01—Abstract
Summary
Summary of the 10-K filed February 25, 2011. Cited figures are marked; the original filing is the authoritative source.
Wells Fargo's 2010 Form 10-K (filed February 25, 2011) shows a company that grew earnings and rebuilt capital while its credit costs and mortgage exposures remained elevated.
Net income was a record $12.4 billiona ($2.21 diluted EPS) versus $12.3 billion ($1.75) in 2009, and revenue fell 4% to $85.2 billion as noninterest income and net interest income both declined. The earnings improvement came mainly from a $7.9 billion reduction in the provision for credit losses ($15.8 billion vs. $21.7 billion), which ran $2.0 billion below net charge-offs. Management frames the credit cycle as turning, with net charge-offs falling each quarter from the late-2009 peak and nonaccrual loans declining for the first time since the Wachovia merger, though total nonperforming assets still stood at $32.4 billion (4.27% of loans).
Capital strengthened materially. Tier 1 common equity rose to $81.3 billionb, or 8.30% of risk-weighted assets, up from 6.46%, and the Tier 1 capital ratio reached 11.16%. However, dividends remain constrained: the quarterly common dividend is $0.05 per share, and any increase or share repurchase requires Federal Reserve approval of the Capital Plan Review submitted January 7, 2011, with no guarantee of timing or outcome.
Management also flagged significant risk areas, including repurchase demands on mortgages (a $1.6 billionc provision in 2010), foreclosure-documentation litigation and regulatory investigations, Dodd-Frank rulemaking still in progress, and Basel III's pending U.S. implementation. The Wachovia integration is described as on track to be substantially complete by the end of 2011, with merger integration costs of $1.9 billion in 2010.
Core deposits grew 2% to $798 billiond, and the company remains the fourth-largest U.S. bank holding company by assets at $1.26 trillion. Investors should weigh the strong capital build and improving credit trends against the still-high nonperforming asset levels, dependence on the Federal Reserve for capital distributions, and legal and mortgage-related exposures.
02—Key points
Key Highlights
- Record net income of $12.4 billion in 2010 (diluted EPS $2.21), up from $12.3 billion (diluted EPS $1.75) in 2009; net income applicable to common stock was $11.6 billion.
- Provision for credit losses fell to $15.8 billion from $21.7 billion, $2.0 billion below net charge-offs of $17.8 billion, as credit trends improved.
- Revenue declined 4% to $85.2 billion, with net interest income down 3% to $44.8 billion and noninterest income down 5% to $40.5 billion (mortgage banking fell to $9.7 billion from $12.0 billion).
- Tier 1 common equity increased to $81.3 billion (8.30% of risk-weighted assets) from 6.46%; Tier 1 capital ratio was 11.16% and Tier 1 leverage ratio 9.19%.
- Nonperforming assets totaled $32.4 billion (4.27% of total loans), including $26.2 billion of nonaccrual loans and $6.0 billion of foreclosed assets; nonaccrual loans declined in Q4 2010 for the first time since the Wachovia merger.
- Common dividend remains at $0.05 per quarter; any dividend increase or share repurchase depends on Federal Reserve approval of the January 2011 Capital Plan Review.
- Wachovia integration expected to be substantially complete by end of 2011, with $1.9 billion of merger integration costs in 2010 and $1.9 billion of mortgage repurchase-related and foreclosure-process risks still being managed.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2010filed February 25, 2011Financial Statements
FY2010 against FY2009
| Line item | FY2010FY2009 | Change |
|---|---|---|
| Interest Expense | $8.04B$9.95B | −19.2% |
| Net Income | $12.36B$12.28B | +0.7% |
| EPS (Basic) | $2.23$1.76 | +26.7% |
| EPS (Diluted) | $2.21$1.75 | +26.3% |
| Shares Outstanding (Basic) | 5.23B4.55B | +15.0% |
| Shares Outstanding (Diluted) | 5.26B4.56B | +15.4% |
05—Questions
Frequently Asked Questions
Can Wells Fargo raise its dividend or buy back more stock soon?
Not without regulatory approval. Because Wells Fargo was one of the 19 SCAP stress-test banks, it must consult with the Federal Reserve before increasing its dividend or repurchasing shares. It submitted a Capital Plan Review on January 7, 2011, proposing dividend increases and repurchases, but the company states it cannot guarantee whether or when the Federal Reserve will approve the plan or what conditions it may impose. The common dividend stayed at $0.05 per share through 2010.
Are credit losses still a concern for investors?
Yes, although trends improved. Net charge-offs were $17.8 billion (2.30% of average loans) in 2010, down from the late-2009 peak, and the provision fell below charge-offs. Still, nonperforming assets were $32.4 billion, the allowance for credit losses was $23.5 billion (3.10% of loans), and management said it expects future allowance reductions only if the economy does not deteriorate. Real estate-secured loans, particularly California and Florida home equity and Pick-a-Pay portfolios, remain the main exposures.
What legal and mortgage-related risks does the filing disclose?
The filing discloses elevated mortgage repurchase demands (2010 repurchase liability additions of $1.6 billion, with a $1.3 billion liability at year-end), foreclosure-affidavit practices that the company reviewed and enhanced, and pending class actions and state and federal investigations concerning foreclosure documents, mortgage origination, municipal derivatives bidding, and interchange fees. Management says it believes the outcome of these matters will not have a material adverse effect on financial position, but notes that unfavorable developments could be material to results in a given period, with a high end of the litigation loss range of $1.2 billion in excess of established liabilities.
How is Wells Fargo preparing for new capital and regulatory rules?
Wells Fargo is implementing the Basel II advanced approach, with a parallel run planned for 2012 subject to regulatory approval, and says it expects to be above a 7% Tier 1 common equity ratio under Basel III within the next few quarters. The Dodd-Frank Act's many rulemakings were largely not yet final, so the company said it could not quantify their full financial impact. Trust preferred securities will be phased out of Tier 1 capital over three years beginning January 1, 2013, under the Collins Amendment.
How significant is the Wachovia acquisition to the company's results?
The Wachovia merger, completed December 31, 2008, remains a major driver of the company's size and cost base. Wells Fargo is now the fourth-largest U.S. bank holding company with $1.26 trillion in assets, and Wachovia's integration produced revenue synergies and substantially all expected cost savings already realized, according to management. Integration expenses were $1.9 billion in 2010, and the remaining Eastern-market store conversions are expected to finish by the end of 2011. Wachovia-related purchased credit-impaired loans had a carrying value of $41.4 billion at year-end 2010 and are accounted for separately, which complicates comparisons with pre-merger credit ratios.
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