Wells Fargo & Co.’s (WFC) fourth quarter 2009 net income applicable to common stock came in at $394 million or 8 cents per share, compared to a net loss of $3.02 billion or 84 cents in the prior-year quarter. Results were soundly ahead of the Zacks Consensus Estimate of break-even.
Results included $450 million in merger costs, a $261 million previously disclosed expense provision for an auction rate securities (ARS) settlement and $150 million employee benefit-related expenses for 401(k) profit-sharing contribution. Diluted earnings per share included 47 cents for TARP preferred stock dividends, including the deemed dividend upon redemption of TARP preferred stock.
During the quarter, Wells Fargo earned $22.7 billion of combined revenue, driven primarily by 16.0% year-over-year growth in legacy Wells Fargo revenue to $12.03 billion. While mortgage originations and servicing revenue remained high, total mortgage banking non-interest income contributed just 15.0% of the company’s consolidated revenue for the quarter.
How the Numbers Materialize
The Wachovia merger remained on track and is expected to realize $5 billion of annual merger-related savings upon completion of the integration process in 2011. Additionally, cumulative integration costs are now expected to be about $5 billion, less than the originally assumed $8 billion.
For full year 2009, net income came in at $12.3 billion, significantly up from $2.7 billion in 2008, while diluted earnings per common share were $1.75, up from 70 cents in 2008. This included 76 cents per share for TARP preferred stock dividends and the deemed dividend upon redemption of TARP preferred stock for 2009. Total revenues increased drastically by 111.7% year-over-year to $88.7 billion, recovering from the effects of the financial crisis in 2008.
Net Interest Income
Net interest income for the quarter came in at $11.5 billion, sequentially down from $11.7 billion. While earning assets were slightly up at $1.09 trillion, 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 (NIM) to 4.31% from 4.90% year-over-year. However, these declines were offset by significant growth in non-interest-bearing checking and savings deposits and wider new lending spreads, which are expected to be beneficial for net interest income over the long term.
Total non-interest income came in at $11.2 billion, primarily due to continued strength in mortgage banking, card, trust and investment fees and insurance revenue. This was partially offset by a decline in deposit service charges. Non-interest expense for the quarter came in at $12.8 billion, up 121.7% year-over-year.
Total core deposits of $770.8 billion at Dec 31, 2009 were up 6.0% from $759.3 billion at Sep 30, 2009. NIM was down 5 bps sequentially but down 62 bps year-over-year compared to legacy Wells Fargo net interest margin.
Credit & Other Assets
Credit quality deteriorated sharply, with net charge-offs rising to $5.4 billion or 2.71% of average loans compared to $5.1 billion or 2.5% of average loans in the prior quarter. Nonperforming assets increased to $27.64 billion or 3.12% of total loans compared to $23.45 billion or 3.07% of total loans in the prior quarter. Allowance for credit losses was $25.0 billion at Dec 31, 2009 compared to $24.5 billion at Sep 30, 2009.
Net unrealized gains on securities decreased to $5.6 billion from $6.6 billion at Sep 30, 2009. This consisted 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. The unrealized gains emerged on mortgage-backed securities yields that increased and narrowed capital market credit spreads.
At Dec 31, 2009, Wells Fargo shareholders equity was $111.8 billion, compared to $122.2 billion at Sep 30, 2009. Capital ratios remained strong with tier I capital and total capital ratio at 9.3% and 13.3%, respectively, compared to 7.8% and 11.8% respectively, year-over-year. Book value per share improved to $20.03, up from $19.46 sequentially and $16.15 year-over-year.
Wells Fargo’s total assets as of Dec 31, 2009 were $1.24 trillion, and total loans were $782.8 billion.
Why Wells Fargo Outperformed
In Dec, 2009, Wells Fargo exited the Troubled Asset Relief Program (TARP) after full repayment of its $25 billion loan along with cash dividends of $1.44 billion to the U.S. Treasury while maintaining strong capital levels. The company also purchased Prudential Financial’s non-controlling interest in securities brokerage joint venture, giving Wells Fargo 100% of the future earnings.
Although there is lot of uncertainty regarding the commercial sector especially due to the credit crunch, regulatory and fiscal policy issues in the near term, we believe that Wells Fargo’s cross-selling ability, strategic Wachovia cost-integration and a diverse business portfolio along with better-than-expected growth in investment banking will drive long-term growth and add to the investors’ confidence.
Read the full analyst report on “WFC”
Zacks Investment Research
