富國銀行 (WFC) 2003 Q4 法說會逐字稿

Welcome to the Wells Fargo fourth-quarter earnings recorded call.

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

Hello, this is Bob Strickland.

Thank you for calling in to the Wells Fargo fourth-quarter 2003 earnings review call.

Before we talk about our fourth 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 condition, including statements about the expected benefits from certain actions taken in the quarter, the potential value of our mortgage servicing portfolio, future expense reductions if mortgage originations remain at lower levels, future gains on our private and public equity portfolio, and regional economic trends.

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 these 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 fourth-quarter results and our most recent annual and quarterly reports, and to the information incorporated into those documents.

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

Thanks, Bob.

I am pleased to report that Wells Fargo earned $1.6 billion or 95 cents per share in the fourth quarter of 2003, up 10 percent from the 86 cents per share earned a year ago.

The 95 cents per share represents another record result, and is the tenth consecutive quarter of record earnings per share.

Once again, the Company's earnings per share growth was driven principally by year-over-year revenue growth of 12 percent.

For the year, we earned a record $3.65 a share, up 10 percent.

Topline revenue grew 12.4 percent on top of 13 percent last year.

Our return on equity was 19.4 percent.

Although revenue growth in the fourth quarter slowed somewhat on a linked-quarter basis due to the anticipated impact of higher interest rates on mortgage refinance activity, earnings per share growth on a linked-quarter basis actually accelerated somewhat, proving once again the value of our diversified business model.

Indeed, our double-digit earnings per share growth occurred despite a number of actions we took in the quarter that reduced the quarter's earnings per share by 5 cents, but which will benefit future earnings.

I will highlight those actions throughout this call.

Let me illustrate the diversity of our earnings sources by highlighting trends in a few of our businesses.

First, mortgage.

Mortgage originations peaked in the third quarter.

With the subsequent increase in mortgage rates, mortgage originations, as anticipated, slowed down from a record $151 (ph) billion in the third quarter of 2003 to $71 billion in the fourth quarter.

While originations fell from lower refinance activity, the purchased mortgage market continues to be strong, and our business model continued to produce the results we anticipated in terms of bottom-line contribution.

Given our balanced mortgage banking model, we have said all along that should refi activity diminish in a higher rate environment, revenues from the servicing side of our mortgage business would expand as mortgage pre-payments slowed.

And we've also said all along that mortgage expenses would be brought down as volumes decreased.

This is exactly how things played out in the fourth quarter.

The cyclical nature of the mortgage origination business is not new to us, and we have structured the business model with a dynamic cost structure through the use of a commissioned sales force and the use of temporary and contract labor to meet the peaks in demand.

We are already realizing the expense savings we have been anticipating.

Mortgage non-interest expenses were down $181 million from the third quarter, primarily due to lower commissions paid to mortgage originators, which is directly tied to the level of origination volume, and a reduction in temporary and contract labor.

At the peak of the refi cycle, we had about 10,000 temps working at the mortgage company.

As of December 31, 2003, that number was down to 2,500.

If origination volume remains at these lower levels, we would expect further expense reduction over the next several quarters.

Although with the recent dip in interest rates, mortgage originations have begun to pick up again.

The natural offset to the decline in originations is an increase in servicing income, which increased by $394 million in this quarter over last quarter, significantly offsetting a $531 million decline in origination-related non-interest income.

As the average note rate of our portfolio declined to 5.9 percent and the duration of our servicing portfolio increased to 51 months, the mortgage servicing right amortization expense decreased to $459 million, down $113 million from the third quarter.

Given the increase in the size and duration of the $710 billion of our servicing portfolio, the potential value of this servicing asset has increased substantially.

Mortgage revenue and profitability in the quarter were negatively impacted by two decisions we made.

First, we decided to hold instead of sell approximately $7 billion of higher-yielding short and intermediate maturity mortgages as part of our corporate asset liability strategy.

This has the effect of reducing the amount of gains we would normally have immediately recorded on the sale of these types of mortgages.

Second, we decided to change the way we record income on interest rate lock commitments on mortgages held for sale.

We now recognize the business margin associated with interest rate lock commitments at the time of sale instead of at the time of funding.

While we expect the SEC to require implementation of this change for the industry beginning in April of this year, we made the change effective December 31, 2003.

The result of this change was a onetime $77 million reduction in non-interest income recorded as net gains on mortgage loan origination sales activities.

In other words, gains we would have recorded in the fourth quarter if our recognition method had not changed from the third quarter.

Again, our balanced mortgage banking business model is working exactly as anticipated.

Apart from our residential mortgage business, total revenue growth in the rest of the Company was 13 percent year-over-year.

Almost all of our other 80 or so businesses are contributing to this double-digit growth.

Our consumer banking group, for example, continues to better penetrate our customer base.

Core product sales increased 15 percent in 2003 to 2.85 million products.

That's over 11,000 products per day or 23 core product sales per minute.

We continue to add more bankers and stores to better serve our customers.

In the fourth quarter, we completed our first two banking acquisitions of the year, Pacific Northwest Bancorp and the Bank of Grand Junction.

These deals added 60 stores and over 700 team members in Washington, Oregon and Colorado.

Consumer loan growth remains strong across virtually all types of consumer lending products.

To cite a few, home equity loans grew 30 percent from the fourth quarter of 2002, while credit card loans increased 12 percent.

In addition, small-business direct loans were 17 percent and SPA (ph) loans increased 31 percent.

Merchant card services and Internet services also had double-digit revenue growth.

Deposit growth has also been strong.

Average core deposits, excluding a $10 billion decline in mortgage escrow deposits related to mortgage refi activity, increased 11 percent from the fourth quarter of 2002.

We note that the latest U.S. money-supply figures showed a decline in the fourth quarter on a seasonally-adjusted basis.

We would attribute this in part to the mortgage escrow deposit declines occurring in the industry, as well as a reduction in average balances held by businesses.

Indeed, we ourselves have recently seen small-business account deposit balances decline somewhat.

Since we are also seeing an increase in small-business loan demand, it's quite possible that the balance decline and increase in borrowings is reflective of an increase in spending on the part of small businesses.

We are also starting to see increasing optimism from small businesses.

The Wells Fargo Gallop Small-business Index, which measures business confidence and overall market confidence, jumped 24 points from 69 to 93 in the January 2004 survey, which was just released on January 14.

All regions of the U.S. reported higher scores.

These results revealed stronger revenues and increased cash flow among small-business owners.

Most of the firms surveyed also pointed to improved financial situations, higher capital spending and more credit availability as key factors underlying their rebound in confidence.

Hopefully if this trend continues, we could see a further increase in orders for new goods and services, leading to job creation among small businesses.

Consumer credit quality remains strong in the fourth quarter.

However, with over 16 billion in consumer loans outstanding -- added in 2003 alone -- it would not be unreasonable to assume there would be upward movement in the future in our dollar losses and our high-growth retail loan portfolios as these portfolios season.

Operating results in our consumer finance business, Wells Fargo Financial, remains solid.

Both revenue and earnings grew over 20 percent for the year.

This growth was driven by a $3.5 billion increase in real-estate secured lending, and a $2.6 billion increase in auto-secured financing.

This receivable growth was achieved while attracting proportionately more prime and near-prime customers, and credit losses remained within expected levels.

To achieve the growth potential inherent in this business, Wells Fargo Financial added 1400 store salespeople during the year, increasing the total in-store U.S. sales force by 46 percent.

Our wholesale banking group had double-digit revenue and income growth in the fourth quarter of 2003 compared with the fourth quarter of 2002.

Offsetting sluggish loan growth, non-interest income was up 19 percent for the year, reflecting in large part our success in cross-selling more to our existing customers and adding new relationships.

Although it is too early to call a rebound in commercial loan demand, we are encouraged to have seen some modest growth in the quarter.

Average commercial loans were 2.2 billion from the third quarter of 2003. $1.1 billion of this increase was due to the acquisition of Pacific Northwest Bancorp.

The same store increase in commercial loans reflected continued strong growth in asset-based lending and some modest increase in lending activity now in our commercial real estate, middle market and small-business direct businesses.

While the technology sector is still weak, agriculture, manufacturing, wholesaling and foreign trade export sectors showed signs of improvement during the quarter.

Many other segments within wholesale banking produced solid results in the quarter, including capital markets, managed partnerships, insurance, trade finance and foreign exchange, asset-based lending and commercial real estate.

During the quarter, we realized 143 million of pretax gains on our equity investments, mostly from realized gains in the private equity portfolio.

This is the first quarter in which we have had meaningful private equity gains since 2000.

Given the actions we have taken to write down these investments during the past two years, and assuming the IPO, M&A and buyout markets remain healthy, we would anticipate additional gains over time on these investments.

During the quarter, we took a number of actions that reduced earnings per share by 5 cents, but which will help earnings over time.

These included the following items -- first, we again took advantage of interest rate volatility to reposition the bond portfolio, selling low-yielding securities and adding to the portfolio at higher yields intra-quarter.

This resulted in $12 million of bond losses but will help the portfolio yield going forward.

Given the historically low level of interest rates, we decided to sell a subprime credit card portfolio, and a $30 million credit loss was recorded to provision expense.

In the third quarter, we contributed a substantial amount of highly appreciated equity securities to the Wells Fargo Foundation.

And in the fourth quarter, we contributed a small amount, as well, resulting in a $7 million charitable contribution expense.

As part of our effort to streamline operations, we incurred integration, consolidation and severance costs largely associated with re-sizing the mortgage business for lower origination volumes.

We also incurred additional expenses related to the implementation of our strategy to consolidate a multiple bank charter.

The impact of our streamlining efforts resulted in a net reduction in net income before tax of $62 million.

Finally, we consolidated certain company-owned properties and wrote down certain leased space in order to reduce future occupancy costs.

These actions reduced net income before taxes by $19 million.

In total, the actions taken during the quarter reduced revenue by 14 million, increased expenses by 115 million and had a bottom-line impact reducing net income after all taxes and tax benefits by $84 million or 5 cents per share.

I wanted to briefly mention one other accounting change that we reported on Friday through amendments of previous SEC filings.

Based on prior fine guidance from the Emerging Issues Task Force, we determined it was appropriate to present certain auto leases as operating leases in our financial statements instead of as direct financing leases.

This change reduced loans and increased other assets on our balance sheet by $3.7 billion dollars.

It had no impact on diluted earnings per share for any year after 2000 and only a 1 cent reduction in diluted earnings per share during 2000.

Just a few words on current regional economic trends.

Much of our 23-state banking franchise is near recovery or already in recovery.

All areas are improving.

In California, overall conditions seem to be improving, including now in the northern part of the state.

The unemployment rate declined to 5.7 percent in December, the lowest level since early 2002.

Nevada and Las Vegas, in particular, remain growth leaders.

We are blessed with high population growth areas.

And as indicated in my earlier comments, small-business activity and optimism seems to be picking up.

In conclusion, we not only had a great quarter, we had a great year, highlighted by our double-digit earnings per share and double-digit revenue growth.

By executing on our vision of satisfying all of our customers' financial needs, we have also achieved double-digit earnings per share and double-digit revenue growth over the past ten years.

Since 1993, our earnings per share have grown at a compound annual rate of 13 percent and our revenue has also grown at a compound annual rate of 13 percent.

Recognizing this consistent double-digit growth in earnings and revenue, our stock price reached a record high in the quarter, resulting in a total market capitalization exceeding $100 billion for the first time.

Only about 20 other U.S. companies have a market cap exceeding $100 billion.

As we begin 2004, our 152nd year of serving our customers' financial needs, we are optimistic that we will earn even more of our customers' financial business by selling them the products they need and providing them with outstanding customer service.

Thank you for listening and if you have any questions, please call Bob Strickland, the Director of Investor Relations, at 415-396-0523.