Deciphering Financial Statements (Wells Fargo & Company)
Wells Fargo & Company is the fourth largest bank in the United States (based on total assets as of December 31, 2004).Wells Fargo is the successor to the banking and stagecoach company founded by Henry Wells and William G. Fargo in 1852.The company’s consolidated statement of income follows.
Wells Fargo & Company and Subsidiaries |
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For the Years Ended December 31 |
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(in millions, except per share amounts) |
2004 |
2003 |
2002 |
INTEREST INCOME |
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|
|
Trading assets |
$145 |
$156 |
$169 |
Securities available for sale |
1,883 |
1,816 |
2,424 |
Mortgages held for sale |
1,737 |
3,136 |
2,450 |
Loans held for sale |
292 |
251 |
252 |
Loans |
16,781 |
13,937 |
13,045 |
Other interest income |
129 |
122 |
119 |
Total interest income |
20,967 |
19,418 |
18,459 |
INTEREST EXPENSE |
|
|
|
Deposits |
1,827 |
1,613 |
1,919 |
Short term borrowings |
353 |
322 |
536 |
Long term debt |
1,637 |
1,355 |
1,404 |
Guaranteed preferred beneficial interests in Company’s |
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|
|
subordinated debentures |
— |
121 |
118 |
Total interest expense |
3,817 |
3,411 |
3,977 |
NET INTEREST INCOME |
$17,150 |
$16,007 |
$14,482 |
Provision for credit losses |
1,717 |
1,722 |
1,684 |
Net interest income after provision for credit losses |
15,433 |
14,285 |
12,798 |
NONINTEREST INCOME |
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|
|
Service charges on deposit accounts |
2,417 |
2,297 |
2,134 |
Trust and investment fees |
2,116 |
1,937 |
1,875 |
Card fees |
1,230 |
1,079 |
977 |
Other fees |
1,779 |
1,560 |
1,372 |
Mortgage banking |
1,860 |
2,512 |
1,713 |
Operating leases |
836 |
937 |
1,115 |
Insurance |
1,193 |
1,071 |
997 |
Net gains (losses) on debt securities available for sale |
(15) |
4 |
293 |
Net gains (losses) from equity investments |
394 |
55 |
(327) |
Other |
1,099 |
930 |
618 |
Total noninterest income |
12,909 |
12,382 |
10,767 |
NONINTEREST EXPENSE |
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Salaries |
5,393 |
4,832 |
4,383 |
Incentive compensation |
1,807 |
2,054 |
1,706 |
Employee benefits |
1,724 |
1,560 |
1,283 |
Equipment |
1,236 |
1,246 |
1,014 |
Net occupancy |
1,208 |
1,177 |
1,102 |
Operating leases |
633 |
702 |
802 |
Other |
5,572 |
5,619 |
4,421 |
Total noninterest expense |
17,573 |
17,190 |
14,711 |
INCOME BEFORE INCOME TAX EXPENSE AND EFFECT |
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|
|
OF CHANGE IN ACCOUNTING PRINCIPLE |
10,769 |
9,477 |
8,854 |
Income tax expense |
3,755 |
3,275 |
3,144 |
NET INCOME BEFORE EFFECT OF CHANGE IN |
|
|
|
ACCOUNTING PRINCIPLE |
7,014 |
6,202 |
5,710 |
Cumulative effect of change in accounting principle |
— |
— |
(276) |
NET INCOME |
$7,014 |
$6,202 |
$5,434 |
EARNINGS PER COMMON SHARE BEFORE EFFECT OF |
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|
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CHANGE IN ACCOUNTING PRINCIPLE |
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Earnings per common share |
$415.00 |
$369.00 |
$335.00 |
Diluted earnings per common share |
409 |
365 |
332 |
EARNINGS PER COMMON SHARE |
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|
|
Earnings per common share |
$415.00 |
$369.00 |
$319.00 |
Dilute earnings per common share |
409 |
365 |
316 |
DIVIDENDS DECLARED PER COMMON SHARE |
$186.00 |
$15.00 |
$186.00 |
1. How is this income statement different from all the other income statements illustrated in this chapter?
2. For a merchandising firm, gross profit represents sales less cost of goods sold. For Wells Fargo, what component of the income statement would be similar to gross profit?
3. Compute the following ratios for each of the years 2002–2004:
(a) Total interest expense/Total interest income
(b) Incentive compensation/Salaries
(c) Employee benefits/Salaries
4. Comment on the ratios you computed in part (3).Make particular mention of any trends.
5. The average loans receivable balance for Wells Fargo during 2004 was $266,503 million. The average amount of deposits during 2004 was $261,193 million. Using the income statement data, comment on the average interest rate Wells Fargo pays to its depositors, the average interest rate Wells Fargo earns on its loans receivable, and the spread between these two rates.
6. The market value of Wells Fargo’s stock at the end of each year was $62.15, $58.89, and $46.87 for the years 2004, 2003, and 2002, respectively. Compute the firm’s price earnings ratio for each year. Use diluted earnings per share. Is it increasing or decreasing over time?