Wells Fargo & Co.'s efforts to transform its loan portfolio showed signs of taking root during the third quarter.
The bank reported third-quarter net income applicable to common stock of $5.45 billion, or $1.13 per share, helped by the rising-rate environment boosting net interest income, as well as declining expenses. That was higher than year-ago net income of $4.13 billion, or 83 cents per share. Wells booked improved revenue even in the face of declining loan growth.
Wells Fargo continued remixing its loan portfolio as average loans declined $4.6 billion from the previous quarter to $939.46 billion. Portfolio sales, runoff and reduced commercial real estate and auto lending offset growth in other areas of consumer and commercial lending. Commercial real estate loans fell $2.8 billion as existing credits were paid down, and executives said the bank passed on some origination opportunities because of credit discipline.
Consumer loans declined $746 million from the second quarter as the bank off-loaded more Pick-a-Pay PCI mortgage loans and transferred some auto loans into held-for-sale. However, President and CEO Timothy Sloan said the bank saw encouraging origination trends in credit cards, auto, home equity and personal loans, and lines of credit. Sloan said overall consumer portfolio balances should begin to grow again in mid-2019.
Executives highlighted the importance of digital channels and automated underwriting in new customer accounts and origination activity in this portfolio. Sloan said 28% of all retail mortgage applications were completed through its online mortgage tool that the bank rolled out in March. About 40% of new auto loans had automated underwriting, making the process more efficient and better positioning that segment to grow again in mid-2019.
New credit card accounts grew by 27% from the second quarter, which CFO John Shrewsberry attributed to the new Propel card. Digital channels generated 45% of new accounts and credit card loans increased $1.1 billion from the second quarter.
"We made a lot of investments from a digital standpoint to be able to provide that service and convenience to our customers. I think we're seeing our existing customers be very attracted to the card, which is great," an executive said.
Sloan said he expects to operate under the Federal Reserve's asset cap through the first half of 2019 and that the bank is "very far along" in its customer remediation efforts and compliance improvements. Wells Fargo completed the requirements of its consent order with the Office of the Comptroller of the Currency related to compliance with provisions of the Servicemembers Relief Act during the quarter. Wells Fargo added $241 million in additional accruals during the quarter for issues related to auto collateral protection insurance.