富國銀行 (WFC) 2004 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 and I want to thank you for calling into the Wells Fargo fourth quarter 2004 earnings review pre-recorded call.

Before we talk about our fourth quarter and full-year results, we need to make the standard securities law disclosure.

In today's call we will make forward-looking statements about specific income statements and balance sheet items and other measures of future results of operations and financial conditions including statements about the projected funding needs of and expected funding sources for the Wells Fargo Foundation, the potential gain we believe is inherent in our equity portfolios, the amount of integration expense expected to be incurred in 2005 for the Strong Financial transaction and the pending acquisition of First Community Capital Corporation, the anticipated benefits of balance sheet repositioning actions taken in 2004, and investments made in 2004, the expected investments in 2005 for new stores and additional team members, and the projected time frame for profitability and cost recovery, the ability to continue to grow our home equity portfolio, the future level of mortgage expenses relative to mortgage production levels, and credit loss expectations for 2005.

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 fourth quarter results and full-year 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.

2004 was another outstanding year for Wells Fargo.

Both annual revenue at $30 billion and annual earnings per share at $4.09 were new records for our Company.

Revenue was up 6%, with combined businesses other than home mortgage up 11%.

Our top line and bottom line results reflect a level of growth and a degree of consistency that we believe are unparalleled in our industry.

We have achieved double-digit compound annual growth rates in revenue, earnings per share, and total stockholder return over the past 5, 10, 15, and 20-year periods.

Our double-digit growth in earnings per share and revenue continued in the fourth quarter of 2004 with net income and revenue each growing 10% from the fourth quarter of 2003, and with quarterly revenue growth accelerating from prior 2004 quarters.

The level and consistency of our growth are not accidental.

They reflect the depth and breadth of our more than 80 businesses which tend to add to our competitive growth rate simply because this gives us more opportunities for growth.

We have maintained all along that to achieve above-average levels of growth, it's necessary to reinvest in our businesses and in our people as opportunities materialize.

In addition to incremental investments in new stores, additional sales people, and technology in the fourth quarter, fourth quarter results also included $292 million, or 11 cents per share of significant investments, including $217 million, or 8 cents per share, of special contribution expense for the Wells Fargo Foundation, $44 million, or 2 cents per share, for a special contribution of Wells Fargo common stock to the 401(k) plan for eligible team members, $19 million, or 1 cent per share, in integration expenses related to the Strong Financial transaction, and a $12 million loss connected with our strategy of reducing lower yielding adjustable rate mortgages.

Let me quickly elaborate on each of these items.

In the third quarter of 2003, we contributed $191 million of highly appreciated public stock to the Wells Fargo Foundation.

And when that stock is sold, Wells Fargo does not pay taxes on the appreciation, it all stays at the Foundation.

The additional $217 million contribution expense in the fourth quarter of 2004 reflects a commitment to fund the Foundation and is projected to keep the Foundation well funded for at least eight years and possibly much longer, given the potential appreciation of the Foundation's assets.

This will allow us to continue to support the communities we serve to our mutual benefit well into the future.

This commitment is expected to be funded with tax-advantaged securities, largely from our private equity investments, reflecting our confidence in the potential gain inherent in our equity portfolios.

The total value of our public equity portfolio at year-end was $696 million, up $122 million from September 30, 2004, with most of the increase reflecting additional unrealized gains.

To recognize the talent and dedication of our exceptional team members who continue to achieve our goal of double-digit earnings per share and revenue growth year after year, we made a special contribution of Wells Fargo common stock to a 401(k) plan for eligible team members equaling 1% of a team member's pay up to a maximum contribution of $750, a total benefit expense of $44 million, or 2 cents per share.

Given the expensing of stock options, we believe this special 401(k) contribution is a more cost-effective way to ensure that our team members are stockholders, have a piece of the action, and personally benefit from increasing Wells Fargo stockholder returns.

As previously announced, we also incurred $19 million, or 1 cent a share, in integration expenses related to the Strong Financial transaction that closed on the last day of the year.

Wells Fargo is now the nation's 20th largest mutual fund company with 120 mutual funds with no load and load options.

We currently have more than $650 billion in total assets under management and administration, including $100 billion in mutual fund assets under management.

In 2005, we expect to incur integration expenses of approximately 2 cents per share to complete the integration of Strong and for our pending acquisition of Houston-based First Community Capital Corporation.

Significant actions to reposition our balance sheet were undertaken in line with market opportunities in 2004.

These actions, which reduced revenue growth by approximately one percentage point in 2004, and reduced earnings per share by 6 cents for the extinguishment of high rate debt alone, were designed to enhance asset yields and to reduce long-term debt costs.

These actions have already begun to help stabilize the cyclical decline in net interest margin, one of the reasons we continue to have an industry-leading net interest margin.

The $12 million loss was taken as part of the strategy early in the fourth quarter.

During 2004 we made significant investments in new store openings, including 104 new retail banking stores and 73 new consumer finance stores, in adding more than 5,000 team members, including 1800 new retail bankers, and in new technology for electronic imaging, call center, and other tech projects, all of which will help us grow sales and serve our customers more efficiently and more effectively.

Since these initiatives occurred progressively during 2004, or were skewed toward the latter part of the year, their cumulative impact was more pronounced on both year-over-year and linked quarter expense growth in the fourth quarter of 2004 than in previous quarters.

We expect to continue to invest in stores and team members with customer contact in 2005.

While some observers believe that significant investment spend and positive operating leverage are mutually exclusive, we believe that they go hand in hand.

In view of our long history of making prudent investments for growth, while economizing on expenditures in non-growth activities, 2004 revenue grew 6% while expenses grew only 2% inclusive of all investment spending and repositioning impacts.

Let me now turn to the key areas where we are experiencing such solid growth.

Community bankings' sales growth continues to accelerate.

Each month in 2004 our retail banking business sold at least one million core products, something we achieved in only five of the months during 2003.

Strong monthly sales resulted in record annual core product sales of 13.9 million, up 18% from 2003.

Our average retail bank household now has 4.6 products with us, increasing over 50% from the 1998 cross-sell ratio at the time of the Wells-Norwest merger, and up 6% from a year ago.

And retail bank households, with eight or more products, our longer term goal, reached 14%.

We also increased sales efficiency with sales per banker per day increasing to 4.8, up from 3.5 in 1999.

Counting the number of products sold is an easy way of identifying sales success, but is not the most important way.

All of our incentive programs focus on products and profit.

If we are not selling our customers the right products, it will not benefit the customer or us.

Our average household profit was up 17% in 2004 compared with 2003.

We divide our customers into four profit tiers.

The number of households in our most profitable tier increased by almost 20% during the year while our least profitable tier decreased by almost 5%.

Besides growing sales and profits, we also grew our distribution channels opening up 104 new community banking stores, two new stores per week, up 55% from the 67 new stores we opened in 2003, and we expect to open approximately the same number of stores in 2005 as we did in 2004.

Our new stores are typically profitable in 18 months, and the cost is fully recovered in 24 months.

Additionally, we renovated 396 stores in 2004, up 21% from 2003.

We also added over 1900 online Internet access computer stations within our stores during the year, helping us train and serve our customers so they can bank online when, where, and how they want to be served.

Consumer online product sales were up 42% in 2004, and bill pay and presentment customers were up 35%.

We also upgraded our ATMs during the year, 96% of which are now Web-enabled.

And while improved technology will better serve our customers, it is our team members who determine our success.

We added 1800 new retail bankers in 2004, up 18% from 2003, and we doubled the number of licensed [audio difficulties].

But having more team members is not as important as having talented, motivated, and energized team members.

Our team member engagement score is now in the 70th percentile in the Gallup database, up from the 56th percentile in 2003.

This is so important for us because we believe improved team member engagement will result in improved customer service and attrition.

We are already seeing results.

In 2004 we reduced high-value checking account attrition by 6%.

We also improved customer wait times by 25% in 2004.

All of our consumer banking metrics, sales, average household profit, banker productivity, team member engagement, and customer retention, improved in the fourth quarter of 2004 compared with the fourth quarter of 2003.

Now let's look at some of the products our team members and community bank are having the most success in selling.

Purchase volume on our consumer credit cards was up 17% from 2003, and year-end balances were up 14%.

Currently 31% of our retail bank's consumer households have a Wells Fargo credit card, up from just 21% in 1999.

Purchase volume on our consumer debit card was up 21% from 2003.

Currently 88% of our checking account customers have a debit card, and 65% of our debit card accounts are active.

We had strong consumer loan growth throughout the year with average consumer loans up 35 billion, or 24% in the fourth quarter of '04 from the fourth quarter of 2003.

One of the key drivers of this growth has been home equity.

Portfolio growth for home equity increased 45% in 2004 and continued to increase a solid 39% annualized on a linked quarter basis in the fourth quarter of 2004.

While interest rates have increased, Wells Fargo is well positioned to continue to grow its home equity portfolio.

For example, in October we launched an advertising campaign to increase awareness of our Smart Fit Home Equity account which gives consumers the option to fix the interest rate on the account for a specified period of time.

As a result, the number of accounts sold in November was double the average during the prior three months, and December's totals were nearly twice that of November's.

There's about 8.6 trillion of untapped home equity available in the United States, and there is still substantial opportunity to cross-sell to existing Wells Fargo customers.

Currently, only 13% of Wells Fargo home mortgage households have a home equity product with us compared with the national average of one in three U.S. homeowners with a home equity account.

In 2004 cross-sell of home equity to mortgage customers, who also have a bank relationship, reached a new high of 43%.

Wells Fargo customers who have a home equity account have an average of 8.8 Wells Fargo products, almost double that of non-home equity customers.

Our home equity portfolio's credit quality remains strong with the average FICO for the portfolio at 724.

At year-end average combined loan to value on total line was 70%, and only 59% on the unutilized line. 28% of our home equity portfolio was in a first lien position, and 37% of the portfolio dollars in a second lien position were behind a Wells Fargo first mortgage.

During 2004 our mortgage company successfully transitioned from a refinance market to more of a purchase market.

Given the increase in average adjustable rate and fixed rate mortgage interest rates between 2003 and 2004, mortgage originations in 2004 declined 37% from our industry record setting level of $470 billion in 2003.

Despite this expected decline, mortgage revenues declined by only $807 million, or 16%, less than half of the origination volume decline demonstrating the benefit of our balanced mortgage business model in which our residential mortgage servicing business and our residential mortgage origination business compliment each other.

The profitability of the servicing business significantly increased in 2004 due to lower MSR impairment provisioning, as well as growth in the servicing portfolio, which increased 14% during the year, in part due to moderation in prepayments from lower refinancings.

In addition, the impact of declining originations and origination revenues was tempered by the mortgage company's ability to lower expenses during 2004, in fact, at a higher rate of reduction than the decline in revenues.

In the fourth quarter the mortgage company released $234 million of reserves in order to fairly value the MSR asset.

Despite the reserve release, the capitalized value of the servicing portfolio at year-end was 1.15% of loans serviced for others, 3 basis points lower than at the end of the third quarter 2004.

In addition, mortgage expenses increased $75 million in the fourth quarter over the third quarter of 2004, including both production related expenses as well as stepped up technology investment spending in the fourth quarter.

Should production levels decline in 2005, expenses can be brought down accordingly.

The average note rate declined 15 basis points in 2005 to end the year at a record low 5.75%.

Wells Fargo Financial, our consumer finance company, had a record year of net income of $507 million, up 12% from 2003.

Earnings at our consumer finance company have doubled over the past five years.

This tremendous growth has been driven by lower-risk real estate and auto secured lending.

The real estate secured portfolio grew 63% in 2004 and ended the year at $13 billion.

Over 90% of the real estate portfolio was in the first position, with average loan to value of 80%, and average FICO of 640.

And while we have experienced strong growth in the non-prime real estate market, we still had only a 2% market share in a market that has grown at a 34% compound growth rate over the past six years.

Auto lending grew 48% in 2004 and ended the year at $10 billion.

The level of growth at Wells Fargo Financial is the result of moving from a generalist to a specialist operation and focusing business from smaller unsecured loans to larger secured real estate and auto loans.

73 new stores were opened in 2004 and we expect to open about the same number in 2005.

Wells Fargo Financial also added 2,579 team members, a 16% increase from a year ago.

Loan losses at Wells Fargo Financial in 2004 were up 28% from a year ago reflecting the strong 39% increase in loans year-over-year.

However, loss rates of 2.6% in 2004 actually declined from 3.1% in 2003 reflecting changes in customer and loan mix.

We do expect to see losses to continue to increase in 2005 as this high growth portfolio seasons, which is reflected in how we price these products.

2004 was a strong year for the consumer, but we also grew our small business and wholesale businesses.

We increased our small business cross-sale ratio to 2.7, up 8% from 2003.

At year-end, 49% of our business checking account customers had a business debit card, up from only 34% two years ago.

Purchase volume on our small business debit cards was up 60% in 2004 from 2003, and small business credit card purchase volume was up 31% over this same period.

For the sixth consecutive year, our Wholesale Banking Group had record earnings, and for the third consecutive quarter, commercial and commercial real estate loan growth was broad-based, up 10% from the fourth quarter of 2003, and accelerating to 13% annualized growth in the third quarter of 2004.

Our middle market loan growth continued to be driven by new borrowers.

Demand from existing borrowers stayed relatively flat with line utilization at around 50% at year-end.

Loan increases were across a broad spectrum of industries with the manufacturing and wholesale sectors growing the most.

In addition to growing loans, we were better at penetrating our wholesale customer with our broad commercial product line.

Our average wholesale customer now has 5.3 products with us.

There are a couple of other items I'd like to highlight.

In the fourth quarter we successfully completed our solicitation to amend the indenture related to our floating rate convertible notes.

The amendment eliminated a provision in the indenture that would have prohibited the Company from paying cash upon conversion of these debentures if an event of default existed at the time of conversion.

As a result, none of the shares of common stock underlying the debentures currently would be considered outstanding for purposes of calculating earnings per share as the result of the new accounting rules, EITF-04-8.

Our debt securities continue to trade at attractive levels.

In 2004 we completed over $20 billion in debt issuance while capitalizing on market opportunities to reduce our funding costs.

The debt was issued at the lowest credit spreads in our Company's history, and because of strong investor demand, five transactions were up-sized to $2.5 billion or larger during the year.

In addition, we tendered for our high-cost debt in June, further improving our long-term funding costs.

We ended the year with strong capital ratios.

Our tier 1 ratio was 8.42%, total capital was 12.08%, and our leverage ratio was 7.08%, remaining well capitalized levels despite our strong earning asset growth and despite returning 52% of our annual earnings to shareholders through dividends and share repurchase net of new shares issued for benefit plans.

Everybody seems to be interested in who holds Fannie and Freddy preferred stock.

For some time we have not had an investment in any of the older Fannie or Freddy preferred stock which are currently underwater.

Finally, although we believe that stock options should not be treated as an expense, we will expense stock options as required beginning this July 1st.

Using the modified perspective method of adoption, we estimate the effect of expensing current outstanding options will reduce earnings per share by 3 cents per share for the second half of 2005.

In summary, 2004 was an outstanding year with record net income, earnings per share, and revenue.

These results were achieved while improving operating leverage and making significant investments throughout the year to benefit the future.

We begin 2005 with good earnings momentum in our major businesses.

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