01—Abstract
Summary
Summary of the 10-K filed February 29, 2008. Cited figures are marked; the original filing is the authoritative source.
Wells Fargo & Company's 2007 Form 10-K, filed February 29, 2008, shows a company that absorbed a sharp housing downturn while still growing revenue and earnings.
Net income was $8.06 billiona ($2.38 diluted EPS), down 4% from $2.47 in 2006, as a $2.7 billion increase in the provision for credit losses cut after-tax earnings by about 18%. Revenue rose 10.4% to a record $39.4 billion, driven by 17% growth in noninterest income and 5% growth in net interest income. Return on average assets was 1.55% and return on equity 17.12%, both near the top of large bank peers.
The main investor concern is credit quality, concentrated in the Home Equity portfolio. Management took a $1.4 billionb special reserve build in Q4 2007, and net charge-offs rose to 1.03% of average loans from 0.73%. Nonaccrual loans climbed to $2.68 billion and nonperforming assets to $3.87 billion.
Management explicitly expects higher net charge-offs in 2008, particularly in Home Equity. The $11.9 billionc liquidating portfolio of third-party-sourced home equity loans is flagged as the highest-risk segment, with a 4.80% annualized loss rate versus 0.86% for the remainder. The balance sheet remains strong.
Total assets were $575 billiond, deposits $344 billion, and stockholders' equity $47.6 billion. The Tier 1 risk-based capital ratio was 7.59% and the total risk-based ratio 10.68%, both above minimums.
Wells Fargo Bank, N.A. holds AAA from S&P and Aaa from Moody's, and the bank is one of only two banks worldwide with the top rating from both agencies. The company also grew through acquisitions, including Greater Bay Bancorp ($7.4 billion in assets), Placer Sierra Bancshares, and the CIT construction business, and repurchased 220 million shares during 2007.
02—Key points
Key Highlights
- Net income of $8.06 billion ($2.38 diluted EPS) fell 4% from 2006, while revenue reached a record $39.4 billion, up 10.4%.
- Provision for credit losses rose to $4.94 billion from $2.20 billion, including a $1.4 billion special reserve build primarily for Home Equity losses.
- Net charge-offs were 1.03% of average loans versus 0.73% in 2006. Management expects higher charge-offs in 2008, especially in Home Equity.
- Noninterest income grew 17% to $18.4 billion, led by card fees (+22%), trust and investment fees (+15%), and mortgage banking (+36%).
- Nonaccrual loans rose to $2.68 billion (0.70% of loans) and total nonperforming assets to $3.87 billion (1.01%), with foreclosed assets up to $1.18 billion.
- Capital remained above requirements: Tier 1 RBC of 7.59% and total RBC of 10.68%, with all subsidiary banks rated well capitalized.
- Wells Fargo Bank, N.A. is rated AAA by S&P and Aaa by Moody's, and the company reported an efficiency ratio of 57.9%, improved from 58.4%.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2007filed February 29, 2008Financial Statements
| Interest Expense | $14.20B |
| Net Income | $8.06B |
| EPS (Basic) | $2.41 |
| EPS (Diluted) | $2.38 |
| Shares Outstanding (Basic) | 3.35B |
| Shares Outstanding (Diluted) | 3.38B |
05—Questions
Frequently Asked Questions
How much did Wells Fargo's credit losses increase in 2007, and why?
The provision for credit losses rose $2.74 billion to $4.94 billion. About $1.3 billion reflected higher actual charge-offs, and a special $1.4 billion reserve build in Q4 2007 was added mainly for expected Home Equity losses from steep home price declines. The allowance for credit losses reached $5.52 billion, or 1.44% of total loans, up from 1.24%.
Which part of the loan portfolio is the biggest credit concern?
The Home Equity portfolio, totaling $84.2 billion, is the main concern. Within it, an $11.9 billion liquidating portfolio of wholesale and correspondent-sourced loans, mostly behind third-party first liens and concentrated in markets with steep price declines such as California, had a 4.80% annualized loss rate in December 2007, compared with 0.86% for the remaining book. Management has stopped originating new indirect home equity loans unless they sit behind a Wells Fargo first mortgage with a combined LTV below 90%.
Is Wells Fargo's capital position strong enough to absorb further losses?
Based on the filing, yes. At year-end 2007 the Tier 1 risk-based ratio was 7.59% (minimum 4%), the total risk-based ratio 10.68% (minimum 8%), and the Tier 1 leverage ratio 6.83% (minimum 3%). Stockholders' equity was $47.6 billion, or 8.28% of assets. The company and each subsidiary bank were classified as well capitalized. The 10-K also notes the company repurchased 220 million shares during 2007, with 42 million shares of authority remaining at year-end.
What drove revenue growth despite the credit problems?
Revenue grew 10.4% to $39.4 billion. Net interest income rose 5% to $21.0 billion on loan growth, with average loans up 12%. Noninterest income rose 17% to $18.4 billion, driven by double-digit gains in debit and credit card fees (+22%), deposit service charges (+13%), trust and investment fees (+15%), and insurance revenue (+14%). Average core deposits grew 13%, and the company reported cross-sell of 5.5 products per retail banking household.
What are the key risks management flags for 2008?
Management expects net charge-offs to be higher in 2008, particularly in Home Equity, and says it may need to build reserves further, which would reduce earnings. Other risks include interest rate sensitivity (earnings at risk of about 4% over 12 months in a rising-rate scenario), mortgage banking volatility from MSR valuation and hedge mismatches, and reduced liquidity in nonconforming secondary markets. The company also notes that it may provide capital support to money market funds holding SIV exposure, and that a 2008 contribution to its pension plan is not required.
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