Wells Fargo Reports Record Full Year and Quarterly Net Income
Wells Fargo Reports Record Full Year and Quarterly Net Income
2012 Net Income of $18.9 Billion, Up 19% from 2011; Record EPS of $3.36
Q4 Net Income of $5.1 Billion, Up 24% YoY; Record EPS of $0.91
- Continued strong financial results:
- Full year 2012:
- Record net income of $18.9 billion, up 19 percent from 2011
- Record diluted EPS of $3.36, up 19 percent from 2011
- Revenue of $86.1 billion, up 6 percent from 2011
- Positive operating leverage (revenue growth of 6 percent exceeded expense growth of 2 percent)
- Returned more capital to shareholders through a higher common stock dividend (up 83 percent), and common stock repurchases (approximately 120 million shares)
- Fourth quarter 2012:
- Record net income of $5.1 billion, up 24 percent from fourth quarter 2011
- Record diluted EPS of $0.91, up 25 percent from fourth quarter 2011
- Revenue of $21.9 billion, up 7 percent from fourth quarter 2011
- Total average core checking and savings deposits up $72.0 billion from fourth quarter 2011
- Total loans of $799.6 billion, up $29.9 billion from fourth quarter 2011
- Core loan portfolio up $47.7 billion from fourth quarter 20111
- Fourth quarter 2012 results2 included:
- $393 million, or $0.05 per share, in above-average quarterly equity gains3
- $(644) million, or $(0.09) per share, in operating losses from an incremental accrual to fully reserve for the costs associated with the Independent Foreclosure Review (IFR) settlement and additional remediation-related costs
- $(250) million, or $(0.03) per share, in noninterest expense for a contribution to the Wells Fargo Foundation
- $332 million, or $0.06 per share, in lower tax expense due to a benefit associated with the realization for tax purposes of a previously written-down Wachovia life insurance investment
- Solid credit quality:
- Net charge-offs of $2.1 billion, or 1.05 percent (annualized) of average loans, including $321 million of net charge-offs (fully covered by loan loss reserves) from the completion of implementation of the OCC guidance4 issued in third quarter 2012
- Excluding the impact of the OCC guidance, net charge-offs of $1.8 billion or 0.89 percent (annualized) of average loans
- $250 million (pre-tax) reserve release5 due to continued strong credit performance
- Maintained strong capital position:
- Tier 1 common equity6 under Basel I increased $3.3 billion from prior quarter to $109.1 billion, with Tier 1 common equity ratio of 10.12 percent under Basel I at December 31, 2012. Estimated Tier 1 common equity ratio of 8.18 percent under current Basel III capital proposals7
- Purchased approximately 42 million shares of common stock in fourth quarter 2012 and an additional estimated 6 million shares through a forward repurchase transaction expected to settle in first quarter 2013
- Full year 2012:
See table in Loans section for more information on core and non-strategic/liquidating loan portfolios.
|2||Fourth quarter 2012 effective tax rate of 27.4 percent used in the calculation of per share amounts.|
|3||Fourth quarter 2012 net gains from equity investments of $715 million were $393 million higher than previous seven quarter average net gains of $322 million.|
Office of the Comptroller of the Currency update to Bank Accounting Advisory Series issued third quarter 2012 (OCC guidance), which requires consumer loans discharged in bankruptcy to be placed on nonaccrual status and written down to net realizable collateral value, regardless of their delinquency status. See section on Credit Quality, including footnote 9, for additional information regarding the implementation of the OCC guidance and its effect on our credit metrics.
|5||Reserve release represents the amount by which net charge-offs exceed the provision for credit losses.|
See tables on TIER 1 COMMON EQUITY for more information on Tier 1 common equity.
|7||Estimated based on management's current interpretation of the Basel III capital rules proposed by federal banking agencies in notices of proposed rulemaking announced in June 2012. The proposed rules and interpretations and assumptions used in estimating Basel III calculations are subject to change depending on final promulgation of Basel III capital rules.|
|Selected Financial Information|
|Dec. 31,||Sept. 30,||Dec. 31,||Year ended Dec. 31,|
|Diluted earnings per common share||$||0.91||0.88||0.73||3.36||2.82|
|Wells Fargo net income (in billions)||5.09||4.94||4.11||18.90||15.87|
|Return on assets (ROA)||1.46|
|Return on equity (ROE)||13.35||13.38||11.97||12.95||11.93|
|Net charge-offs as a % of avg. total loans||1.05||1.21||1.36||1.17||1.49|
|Allowance as a % of total loans||2.19||2.27||2.56||2.19||2.56|
|Allowance as a % of annualized net charge-offs||211||190||188||193||174|
|Revenue (in billions)||$||21.9||21.2||20.6||86.1||80.9|
|Average loans (in billions)||$||787.2||776.7||768.6||775.2||757.1|
|Average core deposits (in billions)||928.8||895.4||864.9||893.9||826.7|
|Net interest margin||3.56||%||3.66||3.89||3.76||3.94|
Wells Fargo & Company (NYS: WFC) reported diluted earnings per common share of $3.36 for 2012, up 19 percent from $2.82 in 2011. Full year net income was $18.9 billion, compared with $15.9 billion in 2011. For fourth quarter 2012, net income was $5.1 billion, or $0.91 per share, compared with $4.1 billion, or $0.73 per share, for fourth quarter 2011.
"2012 was an outstanding year for Wells Fargo," said Chairman and CEO John Stumpf. "We saw the continued benefits of our diversified business model and reported record full year and fourth quarter earnings, robust deposit and solid loan growth, and strong performance across our business units. The Company's success is due to our more than 265,000 team members who remained focused on our customers and on our vision to satisfy all of our customers' financial needs.
"This time last year, I said we would benefit from the many opportunities we saw for 2012 - and we did just that. From growing revenue, making strategic acquisitions and achieving efficiency improvements, I am extremely pleased with our 2012 performance. We also returned more capital to our shareholders through common stock dividends and common stock repurchases. We are very well positioned for and look forward to 2013, as Wells Fargo continues to work hard to contribute to a growing U.S. economy by doing what we do best: helping customers succeed financially."
Chief Financial Officer Tim Sloan added, "The Company's underlying results were driven by solid loan growth, improved credit quality, and continued success in improving efficiency. While our fourth quarter included some noteworthy items, we achieved strong returns on average assets and equity of 1.46 percent and 13.35 percent, respectively. We are very pleased with the Company's outstanding performance despite the challenges our industry faced during this past year, including continued low interest rates and elevated unemployment. Our balanced business model helped us deliver strong results throughout these challenging times and should provide us the opportunity to continue to deliver value to our shareholders in the coming year."
Revenue for the year was $86.1 billion, up 6 percent from $80.9 billion in 2011. Revenue in the fourth quarter increased 7 percent to $21.9 billion, up $1.3 billion from a year ago. On a linked-quarter basis, revenue growth accelerated 14 percent (annualized), up $735 million. Growth in noninterest income was generated across our diversified businesses and net interest income was relatively flat linked quarter. Businesses generating linked-quarter, double-digit annualized revenue growth included capital finance, capital markets, commercial banking, commercial real estate, corporate banking, credit card, mortgage, and wealth management.
Net Interest Income
Net interest income in the fourth quarter decreased $249 million, or 2 percent, from a year ago, and was down slightly on a linked-quarter basis to $10.6 billion in fourth quarter. Income from our loan portfolios rose slightly from prior quarter, reflecting both organic growth in consumer and commercial loans and the retention of $9.7 billion in high-quality, conforming first real estate mortgages in the fourth quarter. While the available-for-sale (AFS) securities portfolio balance was essentially flat linked-quarter, income continued to be impacted by runoff in federal agency mortgage-backed securities (MBS) and a decision to replace that runoff with shorter duration securities. Interest income from the AFS securities portfolio declined by $69 million. Interest income from the mortgage warehouse was down $63 million in the quarter as the size of the warehouse declined in line with lower origination volume.
The decline in interest income was partially offset by a $49 million decrease in interest expense, reflecting the benefit of continued reductions in deposit and long term funding costs.
On a linked-quarter basis, the Company's net interest margin declined 10 basis points to 3.56 percent. The primary driver of the decline, approximately 8 basis points, was strong deposit growth of $30 billion in the quarter (12 percent annualized). This inflow of deposits caused cash and short term investments to increase, and while these inflows diluted net interest margin, they were essentially neutral to net interest income. The ongoing repricing of the balance sheet in the current low interest rate environment resulted in approximately 5 basis points of additional net interest margin compression. This was partially offset by the benefit of slightly higher income from variable sources, such as fee income and periodic dividends, which increased 3 basis points on a linked-quarter basis.
Noninterest income of $11.3 billion increased $1.6 billion, or 16 percent, from fourth quarter 2011 and increased 28 percent (annualized) from third quarter 2012. The linked-quarter increase reflects growth in service charges, trust and investment fees, and mortgage banking. Noninterest income was also bolstered by above-average equity gains, driven by gains in our private equity businesses.
Mortgage banking noninterest income was $3.1 billion, up $261 million from third quarter 2012, on $125 billion of originations, compared with $139 billion of originations in third quarter. During the fourth quarter, the Company retained on balance sheet 1-4 family conforming first mortgage loans, forgoing approximately $340 million of fee revenue that could have been generated had the loans been originated for sale during the quarter along with other agency conforming loan production. The Company provided $379 million for mortgage loan repurchase losses, compared with $462 million in third quarter (included in net gains from mortgage loan origination/sales activities). Net mortgage servicing rights (MSRs) results were $220 million, up from $142 million in third quarter 2012, due primarily to MSRs valuation adjustments made in the third quarter for increased servicing and foreclosure costs. The ratio of MSRs to related loans serviced for others was 67 basis points and the average note rate on the servicing portfolio was 4.77 percent. The unclosed pipeline at December 31, 2012 was $81 billion, compared with $97 billion at September 30, 2012.
The Company had net unrealized securities gains of $11.9 billion at December 31, 2012, compared with $12.4 billion at September 30, 2012. Period-end AFS securities balances increased $5.8 billion.
Noninterest expense increased $388 million, or 3 percent, from fourth quarter 2011 and increased $784 million from third quarter 2012. The increase in noninterest expense from the prior quarter was due primarily to $644 million in operating losses from an incremental accrual to fully reserve for the costs associated with the IFR settlement (discussed below) and additional remediation-related costs, and $250 million for a contribution to the Wells Fargo Foundation. The Company continued to operate within its targeted efficiency ratio range of 55 to 59 percent, with an efficiency ratio of 58.8 percent in fourth quarter 2012, compared with 57.1 percent in third quarter 2012 and 60.7 percent in fourth quarter 2011. The Company is well positioned to remain within this targeted range in 2013.
Independent Foreclosure Review Settlement
On January 7, 2013, the Company announced that, along with nine other mortgage servicers, it entered into settlement agreements with the Office of the Comptroller of the Currency (OCC) and the Federal Reserve Board (FRB) that would end their IFR programs created by Article VII of an April 2011 Interagency Consent Order and replace it with an accelerated remediation process.
In aggregate, the servicers have agreed to make direct, cash payments of $3.3 billion and to provide $5.2 billion in additional assistance, such as loan modifications, to consumers. Wells Fargo's portion of the cash settlement is $766 million, which is based on the proportionate share of Wells Fargo-serviced loans in the overall IFR population. Wells Fargo recorded a pre-tax charge of $644 million in fourth quarter 2012 to fully reserve for its cash payment portion of the settlement and additional remediation-related costs. The Company also committed an additional $1.2 billion to foreclosure prevention actions. This commitment did not result in any charge as the Company believes that this commitment is covered through the existing allowance for credit losses and the nonaccretable difference relating to the purchased credit-impaired loan portfolios. With this settlement, the Company will no longer incur costs associated with the independent foreclosure reviews, which had recently approximated $125 million per quarter for external consultants and additional staffing.
"In addition to the benefit to our customers, we are very pleased to have put this legacy issue behind us and to have removed the future costs associated with independent foreclosure reviews," said Stumpf.
Our effective tax rate was 27.4 percent for the fourth quarter 2012, compared with 31.3 percent for the fourth quarter 2011 and 32.5 percent for the year ended December 31, 2012, compared with 31.9 percent for the year ended December 31, 2011. The lower tax rate in the fourth quarter 2012 was primarily attributable to the realization, for tax purposes, of a discrete $332 million benefit resulting from the surrender of previously written-down Wachovia life insurance investment.
Total loans were $799.6 billion at December 31, 2012, up $16.9 billion from September 30, 2012, including double-digit annualized loan growth in commercial banking, credit card, mortgage, and retail brokerage. Included in the total loan growth was $9.7 billion of 1-4 family conforming first mortgage production retained on the balance sheet. The growth in core loan portfolios more than offset the reduction in the non-strategic/liquidating portfolios, which declined $4.1 billion in the quarter.
Average total loans of $787.2 billion in fourth quarter 2012 grew $18.6 billion, or 2 percent, from fourth quarter 2011. On a linked-quarter basis, average loans increased $10.5 billion, or 5 percent (annualized). Average commercial and commercial real estate loans increased $10.8 billion, or 3 percent, from fourth quarter 2011 and increased $1.6 billion, or 2 percent (annualized), on a linked-quarter basis. Average consumer loans increased $7.8 billion, or 2 percent, from a year ago and increased $8.9 billion, or 8 percent (annualized), on a linked-quarter basis.
|December 31, 2012||September 30, 2012|
|(in millions)||Core||Liquidating (1)||Total||Core||Liquidating (1)||Total|
|Change from prior quarter:||$||21,038||(4,094)||16,944||11,903||(4,472)||7,431|
(1) See NON-STRATEGIC AND LIQUIDATING LOAN PORTFOLIOS table for additional information on non-strategic/liquidating loan portfolios. Management believes that the above information provides useful disclosure regarding the Company's ongoing loan portfolios.
Average core deposits of $928.8 billion for fourth quarter 2012 increased $63.9 billion, or 7 percent, from fourth quarter 2011. On a linked-quarter basis, average core deposits grew $33.5 billion, or 15 percent (annualized). Average mortgage escrow deposits were $42.2 billion for fourth quarter 2012, up $7.2 billion from fourth quarter 2011 and up $2.2 billion on a linked-quarter basis. Excluding mortgage escrow balances, total average core deposits grew 7 percent from fourth quarter 2011 and 15 percent (annualized) on a linked-quarter basis. Average core checking and savings deposits were 94 percent of average core deposits, up from 93 percent a year ago. The average deposit cost for fourth quarter 2012 was 16 basis points, compared with 18 basis points in third quarter 2012. Average core deposits were 118 percent of average loans, up slightly from third quarter 2012.
Capital increased in the fourth quarter, with Tier 1 common equity reaching $109.1 billion under Basel I, or 10.12 percent of risk-weighted assets, up from 9.46 percent in fourth quarter 2011 and 9.92 percent in third quarter 2012. Under current Basel III proposals, the Tier I common equity ratio was an estimated 8.18 percent8. In the fourth quarter, the Company purchased approximately 42 million shares of its common stock and an additional estimated 6 million shares through a forward repurchase transaction expected to settle in first quarter 2013, and paid a quarterly common stock dividend of $0.22 per share.
|8||Estimated based on management's current interpretation of the Basel III capital rules proposed by federal banking agencies in notices of proposed rulemaking announced in June 2012. The proposed rules and interpretations and assumptions used in estimating Basel III calculations are subject to change depending on final promulgation of Basel III capital rules.|
|Dec. 31,||Sept. 30,||Dec. 31,|
|(as a percent of total risk-weighted assets)||2012||2012||2011|
|Ratios under Basel I (1):|
Tier 1 common equity (2)
|Tier 1 capital||11.75||11.50||11.33|
|Tier 1 leverage||9.47||9.40||9.03|
|(1)December 31, 2012, ratios are preliminary.|
(2)See tables on TIER 1 COMMON EQUITY for more information on Tier 1 common equity.
"Wells Fargo's risk profile continued to improve in 2012," said Chief Risk Officer Mike Loughlin. "Credit losses were $9.0 billion in 2012, compared with $11.3 billion in 2011—an improvement of $2.3 billion or 20 percent. In addition, year-over-year, our nonperforming assets declined by $1.5 billion or 6 percent, our consumer 30 - 89 days past due was down $1.8 billion or 22 percent, our liquidating portfolios declined by $17.8 billion or 16 percent, and the Pick-a-Pay PCI portfolio continued to perform better than we estimated at the time we acquired Wachovia. Reflecting continued, improved credit performance, we released $250 million in loan loss reserves in the fourth quarter. Absent significant deterioration in the economy, we continue to expect future reserve releases in 2013, though at a lower level than in 2012," said Loughlin.
Reported credit metrics for the quarter were affected by the completion of implementation of the OCC guidance issued in third quarter 2012. In the fourth quarter, we applied the updated OCC guidance to previously modified loans to consumers who have been discharged in bankruptcy. Fourth quarter adjustments associated with the OCC guidance affected nonperforming loans and net charge-offs as follows9:
- $394 million reclassification of performing consumer loans to nonaccrual status
- $321 million increase in net loan charge-offs, fully covered by loan loss reserves
|9||Reclassification to nonaccrual loans includes $264 million and the increase in net loan charge offs include $271 million from the completion of implementation of OCC guidance.|
Net Loan Charge-offs
Net loan charge-offs improved to $2.1 billion in fourth quarter 2012, or 105 basis points of average loans, compared with $2.6 billion in fourth quarter 2011, or 136 basis points of average loans. On a linked-quarter basis, net loan charge-offs improved by $277 million, or 16 basis points of average loans.
Excluding the $321 million in charge-offs resulting from the adjustments associated with the OCC guidance, net charge-offs in fourth quarter 2012 were $1.8 billion or 89 basis points with commercial losses of $255 million, or 29 basis points, and consumer losses of $1.5 billion or 138 basis points10. Full year 2012 credit losses (excluding losses from the OCC guidance implementation) declined $3.2 billion or 28 percent from 2011.
|10||Management believes that the presentation in this news release of information excluding the impact of the OCC guidance provides useful disclosure regarding the credit quality of the Company's loan portfolios.|