富國銀行 (WFC) 2003 Q2 法說會逐字稿

Good morning and welcome to the Wells Fargo second quarter earnings recorded call.

At this time I would like to turn the call over to Bob Strickland, Director of Investor Relations.

Hello.

Thank you for calling into the Wells Fargo second quarter 2003 earnings review recorded call.

Before we talk about our second quarter results, we need to make the standard securities law disclosure.

In today's call we will make forward-looking statements about specific income statement and balance sheet items and other measures of future results of operations and financial conditions, including statements about the likelihood of future losses on our equity investments, the value of our mortgage servicing rights and the amounts of our mortgage loans held for sale relative to changes in interest rates, credit quality of our loan portfolios, including the adequacy of our allowance for loan losses, the expected third quarter 2003 level of our mortgage warehouse and the expected earnings growth of our consumer finance company.

Forward-looking statements give our expectations about the future.

They are not guarantees and results may differ from expectations.

Forward-looking statements speak only as of the date they are made, and we do not undertake any obligation to update them to reflect changes that occur after that date.

For a discussion of some of the factors that may cause actual results to differ from expectations, refer to our SEC filings, including the 8-K filed today, which includes the press release announcing our second quarter results, our form 10-Q for the first quarter 2003, and our form 10-K for 2002 and to information incorporated into those documents.

Now I will turn the review over to our Chief Financial Officer, Howard Atkins.

Thanks, Bob.

The big news this quarter is we did it again.

Double-digit top line revenue growth, double-digit bottom line earnings per share growth and improved credit quality.

We believe we are one of the few large banks whose growth accelerated in the second quarter while its risk profile continued to improve.

In an uncertain economy, that kind of strong and consistent growth is quite an achievement.

It reflects the diversity of our businesses, the value of our customer centric business model and the increasingly successful efforts of our 139,000 team members to cross-sell and serve the more than 20 million customers that do business with Wells Fargo.

Wells Fargo earned 90 cents per diluted share in the second quarter.

That is the eighth consecutive quarter of record earnings per share, up 10% from a year ago.

Revenues were up a solid 12% for the quarter.

Before explaining how and why we are achieving such strong growth, let me mention several things that were done in the quarter to further strengthen our overall financial position.

First, the 90 cents of earnings per share earned included a net loss of 1 cent on debt and equity investments comprised of $47 million net loss on equity investments and $20 million in bond gains.

During the last eight quarters, the book value of our private and public equity portfolios was reduced from a peak of $4.1 billion to $2.2 billion at June 30th, 2003, which is now less than 1% of total Wells Fargo assets.

Given the actions we have already taken, we believe we may be at the end of the line, so to speak, with respect to any remaining issues in the equity portfolios.

And baring a significant reversal in the equity markets, we do not anticipate the need to take any additional losses.

The public equity portfolio of $527 million at the end of the second quarter had an unrealized gain of $83 million.

Second, we took a $620 million provision for mortgage servicing rights impairment during the quarter that reduced our capitalized mortgage servicing rights by almost $400 million from $4.2 billion at the end of the first quarter to $3.8 billion at the end of the second quarter.

Since the beginning of 2002 we reduced mortgage servicing rights by $2.4 billion.

At quarter end mortgage servicing rights net of the mortgage valuation allowance of $2.6 billion were .73% of related mortgage loans serviced for others, down from 1.6% in the first quarter of 2002.

If long-term interest rates continue to rise as they have in the last month, we could actually see mortgage servicing right values increase, which could reduce or even eliminate the need for more such provisioning at a time when mortgage refi activity may be slowing.

Third, in order to keep our interest rate profile relatively neutral, we continue to reduce our mortgage backed securities portfolio and lengthen the duration of our funding somewhat during the quarter.

The total available for sale securities portfolio stood at $24.6 billion at quarter end, down $19 billion, or 43%, from a peak of $44 billion in early 2000.

Should long-term interest rates continue to increase, we will have increased our capacity to grow net interest revenue from the investment portfolio at a time when the mortgage warehouse might be declining.

The bond portfolio had a $1.5 billion unrealized gain at quarter end.

During the quarter the company significantly improved its long-term liquidity through the issuance of $11 billion of long-term debt and bank notes.

Included in that amount was the placement of a one of a kind $3 billion, 30-year convertible debt security.

This was the largest convertible with the highest conversion premium ever issued by a financial institution.

Wells Fargo's debt now trades at a premium to virtually every other large financial institution in the world, reflecting investors' confidence in the consistency and financial strength of the company.

Both Moody's and S&P have placed our debt on watch for possible upgrade and for the third consecutive year Euro "Money" magazine named Wells Fargo the best financial global borrower.

Before returning to our growth story, let me mention one other key aspect of our strong balance sheet.

Our credit quality remains within satisfactory ranges, and if anything, improved during the second quarter.

While net chargeoffs were essentially flat with the first quarter of 2003, our loss rates improved from both the first quarter of 2003 and the second quarter of 2002.

Second quarter losses of .81% of loans were down from .87% of loans in the first quarter of 2003 and are at the lowest level since the second quarter of 2000.

Net credit losses on commercial loans declined $7 million, or 6% on a linked quarter basis and declined $20 million, or 15% year-over-year.

Consumer loan losses were essentially flat on a linked quarter basis despite the continued double-digit growth in various consumer loan portfolios.

Consumer loss rate and delinquencies remained within ranges that we view as expected and manageable.

Non-performing assets for the company were down $102 million, or 5% from a year ago and were flat from the first quarter of 2003.

The $49 million linked quarter decline in commercial non-performing assets was due to the active management and resolution of four problem credits.

The $41 million linked quarter increase in non-performing assets in the commercial real estate portfolio was due primarily to a single non-accrual office building located on the East Coast.

And the $22 million increase in non-performing assets for our home equity portfolio was due to normal seasoning in this high growth portfolio and was within normal expected quarterly variances.

As mentioned last quarter, given our strong loan growth, it is helpful to view non-performing assets as a percent of total loans.

Non-performing assets as June 30th, 2003 were .82% of total loans, down from 1.01% at June 30th, 2002 and down from .86% on a linked quarter basis.

And again, the lowest level since the third quarter of 2000.

In our consumer loan portfolio, 30-day delinquencies improved from the second quarter of 2002 and were consistent with first quarter results.

Our loan loss reserves remain very strong.

At the end of the second quarter our $3.9 billion loan loss reserves were 1.8% of total loans, 249% of non-performing loans and 230% of annualized second quarter net chargeoffs.

We remain very pleased with the performance of our well diversified loan portfolio and credit quality metrics remained within expected and manageable ranges and consistent with current economic conditions.

Returning to our growth trends, total revenue grew 12% year-over-year.

In fact, despite the equity losses and the mortgage impairment provision and the actions taken to lengthen funding, year-over-year revenue growth actually accelerated in the quarter from year-over-year revenue growth during the first quarter of 2003 and linked quarter revenue grew 15% annualized.

Revenue growth was once again broad-based with revenue increasing solidly in virtually all of our businesses, both spread income and fee income expanded in the quarter.

Let me discuss the principal sources of growth during the second quarter.

First, community banking.

Community banking revenues grew 14% year-over-year.

Core sales to banking households increased to 4.3 products during the quarter.

Our target is 8 products per household, and already 12% of our customers have 8 or more products and 35% have 5 or more.

Let me give you a few examples of the key product sales to consumers during the quarter.

Average total loans in our community banking group were up $26 billion, or 23% year-over-year and up $8 billion or 24% annualized on a linked quarter basis.

Home equity loan and line balances were up 28% from the second quarter of 2002.

Once again they led community banking loan growth.

We maintained our number one national ranking in home equity, which has become, as many of you know from personal experience, the consumers debt consolidation product of choice.

Home equity is abundant, easy to access, and has relatively low after tax cost.

We continue to make great progress in selling home equity to both our mortgage and banking customers.

About 10% of our 4 million mortgage customers now have a home equity product with Wells Fargo.

And that's up from 7% in March of 2002 and up 9% from the beginning of this year.

Through our banking stores we now have sold a home equity product to approximately 16.5% of our traditional banking customers who own homes, up from about 14% a year ago.

We also now sell more home equity loans through the Internet than any other provider in the country.

Internet profitability is comparable to that of the other home equity chance.

Other consumer lending products are also strong.

For example, credit card outstandings in our community bank increased 9% from a year ago.

This growth is all from our own customers and is not a function of one off national marketing campaigns, which we do not do.

We added 241,000 new credit card accounts in the second quarter of 2003, a 23% increase over the second quarter of 2002 new credit card accounts.

Only one in four of our 10 million banking households have a Wells Fargo credit card, while three of four have a debit card.

So, we've got a huge opportunity to increase fee revenue by putting a credit and debit card in every customer's wallet.

We've also increased our direct consumer installment debt in community banking by $3.5 billion or 26% from second quarter 2002, primarily due to recent acquisitions of some high quality secured loan portfolios with an average remaining maturity of less than two years and with rates of return in the high teens.

Also, our residential adjustable rate mortgages increased $4 billion on average from the first quarter of 2003.

Most of these prime adjustable rate mortgages are relationship loans to high cross-sell customers and the rest are short duration ARMs originated by our mortgage company and held instead of being sold for gain in lieu of holding longer term fixed rate securities in the investment portfolio.

Through new product introductions and more effective sales focus, we increased our personal lines and monthly loans to customers by 46% from the second quarter of 2002.

Although this is from a small base, it represents renewed growth in this business.

Another key factor that helped us achieve record growth in the quarter was our mortgage business.

Let me mention a few key points.

We had a record $204 billion in mortgage applications in the quarter, up 30% from the previous high in the first quarter of 2003.

A record $135 billion in originations, 20% higher than the former record in the fourth quarter of 2002.

Retail originations, our most profitable channel, had a higher growth rate in the quarter than correspondent and wholesale originations on both a linked quarter and year-over-year basis.

Due to our successful marketing and sales efforts and our larger retail sales force.

The mortgage warehouse increased $7 billion on average from the first quarter of 2003, ending the quarter at $58 billion.

June was our busiest application month ever, and we head into the third quarter with a record application pipeline of $120 billion up $31 billion from this year's first quarter.

Accordingly, we expect the mortgage warehouse to be at least as high in the third quarter as it was in the second quarter.

The record originations in the quarter will translate into more mortgage market share and then even larger owned residential mortgage servicing portfolio.

The servicing portfolio now stands at $582 billion, up about $100 billion from a year ago.

Also, the average note rate on our owned residential servicing portfolio dropped from 6.49% to 6.23% at quarter end.

This average note rate is at historic lows, and we've reduced capitalized mortgage servicing rights as a percent of related mortgage loans serviced for others to 73 basis points.

Accordingly, the incremental value of the servicing portfolio in a rising rate environment has increased from prior periods.

As interest rates rise, we would anticipate getting an even larger revenue contribution for mortgage servicing as the need for impairment provisioning and accelerated MSR amortization goes away.

We are extremely pleased with the solid growth in consumer deposits.

Community banking core consumer and small business deposit balances were up approximately $22 billion, or 14%, from the second quarter of 2002.

Excluding savings certificates, community banking, core consumer and small business interest and non-interest bearing savings and checking average balances were up $26 billion or 19% year-over-year.

About 40% of the 19% second quarter growth in core deposits was due to mortgage escrow account balances.

Overall the terrific growth in deposits in the second quarter came from higher average balances, increased sales of primary checking and savings accounts and our effort to reduce customer and depositor attrition.

In our wholesale banking business revenues increased 1% year-over-year and accelerated to a 4% annualized increase on a linked quarter basis.

We continue to increase market share in wholesale banking.

New relationships in our wholesale banking area increased 6% from the same period a year ago.

And this helped boost fee income in our wholesale banking group by 4% in the second quarter of 2002 with virtually all sources of fee-based income growing year-over-year, including capital markets, foreign exchange, cash management, asset-based lending, real estate brokerage and commercial insurance brokerage.

The growth in foreign exchange revenues reflects the success in selling our foreign exchange online product to our commercial customers.

Approximately 6,000 active customers now use our online product to satisfy their foreign exchange needs.

This represents a 30% growth in new customers in the past year.

While improving value to the equity markets and successful efforts to grow customers, the combination of personal and institutional investment management and trust fees increased 9% annualized on a linked quarter basis.

During the second quarter Wells Fargo completed the acquisition of 11 mutual funds with $1.4 billion of assets under management for Montgomery Asset Management.

This acquisition rounded out our fixed income and equity fund lineup and further strengthened our investment management capabilities.

Company-wide average commercial loans increased a modest 2% from the second quarter of 2002, but were up $477 million or 4% annualized from the first quarter of 2003 due primarily to loan growth in our small business and asset-based lending groups.

We believe the increased number of middle market commercial accounts we've gained and the deeper relationships we've developed to effective cross-sell positions us well competitively for commercial loan growth with stronger aggregate commercial loan demand eventually materializes.

Revenue at our consumer finance business increased 20% both year-over-year and linked quarter annualized.

Profits in this quarter of $110 million were up 47% from the second quarter of 2002.

Profits of $212 million for the first six months increased 33% over the same period last year.

Receivables in our consumer finance business grew a record $1.7 billion, or 9% unannualized from the first quarter of 2003.

More than half of this growth, about $1.2 billion, was from real estate secured and auto secured receivables.

In addition, our Canadian consumer finance operation grew its receivables $133 million or 13% from the first quarter of 2003.

Demand for consumer finance remains robust and our loan growth was assisted by the addition of several new channels of indirect auto loan sourcing, by the implementation of risk based pricing for real estate secured products and the addition of over 1,000 new sales and service team members.

Now that irrational competitors are out of the business, we expect Wells Fargo Financial to produce solid double-digit earnings growth in the years ahead.

Turning to expenses, non-interest expenses were up 17% from the second quarter of 2002.

About 70% of the increase in year-over-year expenses and about 80% of the increase in linked quarter expenses supported the strong growth in our residential mortgage products, both first mortgage originations and home equity loans and lines.

Our consumer finance company, another business experiencing very strong growth, accounted for an additional 9% of the expense growth year-over-year and 6% on a linked quarter basis.

We remain committed to efficient expense management, particularly in non-labor cost management.

But we are also spending wisely and investing for the future.

Just a few examples.

First, in our effort to win the wealth management business of our customers, we are investing heavily in licensing bankers to sell investment products to the mass affluent and hiring new private bankers to serve the affluent in our retail stores.

We will license close to 500 personal bankers and add up to 100 private bankers in our stores.

Second, we have added about 500 Internet access online stations in our retail stores to help us activate more online accounts and teach customers how to use online banking and our bill pay products at Wells Fargo.com.

And we have recently made our website more accessible to Hispanics when we introduced a Spanish language version of our sight, as well as for the blind and visually impaired.

We were recently accorded a National Federation of the Blind Online Seal of Approval for extending a helping hand to visitors who can't see what's on our computer screen.

It's all about serving the customer how, when and where they want or need to be served.

Third quarter, second quarter expenses also included costs to expand or complete a number of technology initiatives to improve customer service and productivity.

Second quarter included costs for imaging infrastructure to image items at the point of deposit, whether at the teller line or at the ATM, included costs for creating electronic delivery of loan documents for home equity and mortgages, replacing paper and physical delivery, and costs for rolling out a new platform in our stores which provides improved teller efficiency, improved risk controls and improved sales tools and performance monitoring.

So, in summary, we did it again.

Broad-based, double-digit revenue growth, double-digit earnings per share growth and improving credit quality, all while in the Wells Fargo tradition strengthening our financial position.

Our business model is working.

We are meeting the changing financial needs of our customers, we're increasing customer cross-sell and we are improving market share.

In view of the strength and consistency of our results as well as recent changes in tax laws, we are evaluating our dividend policy.

Thank you for listening.

And if you have any questions, please call Bob Strickland, Director of Investor Relations, at 415-396-0523.