How did Wells Fargo's profitability and earnings per share change in 2004?

Net income increased 13% to $7.0 billion from $6.2 billion, and diluted EPS rose 12% to a record $4.09 from $3.65. Return on average assets was 1.71% and return on average common equity was 19.56%, both up slightly from 2003. Results were helped by revenue growth and operating leverage, with noninterest expense up only 2%.

What one-time or unusual expenses affected 2004 results?

The company recorded a $217 million charitable contribution to the Wells Fargo Foundation (about $0.08 per share), a $44 million special 401(k) stock contribution for employees (about $0.02 per share), $19 million of Strong Financial integration expense, and a $174 million net loss on debt extinguishment (about $0.06 per share). These were partly offset by a $208 million reversal of the mortgage servicing rights valuation allowance.

How healthy is the loan portfolio and credit quality?

Total loans reached $287.6 billion, up 14% year over year, with consumer real estate the main growth driver. Net charge-offs were $1.67 billion, or 0.62% of average loans, versus 0.81% in 2003. The allowance for credit losses was $3.95 billion, or 1.37% of total loans. Nonaccrual loans fell to $1.36 billion, or 0.47% of loans. Management noted that wholesale middle-market and real estate loss rates were unusually low and may not be sustainable.

What risks should investors watch in the coming year?

Key risks include continued margin pressure from the low-rate environment and new loans priced below the portfolio average; mortgage banking earnings sensitivity to interest rates and refinancing activity, with mortgage servicing rights hedged but not fully covered; the expected impact of expensing stock options from July 2005 (about $0.03 per share for the second half of 2005); and integration costs from pending acquisitions. The filing also notes that a 325 basis point rise in the federal funds rate would reduce 2005 earnings at risk by about 3%.

WFC 10-K FY2004 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed March 10, 2005. Cited figures are marked; the original filing is the authoritative source.

Wells Fargo & Company's 2004 Form 10-K (filed March 10, 2005) portrays a year of record earnings and continued balance sheet growth for the fifth-largest U.S. bank holding company, with $427.8 billion^a in total assets at year-end 2004.

Net income rose 13% to $7.0 billion^b, and diluted EPS increased 12% to a record $4.09. Total revenue grew 6% to a record $30.1 billion despite a 37% decline in mortgage originations, and noninterest expense rose only 2%, which improved operating leverage. Results were supported by average loan growth of 26%, average retail core deposit growth of 11%, and a 4% increase in noninterest income led by trust, investment, card and loan fees.

The main offsets for investors were margin compression and higher investment spending. The net interest margin fell to 4.89% from 5.08%, reflecting lower investment portfolio yields and new loans added below the portfolio average. Management also absorbed a $217 million^c charitable contribution to the Wells Fargo Foundation, a $44 million special 401(k) stock contribution, and a $174 million loss on debt extinguishment.

Asset quality improved: net charge-offs fell to 0.62%^d of average loans from 0.81%, and nonaccrual loans declined to 0.47% of total loans. The allowance for credit losses covered 237% of net charge-offs. Capital and liquidity remained strong.

The Tier 1 risk-based capital ratio was 8.41% and the total risk-based capital ratio was 12.07%, both above regulatory minimums, and the company was rated Aaa by Moody's at the bank level. The board authorized an additional 25 million share repurchase in January 2005, and dividends declared rose 24% to $1.86 per share. Management also flagged upcoming headwinds: expensing of stock options beginning July 1, 2005 (about $0.03 per share in the second half of 2005), integration costs tied to the Strong Financial acquisition and the pending First Community Capital deal, and continued sensitivity to interest rates and mortgage refinancing activity.

02—Key points

Key Highlights

Record diluted EPS of $4.09, up 12% from $3.65; record net income of $7.0 billion, up 13%.
Record revenue of $30.1 billion, up 6%, despite a 37% decline in mortgage originations to $298 billion.
Net interest margin compressed to 4.89% from 5.08%, driven by lower securities yields and lower-yielding new loan volume.
Average loans grew 26% to $269.6 billion, led by 1-4 family first mortgages and home equity; average core deposits rose 8%.
Asset quality improved: net charge-offs fell to 0.62% of average loans from 0.81%; nonaccrual loans fell to 0.47% of total loans.
Strong capital position: Tier 1 RBC of 8.41% and total RBC of 12.07%, with the company rated Aaa by Moody's at Wells Fargo Bank, N.A.; dividends per share rose 24% to $1.86.
Acquired $29 billion of assets under management from Strong Financial, making it one of the top 20 U.S. mutual fund companies.

03—Questions

Frequently Asked Questions

How did Wells Fargo's profitability and earnings per share change in 2004?
Net income increased 13% to $7.0 billion from $6.2 billion, and diluted EPS rose 12% to a record $4.09 from $3.65. Return on average assets was 1.71% and return on average common equity was 19.56%, both up slightly from 2003. Results were helped by revenue growth and operating leverage, with noninterest expense up only 2%.
What one-time or unusual expenses affected 2004 results?
The company recorded a $217 million charitable contribution to the Wells Fargo Foundation (about $0.08 per share), a $44 million special 401(k) stock contribution for employees (about $0.02 per share), $19 million of Strong Financial integration expense, and a $174 million net loss on debt extinguishment (about $0.06 per share). These were partly offset by a $208 million reversal of the mortgage servicing rights valuation allowance.
How healthy is the loan portfolio and credit quality?
Total loans reached $287.6 billion, up 14% year over year, with consumer real estate the main growth driver. Net charge-offs were $1.67 billion, or 0.62% of average loans, versus 0.81% in 2003. The allowance for credit losses was $3.95 billion, or 1.37% of total loans. Nonaccrual loans fell to $1.36 billion, or 0.47% of loans. Management noted that wholesale middle-market and real estate loss rates were unusually low and may not be sustainable.
What risks should investors watch in the coming year?
Key risks include continued margin pressure from the low-rate environment and new loans priced below the portfolio average; mortgage banking earnings sensitivity to interest rates and refinancing activity, with mortgage servicing rights hedged but not fully covered; the expected impact of expensing stock options from July 2005 (about $0.03 per share for the second half of 2005); and integration costs from pending acquisitions. The filing also notes that a 325 basis point rise in the federal funds rate would reduce 2005 earnings at risk by about 3%.

04—Continue

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