Wells Fargo Earns Record $22.7 Billion Full Year Income

Wells Fargo Reports Record Full Year Net Income

Q4 Record Revenue of $22.7 billion; Q4 Net Income of $2.8 billion

SAN FRANCISCO--(BUSINESS WIRE)--Wells Fargo & Company (NYSE:WFC):

“Despite doubling the size of the Company and despite cyclically elevated credit costs this past year, our capital ratios ended 2009 higher than they were upon completion of the Wachovia acquisition, even after redeeming TARP in full and purchasing Prudential’s noncontrolling interest in the retail securities brokerage joint venture.”

Full Year 2009:

• Record net income of $12.3 billion


• Record revenue of $88.7 billion


• Record pre-tax pre-provision profit (PTPP) of $39.7 billion, more than 2.1 times annual net charge-offs. (See footnote 4 on page 18 for information on PTPP)


• Diluted earnings per common share of $1.75 reduced by $0.76 per share for TARP preferred stock dividends, including the deemed dividend upon redemption of TARP preferred stock


• Total credit extended to consumers and businesses of $711 billion


• Net interest margin of 4.28 percent, return on assets of 0.97 percent, and return on equity of 9.88 percent

Fourth Quarter 2009:

• Net income of $2.8 billion, after pre-tax $500 million credit reserve build and $861 million of merger-related and incremental expenses, including:
  
  
  
  
  
  
  
  
  • $450 million in merger costs
  
  
  • $261 million previously disclosed expense provision for auction rate securities (ARS) settlement
  
  
  • $150 million employee benefit-related expenses for 401(k) profit sharing contribution to all eligible team members
  
  
  
  
  
  
  
  
  
  
  

• Diluted earnings per common share of $0.08 reduced by $0.47 for TARP preferred stock dividends, including $0.39 per share upon redemption of TARP preferred stock


• Record revenue of $22.7 billion, up 4 percent (annualized) from third quarter 2009


• PTPP of $9.9 billion, driven by continued revenue growth offset by $861 million in merger-related and incremental expenses


• Average checking and savings deposits of $661 billion, up 20 percent (annualized) from prior quarter


• Continued signs of a positive turn in credit quality:
  
  
  
  
  
  
  
  
  • 30 day delinquent balances in a number of the retail and commercial segments were stable or improved, including auto, credit card, liquidating home equity, personal credit management, small business direct, and student lending, aided by continued improvement in the performance of newer vintages
  
  
  • Growth in nonperforming loans concentrated in secured real estate portfolios; other loan categories stable, including flat or declining commercial and industrial (C&I) and consumer revolving/installment credit nonaccruals
  
  
  • Growth in net charge-offs declined significantly in the quarter. Almost all major loan categories had relatively flat/declining losses, with the exception of commercial real estate. Credit card losses declined for the second consecutive quarter.
  
  
  • “Roll rates” from current to 30 days past due continued to improve in Pick-a-Pay portfolio, both impaired and non-impaired
  
  
  
  
  
  
  
  
  
  
  

• Significant increases in capital:

									Dec. 31,			Dec. 31,
(as a percent of total risk-weighted assets)									2009 (1)			2008
Tier 1 capital									9.3	%		7.8
Tier 1 common equity (2)									6.5			3.1
Total capital									13.3			11.8
(1) December 31, 2009, ratios are preliminary.
(2) See table on page 38 for more information on Tier 1 common equity.

• Stockholders’ equity and Tier 1 common ratio higher at December 31, 2009, than prior to Wachovia acquisition


• Equity offering in December raised $12.2 billion

• Full repayment of $25 billion TARP investment; paid $1.44 billion in cash dividends to U.S. Treasury over the life of the investment


• Purchased Prudential Financial’s noncontrolling interest in securities brokerage joint venture, giving Wells Fargo 100 percent of the future earnings of the business


• Adoption of FAS 166/167 on January 1, 2010, improved Tier 1 common ratio by 1 basis point, reduced Tier 1 capital ratio by 1 basis point

• Wachovia integration on track and on schedule:
  
  
  
  
  
  
  
  
  • Pick-a-Pay portfolio performed better than originally modeled
  
  
  • Re-confirmed estimate for $5 billion annual cost saves upon completion of integration in 2011, over 50 percent of annual run rate achieved in 2009
  
  
  • Estimated cumulative merger expenses further reduced to less than $5 billion
  
  
  • Asset reduction in non-strategic loan categories proceeding as planned – reduced non-strategic loans by $18.9 billion, or 15 percent in 2009
  
  
  • $109 billion of higher-cost certificates of deposits (CDs) matured in 2009; retained approximately 60 percent in lower-rate CDs and liquid deposits at lower than expected yields
  
  
  • Converted first state banking stores (Colorado) in November 2009, conversion of remaining overlapping markets expected throughout 2010
  
  
  
  
  
  
  
  
  
  
  

• Industry leader in loan modifications for homeowners:
  
  
  
  
  
  
  
  
  • As of December 31, 2009, nearly half a million Wells Fargo mortgage customers were in active trial or completed loan modifications started in prior 12 months; of this total, 119,000 were under the Home Affordable Modification Program (HAMP), including 8,400 completed modifications, and the rest were non-HAMP modifications
  
  
  • Over 30 percent of purchased credit-impaired (PCI) Pick-a-Pay portfolio modified through December 31, 2009
  
  
  
  
  
  
  
  
  
  
  

Selected Financial Information
							Quarter ended						Year ended
							Dec. 31,				Sept. 30,		Dec. 31,
								2009			2009		2009
Earnings
Diluted earnings per share							$	0.08			0.56		1.75
Wells Fargo net income (in billions)								2.82			3.24		12.28
Asset Quality
Net charge-offs as % of avg. total loans								2.71	%		2.50		2.21
Nonperforming loans as % of total loans								3.12			2.61		3.12
Allowance as a % of total loans								3.20			3.07		3.20
Other
Revenue (in billions)							$	22.70			22.47		88.69
Average loans (in billions)								792.4			810.2		822.8
Average core deposits (in billions)								770.8			759.3		762.5
Net interest margin								4.31	%		4.36		4.28

Wells Fargo & Company (NYSE:WFC) reported record net income of $12.3 billion, or $1.75 per common share, for 2009. Fourth quarter 2009 diluted earnings per share were $0.08, compared with $0.56 for third quarter 2009 and a loss of $0.84 per share in fourth quarter 2008. Fourth quarter and full year 2009 diluted earnings per share were reduced by $0.47 and $0.76, respectively, for combined cash dividends and the deemed dividend upon redemption and full repayment of TARP preferred stock. Results prior to January 1, 2009, do not include Wachovia.



“For the fourth quarter of 2009 and for the full year, we delivered significant value for our customers, communities, shareholders and country,” said Chairman and CEO John Stumpf. “We thank our team of 281,000 for their dedication and steadfast focus on customers in 2009 as we continued the important integration of Wachovia into Wells Fargo. This merger, which essentially doubled the size of our company, has already generated tremendous synergies as we expand the time-tested Wells Fargo model to more customers and team members over a broader geography, including additional businesses that help customers succeed financially. In particular, we are very pleased with the positive results we’ve seen in attracting deposits from new and existing customers, and we are excited about the opportunity to deepen current relationships, cross-sell to new customers and achieve even higher customer satisfaction, while rewarding them for more of their business. Our mission and fundamental business model remains the same and we believe our strategic and financial position is even stronger today than it was a year ago when we completed our merger with Wachovia.



“Wells Fargo continued to do its part in making credit available to help our nation’s economic recovery. Nearly half a million Wells Fargo loan customers were provided with mortgage payment relief through active trial and completed loan modifications in 2009. We provided $711 billion in loans and lines of credit to help get the economy going again.



“As this past year’s financial performance has shown, the earnings capability of Wells Fargo’s business model has significant power to generate capital internally. Because of the value we created in 2009 for our customers and communities, we were able to achieve record revenue and earnings for the year. As we enter 2010, we believe our franchise has never been better positioned to meet the challenges and opportunities ahead of it. The Wells Fargo model has been built to outperform our peers over time and through cycles. Clearly we have done just that again in 2009 and believe that this very same model and execution discipline will continue to outperform the industry in the years and cycles ahead.”



Financial Performance



“Fourth quarter financial results reflected a continuation of the solid revenue, earnings and capital generation we have produced all year,” said Chief Financial Officer Howard Atkins. “Fourth quarter earnings of $2.8 billion contributed to a record $12.3 billion in net income for the full year. Revenue continued to build during the quarter across the majority of our businesses, reaching a new quarterly record of $22.7 billion, leading to pre-tax pre-provision profit of nearly $10.0 billion despite $861 million of merger-related and incremental expenses in the quarter. Risk in our asset portfolios has been reduced throughout the year, including fourth quarter, by reducing higher-risk loan portfolios, shedding legacy trading positions, and reducing longer duration investment securities at lower interest rates. We continued to strengthen our balance sheet by building credit reserves to $25 billion at quarter end, up $500 million in the quarter, up $3.5 billion during 2009 and more than six times the reserve (pre-merger) we had at the start of the credit crisis in mid-2007.



The Wachovia integration is proceeding as expected. Credit losses are tracking better than originally estimated at the time of the merger. Expense synergies are on track for $5 billion in annual run rate savings upon completion of the integration in 2011 and cumulative integration costs are now expected to be $3 billion less than the originally assumed $8 billion. Revenue synergies have already begun to be realized with great potential for many more. We built capital significantly throughout the year. Stockholders’ equity and Tier 1 common at December 31, 2009, were above the strong levels we had prior to the Wachovia acquisition, even after redeeming TARP and purchasing Prudential’s minority interest.”



Revenue



Revenue of $22.7 billion increased 4 percent (annualized) from third quarter 2009, largely the result of continued growth in fee income in our trust and investment management, credit/debit card and mortgage banking businesses. We also experienced broad-based growth across multiple businesses, including double-digit (annualized) linked-quarter revenue growth in asset management, auto lending through Wachovia Dealer Services, insurance, merchant card, mortgage banking, and wealth management. Legacy Wells Fargo had record retail bank household cross-sell of Wells Fargo products of 5.95 in the fourth quarter, and core product solutions (sales) of 6.08 million, up 16 percent from prior year. While mortgage originations and servicing revenue remained high, total mortgage banking noninterest income contributed just 15 percent of the Company’s consolidated revenue for the quarter.



Net Interest Income



Net interest income was $11.5 billion, compared with $11.7 billion in third quarter 2009. While earning assets were up slightly, the decline in core loans, the reduction in non-strategic assets and the third quarter sale of longer-duration mortgage-backed securities reduced net interest income growth and net interest margin in the fourth quarter, offset by significant growth in noninterest-bearing checking and savings deposits and wider new lending spreads, which are expected to benefit net interest income over the long term.



Noninterest Income



Noninterest income was $11.2 billion, up 15 percent (annualized) from $10.8 billion in third quarter 2009, and included:

• Mortgage banking income of $3.4 billion, including:
  
  
  
  
  
  
  
  
  • $1.2 billion in income from mortgage loan originations/sales activities (net of $316 million increase in repurchase reserves) on $94 billion of residential mortgage originations and $144 billion of applications
  
  
  • $1.9 billion market-related valuation changes to mortgage servicing rights (MSRs) net of economic hedge results, largely reflecting the continuation of strong carry income and effective hedge performance; average servicing portfolio note rate was only 5.66 percent, the lowest since September 30, 2005, and the value of MSRs to loans serviced for others was 91 basis points.
  
  
  
  
  
  
  
  
  
  
  


• Trust and investment fees of $2.6 billion, up 16 percent (annualized) linked quarter, primarily reflecting an increase in client assets and higher revenue from the retail securities brokerage business. After purchasing Prudential’s noncontrolling interest in the securities brokerage joint venture on December 31, 2009, Wells Fargo has 100 percent of the future earnings of the business.


• Service charges on deposit accounts of $1.4 billion, down 15 percent (annualized) linked quarter due to normal seasonality


• Credit/debit card fees of $961 million, up 6 percent (annualized) linked quarter reflecting seasonally higher volumes and higher debit card penetration


• Insurance revenue of $482 million, up 12 percent (annualized) linked quarter


• Net gains on debt and equity securities of $383 million, largely reflecting private equity gains


• $272 million reduction in other noninterest income linked quarter, partly reflecting lower investment income in employee benefit plan

The Company had net unrealized securities gains of $5.6 billion at December 31, 2009, consisting of $3.3 billion in unrealized gains in the agency mortgage-backed securities portfolio and $2.3 billion on spread-related fixed-income securities and equity investments. During the quarter, mortgage-backed securities yields increased while capital market credit spreads generally narrowed.



Noninterest Expense



“While our core cost discipline remained very much in place in the quarter, noninterest expense increased to $12.8 billion from $11.7 billion in third quarter 2009, driven in large part by $450 million of Wachovia merger integration and severance expense (up $251 million from third quarter), $261 million for the previously announced ARS settlement and $150 million for employee benefit-related expense for 401(k) profit sharing contribution to all eligible team members,” said Atkins. “We also continued to invest for both the short- and long-term benefit of our customers. We added sales and service team members in regional banking as we align Wachovia’s banking stores with the Wells Fargo model. As we’ve rolled out our regional commercial banking office model into the Eastern states, we’ve increased sales and service headcount by 8 percent from the third quarter. We also added resources to handle the higher volumes of mortgage loan modifications, with home retention staff up 17 percent in the quarter to more than 15,000 team members dedicated to helping customers stay in their homes. The Company’s efficiency ratio was 56.5 percent, up from the third quarter’s record level but roughly flat with the first and second quarter.”



Income Taxes



The Company’s effective income tax rate was 25.2 percent in the fourth quarter, down from 29.5 percent in the third quarter (adjusted for noncontrolling interest). The reduction in tax expense primarily related to the resolution of certain federal and state income tax matters in the quarter and to a greater proportion of tax-exempt income.



Loans



Average total loans were $792.4 billion in the fourth quarter compared with $810.2 billion in the third quarter. In part, the decline was driven by the Company’s objective to reduce identified higher-risk, non-strategic and liquidating consumer loan portfolios, down $4.7 billion in the fourth quarter. “While we believe we’ve been an industry-leader in supplying credit to consumers and businesses – $711 billion in commitments and originations in 2009 – loan demand remained relatively soft in the fourth quarter, although the pace of decline in core loans moderated slightly in the quarter,” said Atkins. “Wells Fargo continued to gain market share in many lending segments including residential mortgage, auto, education finance, SBA and middle market commercial. With commercial line utilization at cyclical lows and total wholesale banking commitments of $258 billion, we are encouraged by the potential for increased loan volume should a growing economy lead to increased commercial loan demand.”



Deposits



“Deposit growth remained very strong as we continued to build consumer and business checking account relationships,” said Atkins. Average checking and savings deposits increased 20 percent (annualized) to $661.4 billion from $629.6 billion in third quarter 2009. Average mortgage escrow deposits were $27.5 billion compared with $28.7 billion in third quarter 2009. Average consumer checking accounts grew a net 5.8 percent from 2008 for Wells Fargo and Wachovia combined, and average business checking accounts grew a net 3.9 percent for the same period. Average total core deposits were $770.8 billion, up 6 percent (annualized) from $759.3 billion in third quarter 2009. During the quarter, $14 billion of Wachovia’s higher-rate certificates of deposit matured, with $6 billion of those balances retained. For the full year 2009, $109 billion of Wachovia’s high-rate certificates of deposit matured, with $62 billion retained, largely in low-cost CDs, checking and savings accounts. Only $8 billion of Wachovia high-rate CDs are expected to mature in 2010.



Capital



“We have built capital significantly in the last 15 months through industry-leading internal capital generation and three successful common stock offerings totaling over $33 billion, including the $12.2 billion offering in the fourth quarter that allowed us to repay TARP in full,” said Atkins. “Despite doubling the size of the Company and despite cyclically elevated credit costs this past year, our capital ratios ended 2009 higher than they were upon completion of the Wachovia acquisition, even after redeeming TARP in full and purchasing Prudential’s noncontrolling interest in the retail securities brokerage joint venture.”

							Dec. 31,			Dec. 31,
(as a percent of total risk-weighted assets)							2009 (1)			2008
Tier 1 capital							9.3	%		7.8
Tier 1 common equity (2)							6.5			3.1
Total capital							13.3			11.8
(1) December 31, 2009, ratios are preliminary.
(2) See table on page 38 for more information on Tier 1 common equity.

On January 1, 2010, the Company adopted new accounting guidance contained in FASB ASC 810, Consolidations, and FASB ASC 860, Transfers and Servicing (FAS 166/167), which resulted in the consolidation of certain off-balance sheet assets not currently included in its financial statements. The adoption of the new guidance added approximately $10 billion in risk-weighted assets and had a small positive impact on common equity upon adoption. The total impact was to increase Tier 1 common equity as a percentage of risk-weighted assets by 1 basis point, to reduce the Tier 1 capital ratio by 1 basis point and to reduce the total capital ratio by 4 basis points.



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