富國銀行 (WFC) 2004 Q3 法說會逐字稿

Welcome to the Wells Fargo third quarter earnings recorded call.

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

Hello, this is Bob Strickland.

Thank you for calling in to the Wells Fargo third quarter 2004 earnings review prerecorded call.

Before we talk about our third 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 our future mortgage expenses, the future financial impact on our mortgage business of the transition of the mortgage market from a refinance market to a purchase market, the future number of our commission based mortgage consultants, our growth potential in the home equity market and the future middle market loan demand.

The 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 third quarter results, to our most recent annual and quarterly reports, and to information incorporated into those documents.

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

Thanks, Bob.

Wells Fargo had another exceptional quarter with 12% earnings growth and earnings per share of $1.02, up 11% from a year ago.

We have now achieved double digit earnings per share growth in 12 consecutive quarters, reflecting the continuation of solid performance trends in most of our businesses.

As in prior quarters, market opportunities allowed us to build long-term value for our shareholders in the third quarter.

Long-term treasury yields declined from over 4.5% at the start of the quarter, to below 4% near the end of the quarter, and corporate debt security spreads relative to U.S.

Treasuries narrowed to historically low spreads.

Taking advantage of these opportunities we sold just under $1 billion of debt securities, realizing a gain of $10 million, and also realized a loss of $35 million in connection with the sale of $3.5 billion of the lowest yielding 3 to 5 year ARMs on our balance sheet.

In addition, as a result of the sizable decline in mortgage interest rates, we added $211 million to the MSR impairment allowance.

This reduced mortgage servicing income by $130 million net of revenue from hedging ineffectiveness and derivative income excluded from hedge effectiveness.

The net effect of all of these actions and items was to reduce third quarter earnings by 6 cents per share.

We continue to invest in our businesses.

We will add about 100 new banking stores and 80 new consumer finance stores this year.

Over the past 3 years we have increased our sales force by over 10,000 people and it usually takes about 3 years for a new sales person to obtain a full book of business.

The continuation of double digit earnings growth in the third quarter of 2004 is even more noteworthy this particular quarter, because it occurred despite the substantial drop-off from the record mortgage refinancing activity that positively impacted earnings a year ago when mortgage rates were at historical lows and from the second quarter of this year when we had a mini re-fi boomlet.

Our ability to consistently achieve double digit earnings growth first and foremost reflects the breadth and the diversity of our business model.

While important, mortgage is only one of many businesses and many opportunities for growth.

To illustrate this point, while home mortgage revenue actually declined $623 million from a year ago, revenue from our businesses other than home mortgage increased 11%.

Second, as we've said all along, the mortgage business itself is relatively balanced.

While our home mortgage origination declined about 63% from the year-ago peak, revenue from home mortgage only declined 40%.

In addition, almost 60% of the mortgage revenue decline from last year was offset by a reduction in mortgage expenses.

Even though interest rates declined in the third quarter of 2004 from the second quarter of 2004, mortgage results were lower in the third quarter than in the second quarter.

Since this may seem counterintuitive let me elaborate.

The principal reason for this decline is the intra-quarter pattern of interest rates.

Around a general upward trend in interest rates since the middle of 2003, mortgage rates dropped in March of 2004 then rose during the second quarter of 2004 and then fell again during the third quarter, although not back down to the March lows.

The initial drop in rates in March produced a surge in mortgage applications which reached $119 billion by the end of the first quarter of 2004 leading to $96 billion in second quarter residential real estate originations.

As interest rates increased during the second quarter applications fell to 100 billion by the end of the second quarter of this year resulting in a drop-off in mortgage originations to $68 billion in the third quarter of 2004.

In addition to reducing origination revenue, the intra-quarter rate pattern also impacted servicing income.

The rise in rates during the second quarter of 2004 resulted in an increase in servicing valuation for that quarter, realized through a $585 million release of impairment reserves, while the subsequent decline in rates in the third quarter of 2004 resulted in $211 million increase in the MSR impairment valuation allowance.

As a result, the valuation allowance at September 30, 2004, rose to $1.8 billion.

The MSR asset was valued at $7.8 billion at September 30, 2004, while 1.18% of loans serviced were others, compared with 1.37% at June 30, 2004.

Given our long experience managing a mortgage business over many cycles, the expense base of this business has been intentionally structured so that costs can be reduced as volumes decline.

Relative to last year's peak activity in the third quarter of 2003, mortgage expenses were reduced $370 million.

On a sequential basis, however, expenses were held relatively flat on the possibility that the intra-quarter decline in mortgage rates would stimulate origination activity.

Should this not occur, expenses will be brought down further.

The mortgage market is now largely transitioned from a refinance market to a purchase market, which is how we are structuring our mortgage business.

In a purchase market, retail originations become more important.

Wells Fargo is already the largest retail home mortgage lender in the country, and in August we announced the goal of doubling the number of our commission days home mortgage consultants, currently numbering 10,000, in a move to double our retail market share.

As I previously indicated, our other 82 businesses combined produced 11% revenue growth from the third quarter of 2003.

Let me highlight a few key areas driving this growth.

Average loans grew 27% in the third quarter compared to a year ago.

Average loan growth was strong across all of our business segments, including 30% growth in community banking, 10% growth in wholesale banking and 45% growth in consumer finance compared with a year ago.

Average loans increased 12% annualized on a link quarter basis, lower than the year-over-year rate, due primarily to the ARMs sold in the quarter.

The loan growth in community banking was driven by residential mortgage, credit cards, home equity, and other evolving credit and installment loan products.

Credit card balances were up 11% from a year ago and 16% annualized on a linked quarter basis.

Credit card purchases increased 19% from the third quarter of 2003, driven by a 30% increase in new accounts.

Currently 30% of our retail households have a Wells Fargo credit card, up from 26% a year ago, and just over 20% at the time of the Wells Fargo/Norwest merger.

Average home equity balances were up 45% from a year ago and roughly the same on a linked quarter basis, up 42% annualized, indicating that growth is still strong for this product despite the recent increase in rates.

This growth was driven by strong demand combined with lower account attrition.

While interest rates have increased Wells Fargo is well positioned to continue to grow within the home equity marketplace due to three main factors;

First, today's interest rates are still near historic lows and the tax deductibility for many homeowners makes home equity an attractive alternative compared to other forms of financing.

Second, home values remain strong.

Home equity now represents at least half of the net worth of most American households.

Third, while more consumers are accepting home equity as a smart financing option, only 1 in 3 homeowners currently hold a home equity line or loan.

Only 20% of Wells Fargo homeowners have a home equity product with Wells Fargo.

This provides significant opportunities for continued quality growth.

Commercial loan growth this quarter was once again broad-based across virtually all of our segments including small business, middle market, commercial real estate, leasing, trade finance, and asset based lending.

The 12% year-over-year growth in middle market loans was primarily from new relationships, while line usage from existing customers remained virtually unchanged at 50%.

The growth came primarily from California and the border states of Arizona and Texas, with no particular industry concentrations.

Competition for loan volume is very intense.

While this has put some pressure on pricing, we have maintained our high underwriting standards.

We have added over 650 new middle market customers this year, making us the #1 provider of financial services to middle market companies in our footprint according to a leading independent research firm.

The middle market loan pipeline remains active in October.

Foothill, our leading asset-based lender, also had broad-based growth from new and existing customers in the third quarter.

Wells Fargo Financial, our consumer finance company, continued to achieve strong loan growth in their real estate secured auto finance and credit card portfolios.

This growth has been the result of changes that have taken place over the past few years.

First, there is a continued focus on growth and acceptable ROAs.

In the past Financial focused more on their higher ROA unsecured lending businesses and did not fully capitalize on growth opportunities in the lower ROA but faster growing, real estate and auto secured lending segments.

Wells Fargo Financial implemented risk based pricing which enabled them to expand their customer base to near prime.

Many operational changes were implemented which have enabled them to grow faster with the proper controls.

For example, collections in underwriting, which were done in individual stores, are now done centrally.

This allows sales people at the stores to concentrate more on sales and servicing the clients.

Wells Fargo Financial has also been adding team members with an additional 2460 team members from a year ago, up 16%.

In community banking, our retail banking businesses remain strong in the third quarter.

Core product sales increased 17% year-over-year to a record 3.81 million products.

We have now achieved 9 consecutive months of selling more than 1 million core products monthly.

By comparison, in 2003, there were only 5 months in which we sold at least 1 million core products.

Since last September we have increased the number of retail bankers by 1700, a 17% increase, while maintaining our sales productivity at 5.1 core sales per banker per day.

Excluding mortgage escrow deposits, community banking grew average core deposits 11% from the third quarter of 2003 and 8% annualized from the second quarter of 2004.

Average consumer checking account balances grew $5.5 billion or 13% from a year ago.

Consumer checking accounts were up a net 6% from a year ago due to our focused selling efforts.

We saw strong double digit annualized revenue growth on a linked quarter basis in our regional banking group.

Virtually all regions reported strong revenue growth including California, border banking, Nevada, Texas, Great Lakes, Northwest, the desert mountain states and the rocky mountain regions.

Let me conclude with a few remarks about the strength of our balance sheet.

With respect to credit quality, nonperforming assets at $1.569 billion were down $150 million or 9% from a year ago, with $47 million of this decline occurring just in the past quarter.

At quarter end, nonperforming assets were only 0.56% of total loans, the lowest level since the Wells Fargo/Norwest merger in 1998.

Credit losses remained at the low end of expected ranges, with charge offs declining 4% from a year ago.

Loss rates continued to track at historic lows and were among the best in the industry at quarter end.

Consumer loan loss rates of 0.67% were flat with the second quarter of 2004 and down from 0.85% in the third quarter of 2003.

Loss rates for our commercial and commercial real estate loans were 0.34% of loans, essentially flat with the second quarter of 2004 and down from 0.58% in the third quarter of 2003.

Our fast growing home equity portfolio had lower losses, a loss rate of 12 basis points for the third quarter of 2003, compared with 19 basis points in the second quarter of 2004 and 13 basis points in the third quarter of 2003.

This portfolio continues to perform better than expected with an average combined loan to value in the low 70s, assuming the entire home equity line is drawn down.

Based only on the drawn portion of the line, the combined loan to value is in the low 60s.

This marked the third quarter of exceptional credit results in our wholesale business units.

Wholesale banking net charge offs for the third quarter of 2004 were only $7 million, down from $60 million in the third quarter of 2003, and $20 million on a linked quarter.

Wells Fargo Financial's losses were higher than a year ago reflecting the strong 45% growth in loans at that business year-over-year.

However, loss rates of 2.63% in the third quarter of 2004 declined from 3.06% in the third quarter of 2003 reflecting changes in customer and loan mix.

The Company's net interest margin rose to 4.89% in the third quarter of 2004 up 6 basis points from the second quarter of 2004.

This was the first time in the past 10 quarters that our net interest margin increased.

Since we don't take a lot of interest rate risk with our balance sheet, trends in our net interest margin tend to be more influenced by our evolving business mix than by the direction of rates, although the repositioning actions we've taken in the past few quarters did have a positive impact on net interest margin in the third quarter.

The unrealized gain on our bond portfolios at September 30, 2004, was $1.3 billion.

We believe per dollar of bonds, that the unrealized gain was one of the highest in financial services at quarter end.

After shedding our lowest yielding ARMs, the average yield on our $89 billion of residential mortgage loans on our balance sheet, largely adjustable rate mortgages with remaining durations of less than 3 years, was 5.5% at quarter end.

Given the further narrowing of spreads for Wells Fargo debt securities in the third quarter, we accelerated our financing plan issuing $7.2 billion of intermediate and long-term debt in the third quarter of 2004 to lock in attractive costs.

Our private equity portfolios cost basis declined to 1.5 billion at September 30, 2004, largely because we have realized more cash on prior investments than we've made in new investments.

And the $482 million of public equity portfolio had an unrealized gain of $92 million at September 30, 2004.

During the quarter we purchased about 5 million of our own shares bringing the year-to-date total of share repurchase to 24 million shares.

We have over 17 million shares remaining in buyback authority at quarter end.

In July, we increased our quarterly common stock dividend payment to 48 cents a share.

Since 1998 our dividend payment has increased a compound annual growth rate of 16%.

In summary we are pleased with another excellent quarter of solid results, the 12th consecutive quarter of double digit earnings per share growth.

These results were driven by broad-based revenue growth in businesses other than home mortgage, improved credit quality, and strong deposit and loan growth, including double digit commercial loan growth in our middle market segment.

Thank you for listening.

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