How did Wells Fargo's underlying earnings perform in 2002 excluding one-time items?

Before the $276 million after-tax FAS 142 goodwill impairment charge, net income was $5.71 billion, or $3.32 per diluted share, compared with $3.42 billion ($1.97 per diluted share) in 2001. The 2001 result included about $1.16 billion after tax of impairment and other special charges, so the comparison improves further when those are excluded. Excluding those 2001 charges, net income was $4.58 billion. Growth was driven by net interest income, the mortgage banking franchise and fee businesses.

What is the biggest risk to Wells Fargo's earnings from this filing?

Mortgage servicing rights are the main earnings risk. Falling long-term rates during 2002 drove prepayment speeds higher and forced a $2.1 billion valuation provision and a $1.07 billion direct write-down. The company hedges only part of the servicing portfolio, so further rate declines could cause additional charges. Management notes that rising origination volume partly offsets this exposure, and that a 2 percentage point increase in short-term rates with a flatter yield curve could reduce net income by about 2% over twelve months.

Is Wells Fargo's loan book getting safer?

Partly. Net charge-offs and nonaccrual loans both declined in 2002, and the allocated portion of the allowance fell because of lower loss rates in retail lines. However, the total allowance fell to 1.96% of loans from 2.18%, mainly because the loan mix shifted toward residential real estate, which historically has lower losses. Management kept the unallocated reserve flat at about 0.65% of loans, citing economic uncertainty in agriculture, auto lending and commercial office markets.

How strong is Wells Fargo's capital position and what are the shareholder returns?

Capital is well above regulatory minimums. The total risk-based capital ratio was 11.31%, the Tier 1 ratio was 7.60% and the leverage ratio was 6.58%, against guidelines of 8%, 4% and 3%. The company returned capital through $1.9 billion in dividends and $2.0 billion of share repurchases, about 43 million shares. The Board raised the quarterly dividend to $0.30 per share from $0.28, and dividends declared for 2002 were $1.10 per share.

WFC 10-K FY2002 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed March 14, 2003. Cited figures are marked; the original filing is the authoritative source.

Wells Fargo's 2002 10-K (filed March 14, 2003) reports a year of strong growth in its core franchise, offset by a sharp rise in mortgage servicing costs.

Net income was $5.43 billion^a ($3.16 diluted EPS) after a $276 million after-tax transitional goodwill impairment charge under FAS 142; before that charge, net income was $5.71 billion ($3.32 diluted EPS), up from $3.99 billion (adjusted) in 2001. Net interest income rose 19% to $14.86 billion on a taxable-equivalent net interest margin of 5.57%, up from 5.36%, driven by loan growth of 14% to $196.6 billion and a 10% increase in average core deposits. Total assets reached $349 billion, making the company the fourth largest U.S. bank holding company by assets.

Credit quality improved modestly. Net charge-offs were 0.96% of average loans, down from 1.09%, and nonaccrual loans fell to $1.49 billion^b (0.8% of loans) from $1.64 billion. The allowance for loan losses was $3.86 billion, or 1.96% of total loans, down from 2.18%, though management noted that the unallocated portion rose to a third of the total reserve, reflecting economic uncertainty in agriculture, used-car lending and commercial office markets.

The main risk flagged for investors is mortgage servicing. Mortgage servicing rights were written down by $1.07 billion^c and carried a $2.19 billion valuation allowance, driven by prepayment speeds after the 30-year mortgage rate fell to 5.01%. Net servicing fees were a $737 million loss.

Originations surged to $333 billion^d, and noninterest income still rose 25% to $9.64 billion. Capital remained strong, with a total risk-based capital ratio of 11.31%, a Tier 1 ratio of 7.60%, and a leverage ratio of 6.58%, all above regulatory minimums. The Board also raised the quarterly dividend to $0.30 per share from $0.28.

02—Key points

Key Highlights

Net income of $5.43 billion ($3.16 diluted EPS) for 2002, or $5.71 billion ($3.32 diluted EPS) before a $276 million after-tax FAS 142 goodwill impairment charge, compared with $3.42 billion in 2001.
Net interest income rose 19% to $14.86 billion, and the net interest margin widened to 5.57% from 5.36%, supported by 14% growth in total loans to $196.6 billion and a 10% rise in average core deposits.
Mortgage servicing rights were written down by $1.07 billion, and the valuation allowance reached $2.19 billion, as high prepayment speeds lowered the value of the servicing portfolio. Net servicing fees were a $737 million loss.
Noninterest income rose 25% to $9.64 billion, helped by record mortgage originations of $333 billion, higher origination fees and gains, and growth in service charges and insurance income.
Credit quality improved: net charge-offs fell to 0.96% of average loans from 1.09%, and nonaccrual loans declined to $1.49 billion from $1.64 billion.
The allowance for loan losses was $3.86 billion, or 1.96% of total loans, down from 2.18%. The unallocated reserve rose to 33% of the total, reflecting concern about agriculture, used-car lending and office vacancies.
Capital was strong, with a total risk-based capital ratio of 11.31%, a Tier 1 ratio of 7.60% and a leverage ratio of 6.58%. The quarterly dividend was raised 7% to $0.30 per share, and $2.0 billion of common stock was repurchased.

03—Questions

Frequently Asked Questions

How did Wells Fargo's underlying earnings perform in 2002 excluding one-time items?
Before the $276 million after-tax FAS 142 goodwill impairment charge, net income was $5.71 billion, or $3.32 per diluted share, compared with $3.42 billion ($1.97 per diluted share) in 2001. The 2001 result included about $1.16 billion after tax of impairment and other special charges, so the comparison improves further when those are excluded. Excluding those 2001 charges, net income was $4.58 billion. Growth was driven by net interest income, the mortgage banking franchise and fee businesses.
What is the biggest risk to Wells Fargo's earnings from this filing?
Mortgage servicing rights are the main earnings risk. Falling long-term rates during 2002 drove prepayment speeds higher and forced a $2.1 billion valuation provision and a $1.07 billion direct write-down. The company hedges only part of the servicing portfolio, so further rate declines could cause additional charges. Management notes that rising origination volume partly offsets this exposure, and that a 2 percentage point increase in short-term rates with a flatter yield curve could reduce net income by about 2% over twelve months.
Is Wells Fargo's loan book getting safer?
Partly. Net charge-offs and nonaccrual loans both declined in 2002, and the allocated portion of the allowance fell because of lower loss rates in retail lines. However, the total allowance fell to 1.96% of loans from 2.18%, mainly because the loan mix shifted toward residential real estate, which historically has lower losses. Management kept the unallocated reserve flat at about 0.65% of loans, citing economic uncertainty in agriculture, auto lending and commercial office markets.
How strong is Wells Fargo's capital position and what are the shareholder returns?
Capital is well above regulatory minimums. The total risk-based capital ratio was 11.31%, the Tier 1 ratio was 7.60% and the leverage ratio was 6.58%, against guidelines of 8%, 4% and 3%. The company returned capital through $1.9 billion in dividends and $2.0 billion of share repurchases, about 43 million shares. The Board raised the quarterly dividend to $0.30 per share from $0.28, and dividends declared for 2002 were $1.10 per share.

04—Continue

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