183

0%

1%

Net income

$1,952

$1,742

$2,004

12%

-3%

Wholesale Banking is the side of the business which contains products sold to large and middle market commercial companies, as well as to consumers on a wholesale basis. These products include lending, treasury management, mutual funds, asset-based lending, commercial real estate, corporate and institutional trust services, and capital markets and investment banking services through Wells Fargo Securities. This segment of the business accounts for 27% of total revenues. I noticed that provision for credit losses increased 58% from last year and 47% from the prior quarter. The increase from the prior quarter was due to a $30 million increase in credit losses and $14 million lower reserve release. The increase from last year was due primarily to a $54 million increase in credit losses and $15 million lower reserve release. Nothing else in this segment was eye opening to me.

Wealth, Brokerage, and Retirement

2Q14

1Q14

2Q13

Q/Q

Y/Y

Total revenue

$3,550

$3,468

$3,261

2%

9%

Provision for credit losses

$(25)

$(8)

$19

-213%

-232%

Noninterest expense

$2,695

$2,711

$2,542

-1%

6%

Net income

$544

$475

$434

15%

25%

This segment of the business provides investment products through its subsidiaries, Wells Fargo Investments, LLC and Wells Fargo Advisors, LLC and accounted for 16% of total revenues. Off the bat there is a decrease of 232% in provision for credit losses from last year and a decrease of 213% from last quarter. The decrease in provisions from last quarter were due to a $21 million reserve release while there was a sharp drop in net charge-offs from a year ago. Net income however increased a whopping 25% from last year and 15% from last quarter.

Wells Fargo

2Q14

1Q14

2Q13

Q/Q

Y/Y

Total revenue

$22,102

$21,641

$22,338

2%

-1%

Provision for credit losses

$205

$318

$664

-36%

-69%

Noninterest expense

$12,918

$12,700

$12,938

2%

0%

Net income

$5,927

$6,061

$5,683

-2%

4%

Diluted EPS

$1.01

$1.05

$0.98

-4%

3%

Shares Outstanding (millions)

5350.8

5353.3

5384.6

0%

-1%

Tangible Book Value

$31.18

$30.48

$28.26

2%

10%

Total Assets on Balance Sheet (millions)

$1,598,874

$1,546,707

$1,438,456

3%

11%

Conclusion

The decrease in provision for credit losses for the company as a whole was at 69%, which is a great thing I believe. What I like is that net income increased 4% from the prior year but decreased 2% from the prior quarter. Diluted earnings per share also increased 3% from last year but decreased 4% from the prior quarter while shares were left relatively unchanged. The company tabulates that tangible book value increased 10% from last year and 2% from last quarter while total assets on the balance sheet increased 11% from a year ago and 3% from three months ago.

Personally I don't like that total revenue for the company decreased 1% from last year; but it at least gained 2% from last quarter. Wells' share price was up 7.09% from the prior earnings release excluding dividends. The share count was flat from the prior year and from the prior quarter. Another important measurable metric for bank stocks is tangible book value and that value has increased from $28.26 to $31.18 in one year while total assets on the balance sheet increased from $1.438 trillion to $1.598 trillion.

The company was able to realize a slight increase in profits because it has been able to do this by focusing on the core of their business, their customers. The company has excellent cross-selling techniques which ropes in a prospective client and makes it difficult for the client to leave. The earnings increase was pretty good, but I loathe decreased revenues. I will give this quarter a pass on the decreased revenues because it was only a 1% decline. This was a decent quarter for the company and I'll continue to purchase small batches of it for my dividend portfolio as I see fit till the next earnings call.

Disclaimer: This article is meant to serve as a journal for myself as to the rationale of why I bought/sold this stock when I look back on it in the future. These are only my personal opinions and you should do your own homework. Only you are responsible for what you trade and happy investing!

Source: Wells Fargo Reports Another Modest Quarter