01—Abstract
Summary
Summary of the 10-K filed February 26, 2014. Cited figures are marked; the original filing is the authoritative source.
Wells Fargo closed 2013 as a record-earnings year: net income rose 16% to $21.9 billiona and diluted EPS reached $3.89.
Results were driven by a sharply lower provision for credit losses ($2.3 billionb, down $4.9 billion year over year) and strong fee income in brokerage, investment banking, cards and mortgage servicing, partly offset by a 25% decline in mortgage banking income as refinancing volume fell. Revenue dipped 3% to $83.8 billion, and the efficiency ratio improved to 58.3%. The company ended the year with $1.5 trillion in assets, $1.1 trillion in deposits and $170 billion of equity.
Credit quality continued to improve: net charge-offs fell 50% to $4.5 billionc (0.56% of average loans), nonaccrual loans declined to $15.7 billion, and the allowance for credit losses dropped to $15.0 billion. Management expects further allowance releases absent a significant economic deterioration. Capital strengthened, with the estimated Basel III Common Equity Tier 1 ratio rising to 9.76%, above the company's 9% internal target.
The company returned $11.4 billiond to shareholders through dividends and buybacks, and the quarterly dividend was raised to $0.30. Key pressures for investors include a net interest margin that compressed to 3.39% from 3.76% as deposit growth and liquidity-driven funding diluted yields, the ongoing legacy mortgage servicing and repurchase matters, the phase-in of Basel III and the Volcker Rule, and a $1.15 billion increase in total long-term debt. Management also flagged cyber-attack risk and the possibility of future regulatory fines and litigation outcomes that could be material.
02—Key points
Key Highlights
- Record net income of $21.9 billion (+16% YoY) and record diluted EPS of $3.89; ROE rose 92 bps to 13.87% and ROA rose to 1.51%.
- Revenue fell 3% to $83.8 billion as mortgage banking income dropped 25% to $8.8 billion, while noninterest income excluding mortgage banking grew about $1.0 billion.
- Provision for credit losses fell to $2.3 billion from $7.2 billion, with net charge-offs down 50% to $4.5 billion (0.56% of average loans).
- Loans grew $26.2 billion to $825.8 billion and deposits grew $76.3 billion (8%) to $1.08 trillion; core deposits funded 117% of average loans.
- Net interest margin compressed 37 bps to 3.39%, reflecting excess liquidity placed in cash and federal funds sold and the lower yields on runoff portfolios.
- Basel III CET1 ratio estimated at 9.76% (above the 9% internal target); Basel I Tier 1 common ratio at 10.82%; the company returned $11.4 billion to shareholders in 2013.
- Nonperforming assets fell 20% to $19.6 billion, and the mortgage repurchase liability declined to $899 million after FHLMC and FNMA settlements.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2013filed February 26, 2014Financial Statements
FY2013 against FY2012
| Line item | FY2013FY2012 | Change |
|---|---|---|
| Interest Expense | $4.29B$5.16B | −16.9% |
| Net Income | $21.88B$18.90B | +15.8% |
| EPS (Basic) | $3.95$3.40 | +16.2% |
| EPS (Diluted) | $3.89$3.36 | +15.8% |
| Shares Outstanding (Basic) | 5.29B5.29B | 0.0% |
| Shares Outstanding (Diluted) | 5.37B5.35B | +0.4% |
05—Questions
Frequently Asked Questions
Why did mortgage banking income fall so sharply in 2013?
Mortgage banking income dropped to $8.8 billion from $11.6 billion as rising interest rates reduced refinancing activity. Mortgage originations fell to $351 billion from $524 billion, and net gains on origination/sale activities declined to $6.9 billion from $10.3 billion. Net servicing income rose to $1.9 billion, partly offsetting the decline.
How much capital did Wells Fargo return to shareholders, and what is its capital position?
The company returned $11.4 billion through dividends and share repurchases, repurchasing about 124 million shares at a net cost of $5.1 billion. Total dividends declared were $1.15 per share, up 31%. The estimated Basel III CET1 ratio rose to 9.76%, and all subsidiary banks were well capitalized at year end.
Is credit quality still improving, and what could reverse the trend?
Credit metrics improved across commercial and consumer portfolios, with nonaccrual loans down 19% and commercial net losses of only $206 million. Management expects further allowance releases absent a significant economic deterioration. Risks include rising unemployment or falling home prices, a recast wave in the Pick-a-Pay portfolio if rates rise sharply, and concentration in California real estate and CRE lending.
What legal and regulatory risks remain material for investors?
Key matters include the FHA insurance lawsuit by the U.S. government, the interchange fee litigation (with settlement payments of about $6.6 billion across defendants), the order-of-posting debit card litigation, and ongoing mortgage servicing and repurchase obligations. The company reports a high-end reasonably possible loss exceeding its reserves of $951 million, and the outcomes could be material to a particular period's results.
What is the outlook for the net interest margin and funding?
The margin is expected to remain pressured while deposit growth and liquidity-driven funding are held in low-yielding short-term assets, and falling yields on runoff portfolios continue to weigh on income. Management notes that the company is positioned to benefit from higher rates, since its assets reprice faster than its liabilities, and that its long-term debt rose $25.6 billion to $153 billion during 2013 to strengthen liquidity.
06—Continue