富國銀行 (WFC) 2004 Q2 法說會逐字稿

Welcome to the Wells Fargo's second-quarter earnings recorded call.

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

Hello and thank you for calling in to the Wells Fargo second-quarter 2004 earnings review prerecorded 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 condition, including statements about the expected benefits of the balance sheet, repositioning actions taken in the quarter; a possibility of future actions to improve asset yields or reduce long-term funding costs; the impact of interest rate changes on mortgage operations including originations, production costs, servicing rights and hedging losses; various statements about future credit losses and credit quality; and the impact of rising interest rates on the ability of consumers to pay higher interest costs.

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, to our most recent annual and quarterly reports and to information incorporated into those documents.

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

Thanks Bob.

Wells Fargo had another great quarter earning $1.7 billion or $1.00 per share in the second quarter of 2004.

Earnings per share grew 11 percent from a year ago.

We have now achieved double-digit earnings per share growth in 11 consecutive quarters.

The quarter was characterized not only by double-digit earnings growth, but also by broad-based revenue growth, strong credit quality, and a long anticipated emergence of commercial loan growth.

The $1.00 per share earned in the second quarter compared with $1.03 per share earned in the first quarter of 2004.

Second-quarter results include just under 1 cent of combined bond and equity investment gains whereas the prior quarter contained 5 cents of market sensitive gains.

As indicated in our quarterly press release, second-quarter earnings were negatively impacted by $398 million of pretax or 14 cents in earnings per share due to certain balance sheet actions we took during the quarter to enhance future yields on our earning assets and to further reduce the cost of our already very low long-term cost of funds.

Let me liberate on why we undertook these repositioning actions and their impact on second-quarter results.

Historically, Wells Fargo has enjoyed one of the highest earning asset yields among large U.S. banks and one of the lowest cost of funds.

Our wide margin is a reflection of our business mix and financial strength, not a fundamental bet (ph) on interest rates.

On the asset side of our balance sheet, we enjoy proportionally greater amounts of loans whose returns are high relative to their risk; and on the deposit side of our balance sheet, we have proportionally more noninterest checking in low-cost, low-interest core deposits in our overall funding mix the most thanks.

Additionally, because of our consistent financial strength, as reflected in Wells Fargo Bank's singled AAA rating among U.S. banks, our new issuance debt costs are currently one of the lowest of any large financial institution.

Every so often, opportunities arise in the market to take advantage of particularly volatile interest rates for the long-term benefit of our shareholders.

Second quarter was one such period.

The ten-year T-bond rate moved from a low of 3.7 percent towards the latter part of the first quarter of 2004, to an inter-quarter high of over 4.8 percent in the second quarter of 2004, before settling back down somewhat at the end of the second quarter.

And mortgage asset spreads widened as rates generally moved up.

During the quarter, we undertook several important actions to take advantage of that volatility.

On the asset side of our balance sheet, we sold $3.5 billion of securities, largely mortgage-backed securities, with yields below 4 percent, and $10.5 billion of 3 and 5-year adjustable rate mortgages also with yields below 4 percent.

These actions largely cleared out the lowest yielding mortgage related assets from our balance sheet.

We were pleased about 80 percent of the sales with newer mortgage-backed securities yielding close to 6 percent, and retained some of the lower (ph) yielding adjustable rate mortgages, most recently originated by our mortgage company.

Instead of replacing all of the assets that were sold with new securities, we repurchased our own debt securities after market rates ran up through a tender offer.

As previously disclosed, this very successful transaction allowed us to retire $2.4 billion of previously issued long-term debt that had a weighted average coupon of 6.2 percent, well above the companies cost of new long-term debt; more than two percent above the yield on the securities and loans that were sold, and 5 percent above our core current short-term market funding costs.

The impact in the second quarter of these various actions was a reduction in pre-tax income of $398 million comprised of $222 million on the assets sold, consisting of $61 million in bond losses and $161 million in losses on mortgage loans sales, reflected in mortgage fee income.

And a $176 million loss to complete the tender offer on our long-term debt reflected in non-interest expenses.

These particular actions represented an extremely effective way from a tax and capital perspective of enhancing future asset yields and further reducing our long-term average cost of funds.

In combination with continued growth in core checking deposits, as well as actions taken between mid 2003 and early 2004 to lengthen funding maturities, the second quarter balance sheet repositioning transactions left the Company overall with little net change in its essentially neutral economic interest rate profile.

To the extent markets remain as volatile as they were in the second quarter, we may take advantage of additional opportunities to further improve asset yields and/or reduce long-term funding cost in future quarters.

As we have discussed with investors in the past, a rising rate environment resulting from an improving economy will benefit many businesses at Wells Fargo.

Commercial loan growth is just one example.

On a linked-quarter basis, average commercial and commercial real estate loans were up $2.3 billion, or 11 percent annualized.

Our commercial loans outstanding have been relatively flat for several years, but still outpaced the overall industry which declined during this period.

This is the first quarter we have seen strong commercial loan growth in nearly 3 years.

This growth came from virtually all commercial customer segments including middle market, commercial real estate, leasing, trade finance, asset base lending and small-business.

Loans to midsize companies have grown 10 percent annualized since year-end 2003.

This growth to middle market companies was broad-based by geography and industry.

We continued to see signs of improvement in business sentiment and the economy across our region.

The May 2004 Wells Fargo Gallup Survey of small business sentiments showed increased optimism among small business owners with the index rising from 93 to 100.

To put the latest results in context, a score of 0 reflects an equal number of small business owners who are optimistic and pessimistic about their company's situation.

The index tracks 6 key measures for both current and future expectations; current financial situation, revenues, cash flow, capital spending, number of jobs, and credit availability.

Net income in our wholesale and commercial banking business grew 12 percent in the second quarter compared with the second quarter of 2003, and for the quarter represented 22 percent of Wells Fargo's overall profits, driven primarily by a 10 percent increase in fee income and improved credit quality.

Cross-sell in this business now stands at 5 products for middle market and large corporate customers.

Let me highlight a cross-sell success story.

Revenue from Acordia, our commercial insurance brokerage business, was up 8 percent in the second quarter of 2004, compared with the second quarter of 2003.

Roughly 15 percent of this revenue growth was the result of cross-selling Acordia products to our existing Wells Fargo commercial customers.

Recent surveys also indicate we continue to gain market share in our treasury management business.

Within our 23 banking states, our leading market share of middle market treasury management business increased from 22 percent in the year 2000 to 26 percent currently.

Among upper middle market companies, we were the only bank among our peers to grow market share nationally between 2002 and 2004.

During the quarter, we agreed to purchase $27 billion in mutual fund assets and 7 billion in institutional investment accounts from Strong Financial.

The asset management businesses of Strong Financial includes 70 mutual funds and serve 870,000 active accounts.

The expanded investment products and capabilities we will gain with Strong will increase fee revenue and cross-sell opportunities for Wells Fargo.

We now turn to Community Banking.

Our retail banking businesses remained strong in the second quarter.

Core product sales increased 16 percent in the second quarter, year-over-year to a record 3.45 million products.

Since last June, we've increased the number of retail bankers by 1600, up 17 percent while we maintained our strong sales productivity at 4.9 core sales per banker per day.

Excluding mortgage escrow deposits, Community Banking grew average core deposits 12 percent in the second quarter of 2003, and 14 percent annualized from the first quarter of 2004.

Average consumer checking account balances grew $5.5 billion, or 13 percent from a year ago, and $2.4 billion or 21 percent annualized on a linked-quarter basis.

This strong deposit growth was driven by a favorable combination of our success in sales of new checking accounts, higher balances per account and improved customer retention.

Specifically, consumer checking accounts were up a net 4.7 percent from a year ago, due to our focused selling efforts.

Despite higher interest rates and improved stock market performance, average balances per account increased 8 percent from the second quarter of last year, in part reflecting our success in building higher net worth customers and growing relationships.

And our continued focus on customer service and reducing the attrition of team numbers and customers resulted in lower checking account attrition which was down 20 percent from January 2002 among high-value customers; attrition has improved nearly 33 percent.

The level of team member engagement helps reduce customer attrition.

We know that without engaged team numbers we will not have engaged customers.

In California in 2000, we had 2 actively engaged team numbers for one -- every 1 actively disengaged team number.

In 2003, we had almost 5 actively engaged team numbers for every 1 actively disengaged, a huge improvement and much better than the Gallup National Financial Industry database average of two actively engaged employees for every 1 actively disengaged.

Our consumer debit and credit card businesses saw solid growth in the second quarter. 87 percent our checking account customers now have a Wells Fargo debit card and they increased their purchases made on their debit cards by 23 percent during the second quarter compared to a year ago. 29 percent of our consumer households have a Wells Fargo credit card, up from 26 percent a year ago.

Credit card purchases increased 12 percent over the same time period.

Consumer loan growth remained strong in the second quarter.

Credit cards, home equity, home mortgage, revolving credit and installment loan products all grew in the quarter.

On a consolidated basis, average consumer loans increased 7.3 billion or 18 percent annualized on a linked-quarter basis.

We continue to bring customers online with 48 percent of our consumer customer base now using wellsfargo.com and approximately 65 percent of our middle market and large corporate customers using our online portal to commercial electronic office.

At quarter end, we had 5.6 million active online customers, up 30 percent from a year ago; and 1.9 million bill pay customers, up 36 percent from a year ago.

We had 485,000 active online small business customers, up 37 percent from last year.

These customers also bought more online with consumer product sales up 62 percent, small business product sales up 50 percent, and revenue from wholesale products up 36 percent year-to-date through May compared with the same period last year.

Mortgage banking revenue and mortgage banking expenses were up in the second quarter.

Despite the increase in interest rates during the second quarter, mortgage production revenue actually increased somewhat as the $72 billion in application pipeline at the start of the quarter was processed and funded during the second quarter.

At quarter end, the application pipeline had declined to a still relatively high $57 billion and despite the decline in refinancing activity during the second quarter, we continued to see strong purchase mortgage demand through our retail system.

In addition to somewhat higher production revenue, servicing income was also up during the quarter due to growth in our servicing portfolios and due to higher interest rates.

Servicing fees net of amortization and provision increased $295 million in the quarter, including a net $375 million impact from a $585 million release of the MSR valuation allowance, net of $210 million of hedge in effectiveness.

The servicing side of our mortgage business became even more valuable in the second quarter.

Total owned servicing at quarter end stood at $749 billion and has grown consistently each quarter, up 18 percent from $633 billion in servicing a year ago, and up 13 percent annualized from the $725 billion in servicing at the end of the first quarter.

The duration of the servicing portfolio increased to approximately 6 years from 4.1 years at the end of the first quarter.

The weighted average note rate of our owned servicing declined to a record low of 5.75 percent, with a very narrow range of note rates around that weighted average.

At quarter end, the MSR valuation allowance remained at a relatively high $1.6 billion, and if rates continue to go up, we would expect lower hedging losses on our servicing and many of our competitors since we do not hedge the entire servicing portfolio.

Should interest rates decline again, servicing values could decrease, but in that environment, we would expect increased refinancing demand and higher origination revenue.

Mortgage expenses increased in the second quarter, due to higher production costs on originated volume, and increased temporary support to process the $96 billion in second quarter 2004 organizations.

Should origination volume decline, production expenses will also decline, and we expect to be able to reduce temporary support expenses well.

In fact, temporary help has already declined from an intra-quarter peak of approximately 3200 FTEs to 2600 FTEs at quarter end.

Credit losses remained at the low end of expected ranges and among the best in the industry.

With total chargeoffs declining by $25 million or 6 percent from a year ago, and nonperforming assets for the Company declining $140 million or 8 percent from a year ago, given the growth in our loan portfolios and large lower chargeoffs, loss ratios have declined to 0.59 percent of average total loans, the lowest loss rate since prior to the 1998 Norwest Wells Fargo merger.

However, as we have said in past quarters, we could see some seasoning of our high-growth consumer portfolios including home equity and consumer finance.

While we remain very comfortable with the performance of our credit, it was necessary to increase the allowance for loan losses at Wells Fargo Financial by $50 million during the quarter, given the sustained growth in their consumer loan portfolios.

Wells Fargo Financials loan portfolio has grown 46 percent from the second quarter of 2003, while their net loss rate has declined from 3.11 percent in the second quarter of 2003, to 2.28 percent in the second quarter of 2004.

With the recent FED rate increase, there has been a lot of media coverage concerning consumer's ability to pay higher interest charges on their variable-rate borrowings.

We believe that if the rising rates are associated with an improving economy and stronger employment, personal disposable income will also be increasing, minimizing the impact of monthly payment increases.

For example, Wells Fargo's Home Equity line bank customers have an average loan balance of around $40,000.

A 100 basis point increase in rates would result in only a tax-deductible $33.00 increase in monthly payments, a manageable increase if employment remains strong.

Furthermore, our bank home equity portfolio has good credit metrics with an average FICO of 720 and an average combined first and second mortgage loan to value of around 70 percent.

This assumes that the entire home equity line is drawn.

If you only look at actual outstanding balances drawn on the home equity line, the combined loan to value is around 60 percent.

In addition, 27 percent of the bank home equity portfolio is in a first lien position.

And 34 percent of the portfolio dollars in a second lien position are behind a Wells Fargo first mortgage.

Finally, our private equity portfolio's cost basis remained at $1.7 billion at June 30, 2004, and the $468 million public equity portfolio had an unrealized gain of $289 million at June 30, 2004, up from $163 million at March 31, 2004.

Unrealized gains on our debt securities were $864 million at June 30, compared to 1.46 billion at March 31, 2004.

In summary, we are pleased with yet another excellent quarter of solid results, the 11th consecutive quarter of double-digit earnings per share growth.

These results were driven by broad-based revenue growth, improved credit quality, and strong deposit and loan growth including commercial loan growth in the middle market segment.

We believe the balance sheet repositioning opportunities we realized in the second quarter will help improve profitability going forward.

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