Wells Fargo & Company: âIn addition to merger integration,
we continued to invest for long-term
growth throughout the Company, adding people in regional banking and
commercial banking as we apply Wells Fargoâs model to the eastern
markets, and investing in technology to improve service across our
franchise.â
Strong, broad-based earnings
Net income of $2.5 billion after integration expenses of $247 million
after-tax
Earnings per common share of $0.45 after integration expenses of $0.05
per common share
All business segments contributed to the strong earnings results: Net
income from Community Banking of $1.5 billion; Wholesale Banking of $1.2
billion; and Wealth, Brokerage and Retirement of $282 million
Pre-tax pre-provision profit1 (PTPP) of $9.3 billion; fifth consecutive
quarter PTPP exceeded $9 billion
Revenue of $21.4 billion, up 2 percent from first quarter 2009
Fee income up 7 percent year over year, led by 20 percent growth in
trust and investment fees, 7 percent growth in insurance revenue and 14
percent growth in processing and other fees
Net interest margin of 4.27 percent, up 11 basis points from a year ago,
highest among large bank peers
Average checking and savings deposits up 14 percent from a year ago
Mortgage application pipeline of $59 billion at March 31, 2010, up $2
billion from December 31, 2009
Credit believed to have âturned the cornerâ
Provision expense down $583 million from prior quarter and currently
expected to continue to decline over the course of 2010; provision for
credit losses equaled net charge-offs in first quarter
Net charge-offs declined $83 million to $5.3 billion. First quarter
charge-offs included $123 million related to newly consolidated loans
due to the adoption of FAS 1672 and $145 million related to newly issued
regulatory charge-off guidance applicable to collateral-dependent
residential real estate loan modifications. All other charge-offs were
$5.1 billion, down from $5.4 billion in fourth quarter. Commercial and
commercial real estate charge-offs declined $356 million from fourth
quarter 2009
1 See footnote 2 in the SUMMARY FINANCIAL DATA table for information on
PTPP.
2 FASB guidance effective beginning January 1, 2010, which amended the
accounting for the consolidation of variable interest entities (see
NEWLY CONSOLIDATED VIE ASSETS AND LIABILITIES table).
Early-stage delinquencies improved across major consumer loan
portfolios, including home equity, auto dealer services, credit card and
Wells Fargo Financial consumer real estate and auto portfolios
New inflows to nonaccruals declined in first quarter, including declines
in non-FAS 167 consumer real estate inflows, a decline in total
commercial and commercial real estate inflows, with a 27 percent decline
in commercial real estate inflows. Growth in nonaccrual balances largely
reflected the time required to work with homeowners to modify loans
before foreclosing and efforts to work with developers rather than foreclose
Allowance for credit losses increased to $25.7 billion, primarily due to
$693 million addition to allowance upon adoption of FAS 167; allowance
at 3.3 percent of loans and almost 5 times quarterly net charge-offs
Remaining purchased credit impaired (PCI) nonaccretable balance was
$19.9 billion at March 31, 2010; PCI portfolio in the aggregate
continued to perform at or better than original assumptions
Provided $402 million to mortgage repurchase reserve (charged to
mortgage origination income)
Wachovia merger integration on track
Converted banking stores in Arizona, Illinois and Nevada in March;
credit card business converted April 10-11; California banking store
conversions scheduled for April 24-25, 2010
Estimated total merger expenses of approximately $5 billion, including
approximately $2 billion in 2010
Achieved over 70 percent of targeted consolidated run-rate savings
Continued to build capital and strengthen the balance sheet
Tier 1 capital of $98.3 billion and Tier 1 capital ratio of 10.0
percent, up from 9.3 percent at December 31, 2009
Tier 1 leverage ratio of 8.3 percent, up from 7.9 percent at December
31, 2009
Tier 1 common equity of $70.1 billion, Tier 1 common equity ratio of 7.1
percent, up from $65.5 billion and 6.5 percent at December 31, 2009 (see
TIER 1 COMMON EQUITY table for more information on Tier 1 common equity)
Reduced high-risk/non-strategic consumer loans by $4.3 billion in the
quarter, $23.2 billion cumulatively since Wachovia acquisition
Unrealized gains on securities available for sale portfolio of $7.4 billion
Supplied more than $128 billion in credit during the quarter, including
mortgage originations and consumer and commercial loans and lines of credit
Loan modification efforts continued to help homeowners remain in their homes
523,336 active and completed trial modifications between January 2009
and March 31, 2010:
144,932 Home Affordability Modification Program (HAMP) active trial and
completed modifications, including 30,014 permanent HAMP modifications
Nearly 380,000 proprietary trial and completed modifications
Since January 2009, added more than 10,000 staff focused on home
preservation for total of 17,400 as of March 31, 2010
On March 17th, Wells Fargo announced its participation in the
governmentâs Second-Lien Modification Program (2MP) under HAMP to help
struggling homeowners with a reduction in their home equity loan payments
Selected Financial Information
Quarter ended
Mar. 31, Dec. 31, Mar. 31,
2010 2009 2009
Earnings
Diluted earnings per common share $ 0.45 0.08 0.56
Wells Fargo net income (in billions) 2.55 2.82 3.05
Asset Quality
Net charge-offs as % of avg. total loans 2.71 % 2.71 1.54
Nonperforming loans as % of total loans 3.49 3.12 1.25
Allowance as a % of total loans 3.28 3.20 2.71
Other
Revenue (in billions) $ 21.45 22.70 21.02
Average loans (in billions) 797.4 792.4 855.6
Average core deposits (in billions) 759.2 770.8 753.9
Net interest margin 4.27 % 4.31 4.16
Wells Fargo & Company (NYSE:WFC) reported diluted earnings per common
share of $0.45 and net income of $2.5 billion for first quarter 2010.
âOnce again the resiliency and advantages of Wells Fargoâs diversified
business model proved themselves in a difficult business environment,
even as we continued to make smooth progress with our industryâs largest
merger, our integration with Wachovia,â said Chairman and CEO John
Stumpf. âThough the economy continues to present challenges, and weâve
yet to see consumers and businesses resume past levels of spending and
borrowing, our teams at Wells Fargo still found opportunities to serve
the financial needs of customers, setting the stage for a first quarter
performance that featured contributions from each of our core business
groups.
âWeâre encouraged by signs of improvement in the credit cycle, and by
the savings and cross sell opportunities weâre realizing as more
Wachovia bank stores convert to Wells Fargo. To capitalize on these
emerging opportunities, our focus will be on just that, keeping our
focus, so we can continue to deliver the performance investors expect,
the services and products customers demand, and the leadership our
communities desire. Whether it is helping customers plan for retirement,
or households avoid foreclosure, or financing the goals of
entrepreneurs, weâre confident Wells Fargo will continue to be uniquely
positioned to contribute to Americaâs economic recovery.â
Financial Performance
âOur company earned $2.5 billion in the quarter, a great example of how
Wells Fargoâs business model produces solid results in different stages
of the economic cycle,â said Chief Financial Officer Howard Atkins.
âWhile loan demand remained soft in the quarter and net mortgage hedging
results declined to levels of a year ago, businesses as diverse as
asset-based lending, debit card, insurance, merchant services, student
lending and retirement services all showed solid gains. Credit metrics
in many portfoliosâ including loss rates and early indicators â
performed better than our previous expectations for first quarter. Based
on results for the last few quarters and current loss projections, we
believe that credit at Wells Fargo has turned the corner with provision
expenses already having peaked in third quarter 2009 and net charge-offs
having peaked in fourth quarter 2009. We continued to build capital in
the first quarter, with Tier 1 common reaching 7.10 percent, up 64 basis
points in the quarter entirely on internal capital generation, Tier 1
leverage reaching 8.3 percent and Tier 1 capital reaching 10.0 percent.â
Revenue
Revenue in the first quarter was $21.4 billion and pre-tax pre-provision
profit was $9.3 billion. The Company has earned at least $9.0 billion in
pre-tax pre-provision profit each quarter since the Wachovia
acquisition. âDespite a $58 billion decline in average total loans,
revenue grew 2 percent from the prior year, reflecting the diversity of
our revenue sources,â said Atkins. Year-over-year revenue was driven by
20 percent growth in trust and investment fees, 7 percent growth in
insurance fees, 14 percent growth in processing and other fees, and an
11 basis point increase in the net interest margin. Mortgage banking
revenues were flat from the prior year. On a linked-quarter basis, total
revenue declined $1.2 billion, due primarily to the reduction in
mortgage hedging results to levels more typical for this point in the cycle.
Net Interest Income
Net interest income of $11.1 billion declined only 2 percent from a year
ago despite a 7 percent, or $58 billion, decline in average loans. The
net interest margin was 4.27 percent, up 11 basis points from a year ago
largely due to substantial growth in core consumer and business checking
and savings accounts.
Noninterest Income
Noninterest income was $10.3 billion, up 7 percent from a year ago. On a
linked-quarter basis, noninterest income was down $895 million due
primarily to lower net mortgage hedge results, seasonality and two fewer
days in the quarter. First quarter noninterest income included:
Mortgage banking fees of $2.5 billion, down $34 million from a year ago:
$1.1 billion in revenue from mortgage loan originations/sales activities
on $76 billion of residential mortgage originations and $125 billion of
applications. Origination revenue declined year over year on a 25
percent decline in originations, largely due to a decline in refinance
activity. Mortgage origination revenue was also reduced by a $402
million addition to the repurchase reserve in first quarter 2010
$1.4 billion of servicing income, up $460 million year over year,
largely attributable to other changes in fair value due to a decline in
pay-offs. Mortgage hedging results were roughly flat from a year ago and
declined $893 million linked quarter largely due to a change in the
composition of the hedge toward more interest rate swaps and lower
coupon mortgage forwards designed to maintain ongoing hedge
effectiveness. The ratio of total MSRs as a percent of loans serviced
for others declined 2 basis points to 0.89 percent
Trust and investment fees of $2.7 billion, up 20 percent year over year,
reflecting continued growth in new customers, higher transaction volumes
and stronger equity markets
Service charges on deposit accounts of $1.3 billion, down 4 percent year
over year, as consumers have decreased their spending and increased
their savings, which offset the impact on service fees from continued
strong account growth
Insurance revenue of $621 million, up 7 percent year over year,
reflecting customer growth and higher crop insurance revenues
Trading revenues of $537 million, representing less than 3 percent of
total consolidated revenue
The Company had net unrealized securities gains of $7.4 billion at March
31, 2010, compared with $5.6 billion at December 31, 2009.
Noninterest Expense
Noninterest expense of $12.1 billion, which included $380 million of
merger integration costs and $11.7 billion of all other expense, was
down from $12.8 billion in fourth quarter 2009. First quarter credit
resolution costs, including expenses associated with foreclosed assets,
loan modifications and other home preservation activities, were
approximately $250 million higher than a year ago. âOf our approximately
$5 billion of estimated total integration costs, we expect approximately
$2 billion to be expensed in 2010, as we convert banking stores and
lines of business, and continue to build infrastructure,â said Atkins.
âIn addition to merger integration, we continued to invest for long-term
growth throughout the Company, adding people in regional banking and
commercial banking as we apply Wells Fargoâs model to the eastern
markets, and investing in technology to improve service across our
franchise.â The efficiency ratio was 56.5 percent in both first quarter
2010 and fourth quarter 2009 and 56.2 percent in first quarter 2009.
Summary of Noninterest Expense
Quarter ended
Mar. 31, Dec. 31, Mar. 31,
(in millions) 2010 2009 2009
Merger integration costs:
Wachovia $ 380 450 77
All other – 1 128
All other noninterest expense 11,737
12,370
11,613
Total noninterest expense $ 12,117 12,821 11,818
Income Taxes
The Companyâs income tax expense for the quarter included $53 million
($0.01 per common share) due to the impact of health care legislation on
the Companyâs postretirement medical benefits deferred tax asset.
Loans
Average total loans were $797.4 billion, up $4.9 billion from fourth
quarter 2009. Total loans at March 31, 2010, included $23.4 billion
related to the adoption of FAS 167. âWhile we continued to supply
significant amounts of credit to consumers and businesses in the first
quarter, as we have done throughout the credit crunch, loan demand
remained soft,â said Atkins. âIn addition, we continued to reduce
high-risk/non-strategic consumer assets, which were down $4.3 billion in
first quarter and down $23.2 billion cumulatively since the Wachovia
acquisition.â
Deposits
Average total core deposits were $759.2 billion, compared with $770.8
billion in fourth quarter 2009 and $753.9 billion in first quarter 2009.
Of the core deposits, $664.4 billion represent transaction accounts or
low-cost savings accounts from consumer and commercial customers, which
increased 2 percent (annualized) from $661.4 billion in fourth quarter
2009. Average mortgage escrow deposits were $24.6 billion, compared with
$27.5 billion in fourth quarter 2009. Consumer checking accounts grew a
net 7.0 percent from first quarter 2009. âYear over year, we saw strong
growth in noninterest-bearing deposits,â said Atkins. âThe
linked-quarter decline in total deposits was driven partly by the
maturity of higher-cost certificates of deposits over the last two
quarters.â
Capital
âWe continued to build capital during the first quarter, with all ratios
higher at March 31, 2010, than year-end,â said Atkins. The adoption of
FAS 167 resulted in the consolidation of $18.6 billion of net
incremental GAAP assets and $6 billion of risk-adjusted assets, with
less than a 1 basis point impact on the Companyâs Tier 1 common equity
ratio.
Mar. 31, Dec. 31, Mar. 31,
2010 (1) 2009 2009
Tier 1 capital 10.0 % 9.3 8.3
Total capital 13.9 13.3 12.3
Tier 1 leverage 8.3 7.9 7.1
Tier 1 common equity (2) 7.1 6.5 3.1
(1) March 31, 2010, ratios are preliminary.
(2) See table on page 37 for more information on Tier 1 common equity.
Credit Quality
âWe believe quarterly provision expenses and quarterly total credit
losses have peaked,â said Chief Credit and Risk Officer Mike Loughlin.
âLosses in the first quarter of $5.3 billion were down from $5.4 billion
in fourth quarter 2009, even after $123 million of FAS 167 losses taken
in the first quarter and $145 million due to newly issued regulatory
guidance requiring the Company to charge-off certain
collateral-dependent residential real estate loans that have been
modified. The costs related to this charge had previously been reserved.
Our credit picture has improved earlier than we had anticipated. In the
consumer portfolio, lower early stage delinquencies, better delinquency
roll rates, and improved values for residential real estate and autos
were evident in the first quarter. In the commercial portfolio
(including commercial real estate) losses declined $356 million from
fourth quarter 2009 and may indicate stabilization and an
earlier-than-expected loss peak.
âThis improvement in credit quality can be partly attributed to actions
we took as early as 2007, including significant investment in
collections, loss mitigation and workout teams; a refined consumer
credit policy that reduced maximum loan-to-value requirements and
virtually eliminated stated income as an acceptable element of loan
applications; and the establishment of a number of run-off/liquidating
portfolios. These actions have produced high quality subsequent
vintages, and allowed us to focus our loss remediation efforts in an
efficient fashion.
âNonperforming assets (NPAs) continued to increase, although at a slower
rate than in the past three quarters, with all of the first quarter
increase coming from consumer real estate loans and commercial real
estate loans. We expect NPAs to continue to increase gradually and peak
before year end. The peak in NPAs should naturally lag the credit loss
peak, reflecting an environment where retaining these assets is the most
viable economic option for the Company and the best way to help
borrowers recover financially.
âOur provision in the first quarter equaled net charge-offs. The loan
loss reserve increase from year end is fully attributable to assets
brought on balance sheet due to the adoption of FAS 167.â
Credit Losses
First quarter net charge-offs were $5.33 billion, or 2.71 percent of
average loans (annualized), compared with fourth quarter net charge-offs
of $5.41 billion, or 2.71 percent. Total credit losses included $1.3
billion of commercial and commercial real estate loans (1.79 percent)
and $4.0 billion of consumer loans (3.45 percent) as shown in the
following table. First quarter charge-offs included $123 million in
losses associated with assets brought onto the balance sheet upon
adoption of FAS 167 and $145 million in losses associated with newly
issued regulatory charge-off guidance applicable to collateral-dependent
real estate loan modifications.