01—Abstract
Summary
Summary of the 10-K/A filed January 16, 2004. Cited figures are marked; the original filing is the authoritative source.
Wells Fargo & Company's Form 10-K/A for fiscal 2002 (filed January 16, 2004) shows a $349 billiona diversified financial services company with 2002 net income of $5.43 billion ($3.16 diluted EPS) after a $276 million after-tax goodwill impairment charge; before that charge, net income was $5.71 billion ($3.32 diluted EPS), up 67% from 2001 when results were depressed by roughly $1.16 billion after-tax of equity-security impairments.
Revenue rose 20% to $25.25 billionb, driven by a 21% jump in net interest income to $14.59 billion (taxable-equivalent) and a 5.53% net interest margin, plus a 20% rise in noninterest income to $10.77 billion. Mortgage origination volume reached a record $333 billion, but heavy prepayments forced $2.1 billion of MSR impairment provisions and a $1.07 billion direct write-down, which pushed net servicing fees to a $737 million loss. Credit quality improved: net charge-offs fell to 0.96% of average loans from 1.10%, nonaccrual loans declined to $1.49 billion, and the allowance stood at $3.82 billion (1.98% of loans).
Capital remained strong, with a 7.70% Tier 1 risk-based ratio, 11.44% total risk-based ratio, and all covered banks rated well capitalized. The company returned $1.9 billionc in dividends and repurchased about 43 million shares, and the board raised the quarterly dividend 7% to $0.30 in January 2003.
This amended filing reflects a reclassification of auto leases from direct finance leases to operating leases under EITF D-107, which lifted reported noninterest income and expense while leaving net income essentially unchanged (2002 net income was $5.434 billiond both before and after the revision). Investors should note the sensitivity of mortgage servicing earnings to interest-rate moves and the large unallocated share of the loan loss allowance (34%).
02—Key points
Key Highlights
- 2002 net income of $5.43 billion, or $3.16 diluted EPS, after a $276 million after-tax FAS 142 goodwill impairment; $5.71 billion ($3.32) before the charge, up 67% from 2001
- Revenue rose 20% to $25.25 billion; net interest income grew 21% to $14.59 billion (taxable-equivalent) with a 5.53% net interest margin, up from 5.29%
- Record $333 billion in mortgage originations drove noninterest income to $10.77 billion, but MSR impairments of $2.1 billion and a $1.07 billion write-down produced a $737 million net servicing fee loss
- Net charge-offs improved to 0.96% of average loans from 1.10%; nonaccrual loans fell to $1.49 billion; the allowance covered 256% of nonaccrual loans
- Capital strength: Tier 1 risk-based ratio 7.70%, total risk-based 11.44%, Tier 1 leverage 6.57%, with all covered subsidiary banks well capitalized
- Shareholder returns: $1.9 billion in common dividends and about 43 million shares repurchased in 2002; quarterly dividend raised 7% to $0.30 in January 2003
- Total assets grew 14% to $349 billion, with loans up 15% to $192.5 billion, while the amended filing reclassified auto leases to operating leases with no material change to net income
03—Questions
Frequently Asked Questions
How did Wells Fargo perform in 2002 compared with 2001?
Net income before the goodwill accounting change was $5.71 billion ($3.32 diluted EPS), versus $3.41 billion in 2001. 2001 was depressed by roughly $1.16 billion after tax of equity-security impairments. After the $276 million FAS 142 transitional charge, 2002 net income was $5.43 billion ($3.16 diluted EPS).
What were the main risks to earnings disclosed in the filing?
The main risks are mortgage servicing rights valuation, which is highly sensitive to prepayment speeds and interest rates (a 200 bp adverse change would reduce MSR fair value by $153 million on the modeled portfolio), interest-rate exposure to a flatter yield curve, potential further impairments of venture capital and equity holdings, and reliance on the allowance for loan losses, 34% of which is unallocated judgment.
Why did mortgage banking income look weak despite record originations?
Originations hit $333 billion, boosting origination fees and gains to over $2 billion combined. However, lower mortgage rates drove prepayments higher, forcing a $2.1 billion valuation provision on servicing rights and $1.9 billion in amortization. The net result was a $737 million loss in net servicing fees.
Is the dividend and capital position secure?
Capital ratios exceed regulatory minimums by a wide margin, and all covered subsidiary banks were well capitalized at year-end 2002. Dividends are funded primarily by subsidiary bank dividends, which are subject to regulatory limits; the company declared $1.10 per share in 2002 and raised the quarterly rate to $0.30 in January 2003.
Why was this 10-K/A filed, and does it change the financials materially?
The amendment reflects EITF D-107, which required certain auto leases to be reclassified from direct finance leases (loans) to operating leases. Noninterest income and expense both rose by about $1.1 billion and $0.8 billion respectively for 2002, while net income, EPS, and equity were unchanged; total assets were revised down slightly to $349.2 billion.
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