WFC

Wells Fargo & Company Q1 2009 10-Q Summary

Business Context and Reporting Period

This report covers the quarterly period ended March 31, 2009. It is the first full quarter of consolidated results following the acquisition of Wachovia Corporation on December 31, 2008. Consequently, Wachovia's results are included in the income statement and average balances for 2009, while its assets and liabilities were included in the balance sheet starting December 31, 2008. The company operates as a diversified financial services provider with segments in Community Banking, Wholesale Banking, and Wealth, Brokerage and Retirement Services.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total revenue increased 99% year-over-year, driven primarily by the inclusion of Wachovia (which contributed 41% of combined revenue) and strong growth in legacy Wells Fargo mortgage banking and fee income.
• Expense Increase: Noninterest expense more than doubled to $11.82 billion, largely due to the Wachovia acquisition, expanded geographic footprint, and higher revenue-based incentive expenses in brokerage and investment banking.
• Provision and Charge-offs: The provision for credit losses rose to $4.56 billion, including a $1.3 billion reserve build. Net charge-offs increased to $3.30 billion, reflecting higher losses in residential real estate and credit cards, though commercial losses remained relatively low.
• Accounting Changes: The company adopted FSP FAS 157-4, which adjusted the valuation of securities available for sale by $4.5 billion (pre-tax), reducing net unrealized losses. This adoption also impacted the presentation of noncontrolling interests under FAS 160.
• Capital Position: Tangible Common Equity (TCE) increased to $41.1 billion. The company reduced its common stock dividend by 85% to $0.05 per share to preserve capital.

Guidance, Outlook, and Risks

• Capital Requirements: Following the Federal Reserve's stress test, the company agreed to increase Tier 1 common equity by $13.7 billion by November 9, 2009. On May 8, 2009, the company announced a common stock offering expected to raise $8.4 billion, with the remainder to be met through retained earnings or exchanging Capital Purchase Program funds.
• Merger Integration: Management expects to generate $5 billion in annual merger-related expense savings, with integration expenses totaling less than the original $7.9 billion estimate and spread over the integration period.
• Credit Outlook: Management anticipates that loan losses will continue to increase as long as the U.S. economy remains weak. The allowance for credit losses is deemed adequate to cover expected consumer losses for 12 months and commercial losses for 24 months.
• Key Risks:
  • Credit Deterioration: Continued weakness in the housing market and unemployment could lead to higher-than-anticipated charge-offs.
  • Securities Valuation: Risk of further other-than-temporary impairment (OTTI) write-downs on the securities portfolio.
  • Integration Execution: Risks associated with successfully integrating Wachovia and realizing projected cost savings.
  • Regulatory Environment: Potential legislative changes regarding mortgage modifications and capital requirements.

Investor Verification Checklist

• Capital Raise Execution: Verify the final proceeds and terms of the May 2009 common stock offering and the timeline for meeting the remaining $13.7 billion capital requirement.
• Allowance Adequacy: Monitor the trajectory of net charge-offs and the sufficiency of the $22.8 billion allowance against worsening economic indicators.
• Merger Synergies: Track the realization of the projected $5 billion in annual merger savings and the actual integration costs incurred.
• Securities Portfolio: Review future quarters for additional OTTI write-downs, particularly in the mortgage-backed securities and collateralized debt obligations portfolios.
• Dividend Policy: Confirm the sustainability of the reduced dividend rate and any future changes to capital return policies.