01—Abstract
Summary
Summary of the 10-K filed February 28, 2012. Cited figures are marked; the original filing is the authoritative source.
Wells Fargo's 2011 Form 10-K (filed February 28, 2012) shows a year of strong earnings recovery driven mainly by lower credit costs rather than revenue growth.
Net income rose 28% to $15.9 billiona, and diluted EPS reached $2.82, up from $2.21. The provision for credit losses fell by half to $7.9 billion, and net charge-offs dropped to $11.3 billion from $17.8 billion. Total revenue declined 5% to $80.9 billion, reflecting lower net interest income (down 4% as net interest margin compressed 32 basis points to 3.94%), weaker mortgage banking income, and reduced debit interchange fees after the Durbin Amendment took effect.
Noninterest expense fell 2% to $49.4 billionb, though efficiency remained a concern at a 61% efficiency ratio, and management targets $11 billion of quarterly noninterest expense by Q4 2012. Balance sheet strength improved meaningfully. Total assets reached $1.3 trillion, deposits grew 9% to $920 billion, and core deposits funded 113% of loans.
Tier 1 common equity rose to 9.46% under Basel I, and management estimates 7.50% under proposed Basel III, 50 basis points above the 7.0% fully phased-in minimum. The company repurchased about 80 million shares and redeemed $9.2 billionc of trust preferred securities, and it raised its quarterly dividend to $0.12. Key risks remain.
Nonperforming assets are still elevated at $26.0 billiond, and the company faces mortgage-related exposure, including a February 2012 settlement in principle with federal and state authorities worth $5.3 billion in commitments, along with ongoing repurchase demands and foreclosure-related consent orders. Regulatory reform (Dodd-Frank, Volcker Rule, G-SIB surcharge) adds uncertainty, and Moody's and S&P downgraded the parent's senior debt by one notch in 2011.
02—Key points
Key Highlights
- Net income of $15.9 billion, up 28% from 2010; diluted EPS of $2.82 versus $2.21, with ROE of 11.93% and ROA of 1.25%
- Provision for credit losses fell 50% to $7.9 billion, with net charge-offs of $11.3 billion (1.49% of average loans) versus $17.8 billion in 2010
- Revenue declined 5% to $80.9 billion as net interest income fell 4% (NIM 3.94%, down 32 bps) and mortgage banking income dropped to $7.8 billion from $9.7 billion
- Noninterest expense down 2% to $49.4 billion; efficiency ratio of 61.0%, with a targeted $11 billion quarterly run-rate by Q4 2012
- Capital and liquidity strengthened: Tier 1 common ratio 9.46% (Basel I), estimated 7.50% under Basel III, deposits of $920 billion, core deposits at 113% of loans
- Nonperforming assets declined to $26.0 billion (3.37% of loans) from $32.3 billion, but remain elevated, and mortgage servicing and repurchase liabilities remain significant risks
- Mortgage settlement in principle announced February 9, 2012: $5.3 billion of commitments plus $83M and $85M OCC/FRB civil penalties
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2011filed February 28, 2012Financial Statements
FY2011 against FY2010
| Line item | FY2011FY2010 | Change |
|---|---|---|
| Interest Expense | $6.65B$8.04B | −17.3% |
| Net Income | $15.87B$12.36B | +28.4% |
| EPS (Basic) | $2.85$2.23 | +27.8% |
| EPS (Diluted) | $2.82$2.21 | +27.6% |
| Shares Outstanding (Basic) | 5.28B5.23B | +1.0% |
| Shares Outstanding (Diluted) | 5.32B5.26B | +1.1% |
05—Questions
Frequently Asked Questions
What drove the increase in Wells Fargo's 2011 earnings despite falling revenue?
The earnings increase was driven mainly by a much lower provision for credit losses, which fell from $15.8 billion to $7.9 billion, and by lower noninterest expense. Revenue declined 5% to $80.9 billion because of lower net interest income, weaker mortgage banking, and reduced debit interchange fees, but the credit cost reduction more than offset these declines.
How strong is Wells Fargo's capital position under the proposed Basel III rules?
Under Basel I, the Tier 1 common equity ratio was 9.46%, up 116 basis points in 2011. Management estimates a 7.50% ratio under proposed Basel III, which exceeds the 7.0% fully phased-in minimum by about 50 basis points. The company also expects to be designated a global systemically important bank and subject to an additional surcharge of 1.0% to 3.5%, with the amount not yet determined.
What are the main risks investors should monitor from the mortgage business?
Key risks include the $1.3 billion repurchase liability and up to $2.1 billion of reasonably possible additional losses, continued mortgage repurchase demands mainly from 2006-2008 vintages, and the April 2011 consent orders with the OCC and Federal Reserve. The February 2012 settlement in principle covers $5.3 billion of commitments but does not release securitization, criminal, or certain MERS-related claims. Management says these items are largely reserved for, but outcomes remain uncertain.
Is Wells Fargo's credit quality still improving?
Yes, but the rate of improvement moderated in late 2011. Net charge-offs fell in each of the first three quarters and were essentially flat in Q4. Nonaccrual loans dropped to $21.3 billion, and loans 90+ days past due and still accruing (excluding government-insured loans) fell to $2.0 billion. Management expects further allowance releases in 2012 but at more modest levels, absent a significant economic deterioration.
How is Wells Fargo returning capital to shareholders?
The company raised its quarterly common dividend to $0.12 per share in 2011, repurchased about 80 million common shares, and redeemed $9.2 billion of trust preferred securities that would no longer count as Tier 1 capital. Future buybacks and dividend increases require Federal Reserve approval under the new annual capital plan rule, so shareholder returns depend on regulatory review of each capital plan.
06—Continue