Why did Wells Fargo's earnings decline in 2001?

Net income declined to $3.42 billion from $4.03 billion, mainly because of about $1.72 billion (pre-tax) of non-cash impairment write-downs taken in the second quarter of 2001 on publicly traded and private equity investments, particularly in technology and telecommunications. Apart from these charges, revenue growth and business momentum were strong, but higher credit losses also weighed on results.

How healthy is the company's loan portfolio?

The portfolio is large at $172.5 billion, but credit quality weakened. Net charge-offs rose to 1.09% of average loans from 0.84%, and nonaccrual and restructured loans rose to $1.64 billion, or 1.0% of total loans. The allowance for loan losses covers 2.18% of total loans and 229% of nonaccrual loans, which management considers adequate. Commercial loans carry the largest allowance allocation, and the company flags economic slowdown and energy-crisis risks as potential sources of further losses.

Is Wells Fargo adequately capitalized?

Yes. At year-end 2001 the company reported a total risk-based capital ratio of 10.45%, a Tier 1 risk-based capital ratio of 6.99%, and a leverage ratio of 6.25%, all above regulatory minimums (8%, 4%, and 3%, respectively). The lead subsidiary banks were classified as well capitalized. Common stockholders' equity was $27.15 billion, or 8.83% of total assets, versus 9.63% a year earlier.

What is the expected earnings impact of the new goodwill accounting rules?

Under FAS 142, goodwill is no longer amortized after January 1, 2002. Management expects this to reduce noninterest expense by about $600 million pre-tax and increase 2002 net income by about $560 million after tax compared with 2001. The company must also test goodwill for impairment and expects to finish its initial assessment and record any transition charge in the first quarter of 2002. The company's $9.53 billion of goodwill includes $5.50 billion tied to the 1996 First Interstate acquisition, which the company says cannot be impaired under FAS 142.

What are the main risks investors should monitor?

Key risks include: (1) further impairment of the venture capital and equity portfolios, which could generate additional losses; (2) rising credit losses if the U.S. economy weakens after the September 11 attacks or if the California energy crisis spreads; (3) interest-rate movements, which affect net interest margin, mortgage origination fees and mortgage servicing rights valuation; and (4) competitive pressure and regulatory changes under the Gramm-Leach-Bliley Act. Management's model shows that a 200-basis-point rate increase would reduce 2002 net income by about 4.4%.

WFC 10-K FY2001 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed March 15, 2002. Cited figures are marked; the original filing is the authoritative source.

Wells Fargo & Company's 2001 Form 10-K (filed March 15, 2002) describes a $308 billion^a diversified financial services company, the fifth largest U.S. bank holding company by assets and third by market capitalization.

Net income for 2001 was $3.42 billion^b, down from $4.03 billion in 2000, and diluted EPS fell to $1.97 from $2.33. The decline was driven by roughly $1.72 billion (pre-tax) of non-cash impairment write-downs on public and private equity securities, mainly in the venture capital portfolio, taken in the second quarter of 2001. Excluding these special charges, ROA was 1.60% and ROE was 17.13%, and revenue (net interest income plus noninterest income, adjusted for impairments) grew about 11% to $21.87 billion.

Core banking momentum was solid: net interest income rose 15% to $12.46 billion^c, the net interest margin widened to 5.36%, and record mortgage originations boosted fee income. Credit quality weakened modestly. The provision for loan losses rose to $1.78 billion from $1.33 billion, net charge-offs reached 1.09% of average loans versus 0.84% in 2000, and nonaccrual and restructured loans climbed to $1.64 billion (1.0% of total loans).

The allowance for loan losses stood at $3.76 billion^d, or 2.18% of total loans, which management considers adequate. Capital remained strong, with a total risk-based capital ratio of 10.45%, a Tier 1 ratio of 6.99%, and a leverage ratio of 6.25%, all above regulatory minimums and consistent with a well-capitalized status. Management also flagged risks including the post-September 11 economic slowdown, the California energy crisis, equity market volatility affecting its venture capital holdings, and the mortgage servicing rights valuation sensitivity to interest rates.

Looking ahead, management expects the elimination of goodwill amortization under FAS 142 to reduce 2002 noninterest expense by about $600 million pre-tax and raise net income by about $560 million after tax. The company also repurchased shares and paid $1.00 per share in dividends in 2001, and it filed a $10 billion universal shelf registration in February 2002 to support future funding and acquisitions. Investors should weigh the strong franchise, cross-selling model, and expected earnings tailwind against elevated credit costs, earnings volatility from equity investments, and sensitivity to interest-rate and economic conditions.

02—Key points

Key Highlights

Net income fell 15% to $3.42 billion in 2001 (diluted EPS $1.97 vs. $2.33), largely due to about $1.72 billion pre-tax second-quarter impairment charges on equity securities; excluding these, ROE was 17.13% and ROA was 1.60%.
Net interest income grew 15% to $12.46 billion, and the net interest margin widened to 5.36% from 5.35%, supported by strong consumer loan growth and lower-cost core deposits.
Total loans reached $172.5 billion (up 7%), while average loans rose 12%; mortgages held for sale surged to $30.4 billion on record origination volume.
Credit costs rose: provision for loan losses was $1.78 billion, net charge-offs were 1.09% of average loans (vs. 0.84%), and nonaccrual/restructured loans increased to $1.64 billion (1.0% of loans).
The allowance for loan losses was $3.76 billion (2.18% of total loans), with the allocated component increasing while the unallocated component declined.
Capital ratios remained above regulatory minimums: total RBC 10.45%, Tier 1 RBC 6.99%, leverage 6.25%; the company repurchased shares and paid $1.00 per share in common dividends.
Expected 2002 tailwind from FAS 142: eliminating goodwill amortization should cut noninterest expense by about $600 million pre-tax and add roughly $560 million to net income.

03—Questions

Frequently Asked Questions

Why did Wells Fargo's earnings decline in 2001?
Net income declined to $3.42 billion from $4.03 billion, mainly because of about $1.72 billion (pre-tax) of non-cash impairment write-downs taken in the second quarter of 2001 on publicly traded and private equity investments, particularly in technology and telecommunications. Apart from these charges, revenue growth and business momentum were strong, but higher credit losses also weighed on results.
How healthy is the company's loan portfolio?
The portfolio is large at $172.5 billion, but credit quality weakened. Net charge-offs rose to 1.09% of average loans from 0.84%, and nonaccrual and restructured loans rose to $1.64 billion, or 1.0% of total loans. The allowance for loan losses covers 2.18% of total loans and 229% of nonaccrual loans, which management considers adequate. Commercial loans carry the largest allowance allocation, and the company flags economic slowdown and energy-crisis risks as potential sources of further losses.
Is Wells Fargo adequately capitalized?
Yes. At year-end 2001 the company reported a total risk-based capital ratio of 10.45%, a Tier 1 risk-based capital ratio of 6.99%, and a leverage ratio of 6.25%, all above regulatory minimums (8%, 4%, and 3%, respectively). The lead subsidiary banks were classified as well capitalized. Common stockholders' equity was $27.15 billion, or 8.83% of total assets, versus 9.63% a year earlier.
What is the expected earnings impact of the new goodwill accounting rules?
Under FAS 142, goodwill is no longer amortized after January 1, 2002. Management expects this to reduce noninterest expense by about $600 million pre-tax and increase 2002 net income by about $560 million after tax compared with 2001. The company must also test goodwill for impairment and expects to finish its initial assessment and record any transition charge in the first quarter of 2002. The company's $9.53 billion of goodwill includes $5.50 billion tied to the 1996 First Interstate acquisition, which the company says cannot be impaired under FAS 142.
What are the main risks investors should monitor?
Key risks include: (1) further impairment of the venture capital and equity portfolios, which could generate additional losses; (2) rising credit losses if the U.S. economy weakens after the September 11 attacks or if the California energy crisis spreads; (3) interest-rate movements, which affect net interest margin, mortgage origination fees and mortgage servicing rights valuation; and (4) competitive pressure and regulatory changes under the Gramm-Leach-Bliley Act. Management's model shows that a 200-basis-point rate increase would reduce 2002 net income by about 4.4%.

04—Continue

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