01—Abstract
Summary
Summary of the 10-K filed February 26, 2010. Cited figures are marked; the original filing is the authoritative source.
Wells Fargo & Company's 2009 Form 10-K reports a transformative year shaped by the December 31, 2008 Wachovia acquisition, which lifted total assets to $1.24 trilliona (fourth-largest U.S. bank holding company by assets) and roughly doubled revenue to $88.7 billion.
Net income was a record $12.3 billionb, or $1.75 per diluted share, with $8.0 billion applicable to common stock after preferred dividends. Earnings were also weighed down by $1.0 billion of accretion-related preferred dividends and a $0.76 per-share hit from fully repaying the $25 billion TARP preferred investment in December 2009. Pre-tax pre-provision profit of $39.7 billion covered net charge-offs more than 2.1 times, and management highlighted that the credit cycle appears to be turning, with consumer credit losses expected to peak in the first half of 2010 and commercial losses later in 2010.
Capital strength improved markedly. Tier 1 common equity rose to $65.5 billionc, or 6.46% of risk-weighted assets, up from 3.13% a year earlier, helped by three common stock offerings totaling over $33 billion since the Wachovia deal was announced, including $8.6 billion in May 2009 (to satisfy the SCAP stress-test buffer) and $12.2 billion in December 2009 (to refinance TARP). The Tier 1 capital ratio was 9.25%.
The quarterly common dividend was cut to $0.05d per share in 2009 to retain earnings. Credit costs remained elevated: the provision for credit losses was $21.7 billion, nonaccrual loans reached $24.4 billion (3.12% of loans), total nonperforming assets were $27.6 billion, and the allowance for credit losses stood at $25.0 billion (3.20% of loans).
Growth engines included a strong mortgage banking year ($12.0 billion of noninterest income, aided by a $5.3 billion net MSR valuation gain), trust and investment fees that rose to $9.7 billion, and core deposits that grew 5% to $780.7 billion. Investors should weigh the upside of a larger, more diversified franchise with a stronger balance sheet against integration execution risk, the potential for further credit deterioration in home-equity and Pick-a-Pay portfolios, legal exposures (including the Adelphia litigation, the Interchange litigation and Wachovia-related securities cases), and the modest 2010 fee-revenue headwinds from new overdraft and card regulations (approximately $500 million and $235 million after tax, respectively).
02—Key points
Key Highlights
- Record 2009 net income of $12.3 billion ($1.75 diluted EPS), with $8.0 billion applicable to common stock after preferred dividends; 2008 net income was $2.7 billion ($0.70 per diluted share).
- Revenue nearly doubled to $88.7 billion from $41.9 billion, driven primarily by the December 31, 2008 Wachovia acquisition; noninterest income rose to 48% of revenue.
- Tier 1 common equity increased to $65.5 billion (6.46% of risk-weighted assets) from $34.4 billion (3.13%), and the Tier 1 capital ratio reached 9.25%.
- Fully repaid the $25 billion TARP Capital Purchase Program preferred stock in December 2009, funded by a $12.2 billion common stock offering; the Treasury retains a warrant for ~110.3 million shares at $34.01.
- Credit costs remained elevated: provision for credit losses of $21.7 billion, net charge-offs of $18.2 billion (2.21% of average loans), nonaccrual loans of $24.4 billion, and an allowance for credit losses of $25.0 billion (3.20% of loans).
- Mortgage banking noninterest income surged to $12.0 billion from $2.5 billion, aided by a $5.3 billion net MSR valuation gain and originations of $420 billion.
- Management expects the Wachovia integration to yield $5 billion in annual run-rate savings by 2011, with cumulative merger integration costs now estimated at about $5 billion, down from $7.9 billion.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2009filed February 26, 2010Financial Statements
FY2009 against FY2008
| Line item | FY2009FY2008 | Change |
|---|---|---|
| Interest Expense | $9.95B$9.76B | +2.0% |
| Net Income | $12.28B$2.65B | +362.3% |
| EPS (Basic) | $1.76$0.70 | +151.4% |
| EPS (Diluted) | $1.75$0.70 | +150.0% |
| Shares Outstanding (Basic) | 4.55B3.38B | +34.5% |
| Shares Outstanding (Diluted) | 4.56B3.39B | +34.5% |
05—Questions
Frequently Asked Questions
How did the Wachovia acquisition change Wells Fargo's financial profile?
The December 31, 2008 acquisition of Wachovia, valued at $12.5 billion in stock, roughly doubled the size of the company. Total assets rose to $1.24 trillion, loans to $783 billion and deposits to $824 billion. Because the deal closed at year-end 2008, Wachovia's results appear in the income statement only from 2009 onward, which makes year-over-year comparisons with 2008 difficult. Management also disclosed that Wachovia's loans were recorded at fair value under purchased credit-impaired (PCI) accounting, which affects how credit ratios such as nonaccrual growth should be interpreted.
Is Wells Fargo's capital position stronger after 2009?
Yes, by most measures. Tier 1 common equity rose to 6.46% of risk-weighted assets from 3.13% a year earlier, and the company says its capital ratios at year-end 2009 were higher than before the Wachovia acquisition. The company and each subsidiary bank were classified as well capitalized. The improvement came from record retained earnings and three common stock offerings totaling over $33 billion, which also diluted existing shareholders. The company has no mandated minimum for Tier 1 common equity, and regulators may still require additional capital, limiting dividends or repurchases.
What are the main credit risks investors should monitor?
Key risks include home-equity portfolios, which had a 3.88% loss rate; the liquidating home-equity segment, with an 11.17% loss rate; the Pick-a-Pay option-ARM portfolio of $85.2 billion carrying value, which carries negative amortization and recast risk; California, the largest state concentration at roughly 14% of total loans; and commercial real estate, where nonaccrual loans reached 5.2% of the CRE portfolio. Management expects consumer losses to peak in the first half of 2010 and commercial losses later in 2010, but cautions that further economic deterioration could require reserve builds.
How much dividend should shareholders expect, and what constrains it?
The quarterly common dividend was reduced to $0.05 per share in 2009 to retain earnings and rebuild common equity. Because Wells Fargo participated in the Federal Reserve's stress-test program, it must consult Federal Reserve staff before raising the dividend, and the Fed's guidance also requires approval for repurchases. The bank holding company depends on dividends from its subsidiary banks, which are subject to federal and state limits. The company is authorized to repurchase up to about 6 million remaining shares, but repurchases are currently limited to employee benefit plan needs.
What regulatory and legal headwinds could affect 2010 results?
Management estimated that new Federal Reserve rules on debit card and ATM overdraft practices, together with its own overdraft policy changes, will reduce 2010 fee revenue by about $500 million after tax, and that new card-fee limits will cut it by about $235 million after tax. Pending legislation could restrict revenue, impose fees and limit acquisitions. Material litigation includes the Adelphia bankruptcy claims against Wachovia (scheduled for trial in September 2010), the Interchange fee antitrust suits, and Wachovia-related securities cases. The company believes the outcome will not have a material adverse effect on its consolidated financial position, although unfavorable developments could be material to a given period.
06—Continue