Analyzing the Annual Report of Wells Fargo & Company, Case Study Example

The end of 2008 and the beginning of 2009 shown that Wells Fargo & Company was a “nationwide, diversified financial services company” (Wells Fargo & Company Annual Report 2008 1) served more than seventy million of customers in North America’s most extensive and comprehensive financial services network. Company’s Annual Report shown that in 2008 an “engine of growth for the U.S. economy” (2) Wells Fargo & Company, earned a profit of $2.7 billion, the revenue rose to 6% in contrast to 2007 and was $41.90 billion, an average loan rose 16 percent, an average earning assets were up 17 percent and core deposits rose 7 percent (2). Wells Fargo & Company originated $230 billion in hypothec, and its “owned-mortgage servicing portfolio was $2.1 trillion” (6). In 2008 the company reached the highest total shareholder return amidst all competitors and stayed on of the world’s powerful financial institutions (2).

The performance of Wells Fargo Bank, N.A. in 2008 year had shown the utmost and highest credit rating given to the United States of America banks by Moody’s Investors Service, “Aa1”, and Standard & Poor’s Ratings Services, “AA+”. The company increased its dividend by ten percent (2).

The merger of Wachovia Corporation at the end of analyzed year laid the foundation for development and growth of combined companies. John Stumpf underlined that Wells Fargo didn’t merge Wachovia for becoming bigger and powerful. The companies combined for “safe, secure and stable” (Wells Fargo & Company Annual Report 2008 3).

In addition to merger Wachovia in 2008 , Wells Fargo purchased banking operations of “United Bancorporation of Wyoming, Flatiron Credit Company, Farmers State Bank, Century Bancshares and EMAR Group” (Wells Fargo & Company Annual Report 2008 6). This year the “most-used channel, wellsfargo.com” (6) sold up 29 percent, with more than 11 million active online customers and introduction of a new “vSafe^SM personal online safe” which was used for saving and keeping significant documents (6).

The analysis of Wells Fargo & Company Annual Report shown that Wells Fargo’s main goals for 2009 year were to build on company’s performance and strength, to satisfy Wachovia’s financial needs – “not just deposits, loans and lines of credit, but their credit cards, debit cards, insurance, brokerage, 401(k)s, mortgage, home equity, and on and on” (7). Wells Fargo wanted to become famous and to be esteemed supplier of “wealth, brokerage and retirement services in the United States, number one, second to none” (8).

History of Company and Its Products

Wells Fargo & Company was “born out of the California Gold Rush” (Since 1852). It was founded in March 1852 by Henry Wells and William Fargo. The primary goal of the company were purchasing gold and selling paper bank drafts. During this period, Wells Fargo reached a reputation of faith dealing rapidly and responsibly with customer’s money. Wells Fargo did its business by the fastest ways possible: “stagecoach, steamship, railroad, pony rider or telegraph” (Since 1852). In 1858, Wells Fargo assisted in start of Overland Mail Company, which was known as “Butterfield”. Later this company became under Wells Fargo’s control, moved “north to the central overland route–the route of the famed Pony Express” (Since 1852). In the middle of 1860s, Wells Fargo joined all meaningful western stage lines. Its stages “rolled over 3,000 miles of territory, from California to Nebraska, and from Colorado into the mining regions of Montana and Idaho” (Since 1852). After finishing of the transcontinental railroad in 1869, Wells Fargo “increasingly rode the rails” (Since 1852) and became the number one nationwide express company which joined more than two thousands and five hundred companies in 25 states.

In 1905, Wells Fargo & Company’s bank merged with Nevada National Bank of San Francisco. Later, in 1923, Wells Fargo Nevada National Bank merged Union Trust Company and formed “Wells Fargo Bank & Union Trust Company (shortened to Wells Fargo Bank in 1954)” (Since 1852). By 1910, there were more than 6 000 locations network and proposed various financial services. They were travelers’ checks, money orders, remittance, and transfer of money by telegraph.

During the World War II Wells Fargo went on a “wartime footing, contributing to the national defense in direct and indirect ways” (Since 1852). In the 1950s, Wells Fargo started opening network of retail branch offices. In ten years the company joined its forces with the American Trust Company of San Francisco with its 102 branch offices. This union intensified Wells Fargo’s opportunity to provide comfortable banking service to its customers (Since 1852). Wells Fargo played fundamental role in creation and development of credit cards used nowadays – MasterCard. In 1967, Wells Fargo with three banks presented a “credit card called Master Charge (renamed MasterCard in 1979)” (Since 1852).

The end of 1980s and the beginning of 1990s was the period of Wells Fargo’s merges with various financial institutions. In 1989, Wells Fargo became the first bank, which offered its customers the possibility to “check bank statements, transfer money between accounts and pay bills electronically from their home computers” (Since 1852). Later, in 1995, Wells Fargo proposed secure account access on the Internet and “remained the industry leader in Internet banking” extends from ocean-to-ocean. In four years, Wells Fargo became the firs bank to exceed one million banking on-line.

Nowadays, the name of Wells Fargo is one of the most well known in the world of finance and “extends from ocean-to-ocean” (Since 1852). The company continues to respond its customers’ demands and needs by proposing best service, creating and developing new decisions, embracing the latest technologies and joining forces with the companies, which supports Wells Fargo’s vision.

New Products Development

In 2008 Wells Fargo & Company was a “$1.3 trillion diversified financial services company” (Wells Fargo & Company Annual Report 2008 34) which provided insurance, banking, mortgage banking, retail banking, investment banking, consumer finance and brokerage through distribution channels and banking stores to customers, institutions and business in all 50 states of the United States of America and another countries. The President and CEO of Wells Fargo & Company, underlined that in 2008 most used Wells Fargo’s product solution wellsfargo.com sold up 29 percent with 11 million of active on-line customers and introduction of personal on-line safe for storing documentation (6).

A merger of Wells Fargo with Wachovia Corporation was completed at the end on analyzed year. The companies created the United States of America principal “coast-to-coast community banking presence, the most extensive distribution system of any financial services company across North America” (Wells Fargo & Company Annual Report 2008 3). Wachovia Corporation was one of the biggest many-sided financial services companies, which gave a wide range of brokerage asset and wealth management, retail banking, investment and corporate banking products “through 3,300 financial centers in 21 states” (34). The merger of Wachovia introduced 15 additional states to 24 Wells Fargo Community Banking states in the Midwest, the Southwest, the Rockies and the West among which were: “Alabama, Connecticut, Delaware, Florida, Georgia, Kansas, Maryland, Mississippi, New Jersey, New York, North Carolina, Pennsylvania, South Carolina, Tennessee, Virginia and Washington, D.C.” (Wells Fargo & Company Annual Report 2008 7).

In Wells Fargo &Company Annual Report 2008 John Stumpf paid great attention, that the combined company became the number one in small business lending, commercial real estate brokerage, mortgage lending and middle market commercial banking. It became number two in debit card, deposits and mortgage servicing (3).

Except Wachovia, Wells Fargo acquired in 2008 banking operations of insurance premium finance and commercial insurance: United Bancorporation of Wyoming, Flatiron Credit Company, Farmers State Bank, Century Bancshares and EMAR Group. The acquisition of Century Bancshares presented Wells Fargo in Arkansas (7). The company continued investments and opened 58 regional banking stores and covered 32 stores from other banks and financial institutions (36).

With its professional and goal-oriented team members Wells Fargo & Company had considerable potential for development of all financial instruments for better performance in the future (7).

Stock Brokers Recommendations

The analysis of Wells Fargo & Company Annual Report 2008 and researching of the sphere the company performed its business shown that there were a lot of risks which could affect company’s financial results. For future performance and improvement of company’s sales and purchases, Wells Fargo should pay great attention to the risks affecting its activity.

Because of its “inherent limitations, internal control over financial reporting” (84) could not avert or detect misstatements. Projections of any assessment of potency to future periods were object to the risk that checkups could become unqualified because of modifications in development, or that the level of compliance with the principles, methods and policies could deteriorate. The company‘s internal control over financial reporting was a “process designed to provide reasonable assurance regarding the reliability of financial reporting” (85) and the arrangement of financial statements for outside goals in conformity with commonly accepted accounting principles. The internal control over financial reporting contained those principles and policies which concerned the support of records that, in logical detail, exactly and without bias reflected the “transactions and dispositions of the assets of the company” (85); provided sensible assurance that transactions were recorded as indispensable; provided sensible assurance concerning prevention of not allowed purchase of company’s assets.

To drive the risk contained in the statement of assets and liabilities, a risk weighting was “applied to each balance sheet asset and off-balance sheet item” (163) principally grounded on the relative credit risk. The claims secured by the United States government or any of its agencies are considered for risk at 0% and definite intangible property related loans considered for risk at 50%. Derivatives and loan commitments were used for risk after calculating statement of assets and liabilities equivalent sums. A credit conversion ratio was “assigned to loan commitments based on the likelihood of the off-balance sheet item becoming an asset” (163). For definite recourse obligations, through credit substitutes, and other transactions which “expose institutions primarily to credit risk” (163), the capital amounts and grading under the guidelines were foundation to high-grade judgments by the supervisors about risk assessment, components and another factors.

Competitor Analysis

In 2008 Wells Fargo & Company had one of the most “extensive financial services network” (1) of 11 000 stores, 12 300 ATMs, Wells Fargo Phone Bank and wellsfargo.com. Wells Fargo & Company was the number one in the United States of America in community banking presence of 6 610 stores. In 2008, Wells Fargo continued to develop its business with new banking stores. The result shown that the company opened 58 regional stores and “converted 32 stores acquired from Greater Bay Bancorp, Farmers State Bank and United Bancorporation of Wyoming, Inc.” (51).

Wells Fargo non-interest-bearing expense was $22.7 billion in 2008. The company continued investing in stores and supplementary sales and “service-related team members” (37). The average mortgages held for sale reduced to $25.7 billion in 2008 in contrast to 2007 with $33.1 billion (47). Net profits on mortgage loan sales activity in 2008 were $1,183. For 2008 Wells Fargo held $145.4 billion of “debt securities available for sale” (52) which contained $63.7 billion obtained from Wachovia. Net unrealized loss in 2008 was $9.8 billion in contrast to $70.2 billion in 2007. $6.1 billion of marketable equity securities available for sale were held by Wells Fargo in 2008. Net unrealized loss in 2008 was $160 million (52).

Annual Report indicated that on December 31, 2008 the common stock was 4 228 630 889 common shares (168). In 2008, Wells Fargo’s revenue grown to $41.90 billion. Net income for analyzed period was $2.66. Net income contained pre tax $8.14 billion credit reserve build, pre tax $124 million of “merger-related expenses” and pre tax $2.01 billion of “other-than-temporary impairment” (4). Net income of Community Banking reduced 43% to $2.93 billion in 2008 in contrast to $5.11 billion in 2007. Net income of analyzed period of Wholesale Banking reduced 48% to $1.29 billion, extensively because of pre tax $1.12 billion provision for credit risk losses, with pre tax $586 million credit reserve build. Net interest income grown 23% to $4.47 billion due to strong loan and deposit increasing. Net income of Wells Fargo Financial in 2008 pointed a net loss of $764 million, showing higher credit costs, containing $1.7 billion credit reserve build (52).

Wells Fargo & Company remained good financial situation under “applicable regulatory capital adequacy guidelines” (38). The correlation of common stockholders’ equity to total assets in 2008 was 5.21% (45).

In 2008, Wells Fargo & Company earned a profit of $2.7 billion, which was 70 cents per share. Company’s return on after-tax gain for every shareholder dollar was 4.79 cents “for every dollar of our shareholders’ equity” (6). It was one of the best results among Wells Fargo rivals. At the end of 2008 Wells Fargo & Company had 281 000 team members which served more than seventy million customers through North America and provided a high-quality and goal-oriented work.

Notes to Financial Statements

John Stumpf, the President and CEO of Wells Fargo & Company pointed 26 notes to financial statements of 2008 financial year. In the Summary of Significant Accounting Policies a great attention was paid to the statement that Wells Fargo & Company recognized profit when the earning process was completed, usually on the settlement date. Particularly, brokerage commission compensation was recognized in “income on a trade date basis” (100). The company increased asset management fees, measured by assets at a special date, as earned. Advisory and underwriting fees were recognized when the appropriate transaction finished. Any profits or damages “not meeting the criteria for initial recognition” (100) were slowed and recognized the time when consummated.

The company proposed the “stock-based employee compensation plans” (146) and accepted share based payment which required that the company measured the cost of employee services acquired instead of restricted share rights or stock options based on fair cost of the award. Total stock option compensation costs to discharged and retirement employees in 2008 was $174 million.

The “Long-Term Incentive Compensation Plan” (146) provided for awards of nonqualified stock option, restricted shares, stock appreciation rights, without restriction stock awards. The total sum of shares of common stock accessible for grant under the plans was 235 million in 2008. The “PartnerShares® Stock Option Plan” (146) was a wide based employee stock option plan which covered employees of part time and full time. In 2008 all of Wells Fargo & Company PartnerShares Plan grants were allowable and vested (147).

In 2008 Wells Fargo & Company “sponsor noncontributory qualified defined benefit retirement plans” (149) contained company’s Cash Balance Plan. This plan covered eligible employees of Wells Fargo and Wachovia Corporation Pension Plan. Under the Cash Balance Plan the “eligible employees’ Cash Balance Plan accounts” (149) were allocated a payment credit grounded on a percentage of their qualifying payment. The payment credit percentage was grounded on years and age of credit servicing. Under the Pension Plan, eligible employees which were engaged before the beginning of 2008 were allocated an annual payment credit grounded on a percentage of their qualifying payment. The payment credit was based on their degree of payment. According to the datum from Annual Report 2008, Wells Fargo & Company made a $250 million contribution. In 2008 the total sum contributed for company’s another pension plans was $33 million.

The analysis of Wells Fargo & Company Annual Report 2008 shown that the equipment and premises of the company were “carried at cost less accumulated depreciation and amortization” (98). Capital rent and lease were involved in equipment and premises at the capitalized sum less increased amortization. In 2008 the amortization and depreciation outlays for equipment and premises was 861 million in comparison with 2007, when it was $828 million and with 2006 when it was $737 million (110). Financial Statements of Wells Fargo & Company and Subsidiaries shown that in 2008 and 2007 among the stockholder’s equity, a treasury stock were 135 290 540 and 175 659 842 shares with $4 666 million in 2008 and $6 035 million in 2007 (87).

Developments Since Publication of the Annual Report

It is almost a year passed since the ending of 2008 financial year. During this time there were some changes and developments in the activity and performance of Wells Fargo & Company. Strickland and Atkins point three main reasons Well Fargo’s profits are still strong. First, Wells Fargo & Company continued to generate profit and “capital at a record rate in the third quarter despite cyclically elevated credit costs” (Strickland and Atkins). Since the merger of Wachovia, the shareholders equity has been grown by $23 billion. Second is that Wachovia is already joined to Wells Fargo’s profit and capital development, better than it was expected. Third is that Wells Fargo’s leaders can see signs of firmness in company’s credit portfolio due to it has less “exposure to credit cards” (Strickland and Atkins) than company’s competitors with huge national credit card portfolios. Since the merging of Wachovia, Wells Fargo & Company is now starting to realize approximately 30% of savings on a run rate basis.

Profit is considered to be the key driver of Wells Fargo earnings. The revenue of the third quarter of 2009 was $22.5 billion. More than $3 billion has been earned in every quarter in 2009. “Year-to-date earnings” (Strickland and Atkins) in 2009 of $9.5 billion were risen 75% compared with 2008. Wells Fargo & Company is gaining new customers, growing the amount of products and increasing share of market. The company has a great progress growing “deposits and accounts throughout the credit crisis” (Strickland and Atkins). Compared with 2008, the savings deposits grown 16% and saving accounts now are 83% of “total core deposits” (Strickland and Atkins).

Strickland and Atkins underlined than even though the economic recession, Wells Fargo & Company has continuously provided credit for “government and institutional clients nationwide and have increased loan commitments by 14% since the beginning of the year”. Nowadays, Wells Fargo & Company is the third biggest United States “wealth manager based on client assets and the second largest based on number of financial advisors” (Strickland and Atkins). At the time when economic recovery continues at its own way, Wells Fargo & Company gaining ground and playing to own strengths.

Works Cited

“Since 1852.” Wells Fargo & Company. 2006. 29 Nov. 2009. <http://www.wellsfargohistory.com/resources/resources.htm>.

Strickland, Bob, and Atkins, Howard I. “Wells Fargo & Company Q3 2009 Earnings Call Transcript.” Seeking Alpha. 21 Oct. 2009. 27 Nov. 2009 <http://seekingalpha.com/article/167932-wells-fargo-amp-company-q3-2009-earnings-call-transcript>.

“Wells Fargo & Company Annual Report 2008.” Wells Fargo & Company. 11 May 2009. 27 Nov. 2009 <https://www.wellsfargo.com/invest_relations/annual>.