富國銀行 (WFC) 2005 Q1 法說會逐字稿

Welcome to the Wells Fargo first-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 into the Wells Fargo first-quarter 2005 earnings review prerecorded call.

Before we talk about our first quarter, 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 that future results of operations and financial conditions, including statements about the expected benefits of certain actions taken in the quarter, expected occupancy cost run rates and the continuation of the practice of using strong current results to invest in long-term growth.

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 first-quarter results and 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.

We started 2005 with continued strong results, including record earnings per share of $1.08 per share, record net income of $1.86 billion and double-digit revenue growth, up 13%.

Once again, these outstanding financial results were achieved after taken into account the impact of actions that reduced current results but which we believe will benefit future earnings growth.

There were three major actions taken during the quarter and a pretax cost totaling $410 million that reduced revenue, increased charge-offs or increased expenses, but which will provide tangible benefits in future periods.

First in a step toward bringing our mortgage, home equity and consumer finance businesses onto common systems and conforming credit charge-off practices with a more stringent standard of the Federal Financial Institution's Examination Counsel, better known as just FFIEC, our consumer finance company, Wells Fargo Financial, recognized $163 million in credit losses in its portfolios.

This is a non-cash charge to bring the timing of charge-offs in accordance with the FFIEC standards.

For example, even though Wells Fargo Financial is not a bank, it will charge-off real estate secured consumer loans after 120 days delinquency, in line with the FFIEC standard rather than the less stringent 180 day practice in the nonbank consumer finance industry.

The accelerated charge-offs generated a $62 million permanent tax benefit.

Second, we recorded a $117 million expense in the first quarter upon shortening the estimated useful lives of certain depreciable assets, primarily building improvements in line with our existing policy.

This expense is primarily reflected in higher occupancy costs in the first quarter.

We would expect occupancy costs to decline in the second quarter, although they will remain at a slightly higher than normal run-rate until declining slightly below the historical run-rate beginning in 2006.

Finally, we realized a $41 million loss on the sale of $1 billion of our lowest yielding auto loans, which had been yielding 3.76% and an $89 million loss on a sale of $17 billion and three to five-year adjustable-rate mortgages, which had book yield of around 4%.

We began replacing the $35 billion in total ARMs and auto loans sold during the last year with newly originated ARMs carrying yields approximately 80 to 90 basis points higher than the rates on the loans that were sold.

More on this later on this call.

In addition to these actions, we continued to make investments in new stores, additional salespeople and major technology projects that reduced current earnings but which will benefit the future.

As indicated, total revenue grew 13% year-over-year even after the impact of the ARM and auto loan sales.

Each of our businesses contributed to this growth.

In our wholesale and commercial businesses, we saw once again solid commercial loan growth.

Average commercial and commercial real estate loans grew 12% from the first quarter of 2004, and loan growth accelerated to 15% annualized on a linked quarter basis in the first quarter of 2005.

The sixth consecutive quarter of growth with double-digit annualized linked quarter growth in each of the last two quarters.

In our wholesale banking group, which includes our middle market and large corporate borrowers, total commercial loans grew 18% year-over-year and 22% on a linked quarter basis.

While this market remains very competitive and while average line utilization from existing borrowers has not increased, we have been able to increase outstandings by increasing the number of commercial businesses that now have banking relationships with us and by broadening these relationships with both loan and non-loan products.

Our commercial credit (ph) ratio is now at 5.3 products, up from 5 a year ago.

During the first quarter, we also increased commercial relationships in business by opening up four new middle market commercial banking offices in Boston, Atlanta, Grand Rapids and Nashville.

We continued to make progress in the small business market.

The optimism of small business owners is on the rise according to the Wells Fargo/Gallup Small Business Index, which is up 7 points from the third quarter of 2004 to 106.

We are the number one lender to small businesses in loans under $100,000 nationwide, and also the number one lender to small businesses in low and moderate income tracts.

Our loans to small business grew 17% year-over-year.

Our cross-sell ratio for small business and business banking combined increased by 9% year-over-year to 2.7 products.

Our small business cross-sell is below what we know from our experience in other segments we're able to achieve, representing a huge untapped opportunity for us.

Trust and investment fees were up 13% from a year ago.

This growth was primarily driven by the acquisition of $29 billion in assets under management from Strong Financial Corporation which closed on December 31, 2004.

On April 11, we completed the merger of Wells Fargo Funds and certain former Strong Funds, creating a single fund family, Wells Fargo Advantage Funds.

The new fund family offers an array of 120 mutual funds with load and no load options including stock, fixed-income, money market, municipal income and asset allocation funds representing more than $100 billion in assets under management.

In the fourth quarter of last year, we indicated that we would have about $0.02 per share of integration cost during 2005 for Strong and First Community.

Because the Strong name change did not take place until April, there was a minimal amount, roughly $8 million in integration expense, realized during the first quarter of 2005 as we postponed fund-related conversion costs such as client welcome kits until after the official name change.

Excluding Strong, we continued to grow assets under management, increasing mutual fund balances and the number of 401(k) participants in our trust business, although investment fee income growth was moderated somewhat by relatively flat equity markets.

In our consumer business, we continued to see strong sales, higher sales productivity and improved customer and business retention in the first quarter.

The remarkable achievements of our banking team members continued with record core sales of 3.85 million products, up 18% from prior year.

Our average retail bank household now has a core sale of 4.6 with 15% of our households having eight or more products on a long-term goal.

While increasing sales, we also increased the profitability of our regional banking households with average profit up 17% from the first quarter of 2004.

We also increased sales efficiency at the same time we were growing our sales force.

The number of retail bankers grew 1700 or 16% from a year ago, while banker productivity remains strong at 5.02 core sales per day.

By improving our service, we are also improving customer retention.

Prior retention helped grow net consumer checking accounts 5.5% from the prior year.

By continuing to focus on executing our vision, we grew both our top and bottom line with double-digit earnings growth in 15 of our 23 banking states, including California, Nevada and Arizona.

We had double-digit revenue growth in 20 of our 23 banking states, including all of our fast-growing Western states.

Average consumer loans in our community banking group were up 7% from the first quarter of last year, excluding one to four family mortgage loans which are down because of the ARM sales over the past year.

Average consumer loans in our community banking group were up 25%.

There was also strong consumer loan growth at Wells Fargo Financial with consumer loans up 44% from the first quarter of 2004.

Wells Fargo Financial's loan growth was driven by 57% growth in real estate secured loans and a 42% increase in auto loans.

While the percentage growth in consumer loans has declined somewhat on a linked quarter basis, excluding one to four family mortgages, we had a $20 billion year-over-year increase in all other consumer loans combined, the combination of home equity, credit card and personal consumer credit loans, one of the biggest year-over-year dollar increases in our history.

While demand for home equity product has slowed somewhat from the record levels achieved last year, home equity balances still increased 38% from the first quarter of 2004 and 2.2 billion or 17% annualized on a linked quarter basis.

In March the Federal Reserve increased the short-term interest rate by .25 for the seventh time since June of 2004.

Our home equity group responded by continuing a successful national campaign to increase awareness of an innovative and unique SmartFit Home Equity Account.

The SmartFit Home Equity Account gives consumers the option to secure a fixed interest rate for a specified period and make interest only payments.

Increasing consumer awareness of rising interest rates and the SmartFit Home Equity Account have led to a shift in customer interest from variable-rate products to fixed-rate accounts.

Consumers are opting for the certainty of payment in an uncertain interest rate environment.

In February 2005 $3 out of every $10 of new funded balances was in fixed-rate products, up from $1 out of every $10 in August of 2004.

Much of that was due to the success of the SmartFit Home Equity Account which has achieved growth of more than 60% per month since Wells Fargo began marketing the product in October of 2004.

Now as consumers lock in home equity rates, our credit risk on home equity loans actually declines, but this does not add to our interest rate risk because we have been offsetting this through ARM sales and other actions.

Home equity portfolio credit quality also remains strong with the average FICO for the portfolio at 722.

The average combined loan to values of both the first mortgage outstandings and the second mortgages total committed amount was 68%.

However, if you use only the amount outstanding under the first and second mortgages, the average combined LTV drops to 57%. 26.5% of the bank home equity portfolio is in the first lien position, and 39% of the portfolio of dollars in a second lien position were behind a Wells Fargo first mortgage.

Loss and delinquency rates remained near historic lows, and this housing market remains strong, although growth is expected to slow somewhat in some markets.

Home equity credit losses were 20 basis points annualized in the first quarter of 2005 compared with 19 basis points in the prior quarter and 26 basis points in the first quarter of 2004.

Some industry observers do not expect home equity values to depreciate at 2004's record pace.

Nonetheless, last year's growth in home values combined with continued growth in 2005 will provide good momentum from a credit perspective throughout 2005 and may also present new lending opportunities for this and future years.

We also continue to see strong growth in card fees which were up 16% from last year.

Purchased volume on our consumer credit cards was up 18% from the first quarter of 2004, and quarter-end balances were up 12%.

Currently 89% of our checking account customers have a debit card, and purchase volume was up 20% from a year ago.

In late January we launched My Spending Report, a free online tool that allows customers a daily consolidated overview of their personal spending organized by familiar expense categories.

Wells Fargo is the first in the industry to offer such a tool which combines spending transactions from a customer's check card, credit card, checking account and bill-pay, accessed through a secured online banking session and updated automatically each day.

As of March 31, we have had almost 1.5 million unique customers view their spending report.

Our Enhanced Rewards program, which provides rewards for both credit and debit usage, has also been very successful.

Introduced in April of last year, we enrolled over 200,000 customers by the end of 2004.

Our mortgage company once again demonstrated its ability to grow in different economic and interest rate environments, as the industry transitioned from a refinance market to more of a purchase market.

Refi is accounting for only 41% of mortgage applications in the first quarter, down from 56% a year ago.

This trend actually plays to our strength as we are the nation's number one mortgage retail originator.

We focus on serving our customers, builders and the more than 300,000 real estate professionals we directly conduct business with across the United States.

We operate the largest mortgage network in the United States from more than 2300 mortgage and Wells Fargo banking stores and the Internet.

We believe our success comes as a direct result of the relationships we build, and that is why more consumers choose Wells Fargo over any other retail lender.

We had a very strong first quarter, funding about 600,000 residential mortgage loans with a volume of $65 billion, about the same as the first quarter of 2004 volumes.

Despite higher interest rates, we took $91 billion of mortgage applications during the quarter, up 14% over fourth quarter of 2004.

Our unclosed application pipeline was $59 billion at the quarter-end, up 18% from year-end.

And we have continued to manage expenses very closely and tailored our expense base to reflect the transition to a purchase mortgage market.

In addition, the mortgage servicing side of our business is now adding to profitability as expected in a rising interest rate environment.

Net mortgage servicing revenues were up $290 million from a year ago and $22 million on a linked quarter basis.

There are several reasons for this.

First, our owned mortgage servicing portfolio stood at $840 billion at quarter-end, up 16% from the prior year and 17% annualized on a linked quarter basis.

We have grown our mortgage servicing portfolio every year since we reentered the servicing business in 1990 even during major refi periods when others saw residential mortgage loan payoffs outpace originations.

We also announced during the quarter the purchase of $10 billion of mortgage servicing from Commercial Federal of Omaha.

We now serve over 5 million customers in all 50 states.

Second,due to higher rates,the duration of the servicing portfolio increased to 5.1 years from 4.5 years at December 31, 2004.

An increase in the life of the servicing means more servicing revenues for a longer period of time and lower MSR amortization costs.

Finally, with 30-year mortgage rates increasing 26 basis points between year-end and March 31st of 2005, MSR values increased to 1.24% of loans serviced for others, thus triggering a required release of $271 million of MSR valuation allowance into mortgage servicing income.

The allowance release of $271 million was up slightly from a 234 million release in the prior quarter and compared to a $400 million provision expense to add to the mortgage servicing right valuation reserve a year ago.

Net derivative gains from hedging the MSRs were $85 million in the quarter compared with $135 million in the prior quarter and $538 million in the first quarter of 2004.

So on a combined basis, the hedging gains and reserve releases contributed $356 million to the mortgage servicing revenue in the first quarter of 2005, down $13 million on a linked quarter basis but up $218 million from a year ago.

We still had $1.3 billion in the valuation allowance at March 31, 2005.

Being a financial intermediary, Wells Fargo's interest rate exposure is driven largely by ever-changing customer borrowing and customer depositing behavior.

To regulate any evolving interest rate exposure, the Company maintains a portfolio of longer duration fixed-income securities as well as a portfolio of shorter duration adjustable-rate mortgages originated by our mortgage company.

While these portfolios serve to offset the natural rate exposure created by our customers, the pacing of any increases and decreases in these portfolios is often driven by market opportunities to enhance long-term yield.

As an example, during 2002 and 2003, when many other institutions were adding securities for short-term carry profit, Wells Fargo actually shrank its securities portfolio, and we have replenished securities only in those few subsequent quarters when yields were especially high.

As a result, Wells Fargo has perhaps the highest investment portfolio yield, 6.26% of any large bank in the U.S. on $30 billion of debt securities.

At March 31, 2005, this portfolio had an unrealized gain of $768 million, making us one of the few large banks that even have an unrealized gain.

During the last year, we sold $35 billion of our lowest yielding previously booked adjustable-rate mortgages and auto loans.

Following seven successive increases in short-term rates by the Fed, we began replenishing some of those sales late in the first quarter of 2005 by holding newly originated ARMs with yields 80 to 90 basis points above the book yield of the ARMs that were sold.

As a result, by the first quarter of this year, we had increased the average yield on $85 billion of first mortgages on the balance sheet to 6%, up from 5.3% a year ago and 5.7% in the fourth quarter of 2004.

Credit quality remains strong throughout our portfolios with historically low loss rates in most of our wholesale business units, and our consumer credit loss rates remain stable and at the lower end of historical ranges.

Net credit losses increased $181 million from the first quarter of last year, but include $163 million in credit losses related to changes in the timing of when credit losses are recognized at Wells Fargo Financial as previously discussed.

Nonperforming assets were down $167 million from year-end and $206 million from the first quarter of 2004.

The 167 million reduction in nonperforming assets on a linked quarter basis primarily reflected lower consumer nonperforming assets due in part to the higher charge-offs at Wells Fargo Financial to conform its credit write-off practices with FFIEC standards and a continued decline in commercial nonperforming assets due to overall economic improvements.

During the first quarter, we had $71.5 million in net gains from equity investments, down $98.9 million from the fourth quarter of 2004 and down 23.2 million from the first quarter of 2004.

While our gains were lower, we still had $162 million in unrealized gains in our public equities portfolio, and we have a total of 1.5 billion invested in private equity securities, giving us many opportunities to recognize gains in the future.

Our capital ratios continued to improve with our total capital ratio at 12.37% and our leverage ratio at 7.17%.

Our capital strength allows us to do positive things for our shareholders -- stock buybacks, small fill-in high return bank acquisitions and over a 3% dividend yield which has grown at a compound annual growth rate of 17% over the past five years.

During the quarter, we opportunistically bought back 10.4 million shares.

With the Board's authorization of 25 million shares in January, 27.6 million shares remained open under board authority at quarter-end.

In conclusion, we once again realized strong topline and bottom-line growth while taking actions to benefit the future, including continued investments in the franchise.

We expect this practice of using strong current results to invest in long-term growth to continue as we improve on executing one of the most diverse customer-focused business models in financial services.

This model has consistently generated double-digit revenue and profit growth.

Thank you for listening.

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