Highlights From WFC's Q4 Conference Call: Improvements Across The Board

This morning, Wells Fargo & Co. (NYSE: WFC) reported Q4 EPS of $0.73, $0.01 better than the consensus estimate. Revenue were $20.61 billion vs. the consensus estimate of $20.08 billion. Shares are currently trading up 1% today.

Highlights From WFC's Q4 Conference Call:

• (John G. Stumpf) A year ago we were excited about all the opportunities we had ahead of us even in a challenging economic environment. And I couldn't be more pleased with all that we accomplished in 2011.
  
• We earned a record $15.9 billion, up 28% from 2010. We grew deposits by $72 billion, up 9%.
  
• We grew loans by $12 billion and grew our core loan portfolio by $33 billion.
  
• We achieved record retail banking cross sell of 5.9 products per household.
  
• We improved credit quality with net charge-offs down 36% from a year ago.
  
• We began our expense initiative and remain focused on the our target of $11 billion in noninterest expense in the fourth quarter of this year, 2012.
  
• We grew ROI by 24 basis points and increased ROE by 160 basis points.
  
• And we remain committed to helping homeowners stay in their homes with over 720,000 active or completed loan modifications initiated since the beginning of 2009.
  
• We also increased capital levels while providing shareholders with a higher return on their investment by increasing our dividend and repurchasing 86 million shares of common stock. We also redeemed $9.2 billion of high-cost trust-preferred securities.
  
• We accomplished all of this while completing the conversion of Wachovia's retail banking stores, the largest conversion in banking history...Our 6,239 banking stores are now on a single platform-serving customers coast to coast. In most mergers.
  
• (Timothy J. Sloan) We generated record earnings of $4.1 billion, up 1% from the third quarter and up 20% from a year ago. Earnings per share were a record $0.73, also up 1% from last quarter and 20% from a year ago. This is the eighth consecutive quarter of EPS growth.
  
• In fact, by almost any measure our results in the fourth quarter moved in the right direction demonstrating the underlying strength of our diversified franchise. We had length quarter growth in revenue with growth in both netinterest income and noninterest income. We had higher pre-tax pre-provision profits, loans, deposits, and securities available for sale. We also had strong credit quality and our capital levels continue to grow.
  
• Starting with the balance sheet, we generated strong loan growth this quarter with loans up $9.5 billion. Our core loan portfolio, which excludes the planned runoff from a liquidating portfolio, was up $13.7 billion from the third quarter.
  
• We once again purchased securities this quarter with balances up $15.4 billion from the third quarter as we continue to redeploy cash.
  
• We also generated strong deposit growth with balances up $24.6 billion.
  
• Revenue grew by 5% from the third quarter driven by strong loan growth and deposit growth, as well as fee growth throughout our diversified businesses. Expenses increased as expected in the fourth quarter but we are still targeting $11 billion of noninterest expense in the fourth quarter of 2012.
  
• Excluding the runoff of $4.2 billion of liquidating loans, our core loans grew by $13.7 billion including organic loan growth of $6 billion.
  
• Commercial loans grew $5.6 billion driven by portfolio acquisitions, new loans and new customer activity. Loan growth in the fourth quarter included the purchase of $2.1 billion of U.S.-based commercial real estate loans.
  
• Consumer loans also grew this quarter, up $3.9 billion from the third quarter, driven by the reconsolidation of $5.6 billion of reverse mortgage loans and was reduced by the runoff of $3.6 billion of liquidating consumer loans. We had loan growth in our core auto portfolio.
  
• Our credit card portfolio growth reflected strong account growth and seasonality. We believe we're well positioned to grow loans organically and through acquisitions and we expect loan growth to continue.
  
• We also continue to generate strong deposit growth with average deposits up $29.5 billion from the third quarter and up $74 billion or 9% from a year ago.
  
• Average core checking and savings deposits grew $30.9 billion or 4% from the third quarter and were up 12% from a year ago. Consumer checking accounts were up 3.2% from a year ago.
  
• Tax equivalent net interest income increased $369 million from the third quarter benefiting from a $24 million increase in average earning assets and a five-basis point increase in net interest margin.
  
• Noninterest income increased $627 million from the third quarter or 7%.
  
• This growth was driven by an increase in mortgage banking revenue of $531 million, up 29% from the third quarter, driven by higher margins and strong originations. Originations increased $31 billion or 35% from the third quarter.
  
• The unclosed mortgage pipeline remained very strong at $72 billion at quarter end. Trading, debt and equity gains were up $337 million.
  
• Link quarter growth and trading gains benefited from $275 million of higher deferred compensation plan investment results, which is offset in expense and stronger core customer accommodation trading.
  
• Credit card fees were down $333 million from third quarter, reflecting the first quarter of lower debit interchange fees, which reduced debit card fees by $365 million in the fourth quarter.
  
• Card fees benefited this quarter from strong growth in consumer credit cards with new account growth up 6% from the third quarter and up 90% from the fourth quarter of 2010, driven by very strong growth in the East.
  
• Third quarter expenses included a $210 million benefit due to lower deferred compensation expenses and the fourth quarter had a net deferred compensation expense of $56 million. These two amounts increased fourth quarter expenses by $266 million compared to the third quarter.
  
• After adjusting for this amount, the remaining increase in expenses were driven by three primary factors. First, mortgage and capital markets personnel expense increased approximately $300 million, driven by higher revenue in the third - in the quarter, which is largely reflected in higher incentive compensation. Secondly, we had seasonally higher equipment costs and higher foreclosed asset expense. Combined, these increased expenses by approximately $200 million. Finally, we had approximately $100 million of higher costs associated with the mortgage servicing regulatory consent order. We currently expect first quarter expenses to remain elevated, driven by seasonally higher comp and benefit expenses and our final quarter of Wachovia integration expenses, but partially offset by continued gains from our expense initiatives. In the second quarter of 2012, we expect expenses will decline by $500 million to $700 million from the first quarter driven by the elimination of merger expenses and lower comp and benefit expenses, which, as I just mentioned, will be seasonally higher in the third quarter.
  
• Our expenses in 2012 will reflect the benefit from our expense initiatives and we continue to target non-interest expenses declining to $11 billion in the fourth quarter of 2012.
  
• Community Banking earned $2.5 billion, up 8% from the third quarter driven by stronger mortgage banking revenue. Sales trends remain strong. Core product sales in the West were $7.6 million, up 9% from the prior year, and core product sales in the East continue to grow by double digits.
  
• Wholesale Banking earned $1.6 billion, down $172 million from the third quarter reflecting lower loan loss reserve release. Revenue increased 5% from the third quarter as many businesses including commercial real estate, banking, government banking and international generated strong loan and deposit growth and fixed income sales and trading investment banking results benefited from improved market conditions.
  
• Wealth, brokerage and retirement earned $325 million, up 12% from the third quarter. This growth was driven by a 6% increase in revenue. Revenue benefited from the $153 million gain on the sale of H.D. Vest and $59 million of deferred compensation and investment gains compared to a $128 million loss in the third quarter. Excluding these items, revenue was down 5% on lower asset-based fees, retail brokerage transaction revenue and securities gains.
  
• Average core deposits increased $3.2 billion, up 2% from the third quarter, reflecting both the flight to quality and our continued success in attracting client assets including deposits. Managed account assets were up 7% from the third quarter driven by strong net inflows.
  
• The majority of our $1.8 trillion residential servicing portfolio, or 69%, is service for the agencies. Our private security where we originated the loans are very low portion of total portfolio.
  
• Reflecting the quality of our portfolio, our delinquency and foreclosure rate was over 400 basis points lower than the industry average excluding Wells Fargo based on the most recent publicly available data. Our total delinquency and foreclosure rate was 7.96% in the fourth quarter down from a peak of 8.96% in the fourth quarter of 2009 but up modestly from the third quarter due to seasonality.
  
• Our capital position continued to improve with Tier 1 common equity ratio increasing to 9.46% and our estimated Tier 1 common equity ratio under current Basel III proposal growing to 7.49%.
  
• We redeemed $5.8 million of trust-preferred securities and the fourth quarter with a weighted average coupon of 8.42%. We purchased $26.6 million shares in the fourth quarter and an additional estimated $5.6 million shares per repurchase transaction that will settle in the first quarter of 2012.
  
• In summary, our strong fourth quarter and full year 2011 results reflected the benefit of our diversified model, which provides us with many opportunities for growth. In the fourth quarter, we grew earnings, revenue, loans, deposits and capital with strong contributions throughout our consumer and commercial businesses. As we begin a new year, we are encouraged by the signs the U.S. economy is doing better and we believe Wells Fargo is in a unique position to further benefit from the opportunities that drove our record performance in 2011.
  
• (Q&A) If I could just focus on the net margin percent and the net interest dollars to start, last quarter the market was disappointed in the NIM percent specifically. You guys probably have one of the worst NIMs last quarter. It seems like this quarter you have one of the best ones. I appreciate there is a lot of moving pieces but as you look forward maybe could give some insight on how you think the NIM percent and the net interest income dollars will trend from here and if we can expect similar volatility to what we have seen. (A) Well, Matt, you focused on the fact that it is difficult to look at the NIM on a quarterly basis and there can be some volatility quarter to quarter so I don't want to provide any specific guidance on the NIM but as we've said generally we think the NIM is trending down a bit given that rates are lower that as you pointed out that interest income was up and reason net interest income was up this because we were able to grow loans and continue to invest in high-quality securities.
  
• I guess I have a follow up on that. As I think about the loans that are running off and the loans that you are purchasing they are starting to converge a little bit. In terms of magnitude the runoff was less of a drag so far. They are going forward, there have obviously been some portfolios in the news, some speculation of you bidding on some. What you think the opportunity is for additional loan purposes from here and maybe some comment on how those deals compared to what's running off? (A) Matt, we are kicking lots of tires. We are in a unique position that we're not capital constrained. We can do things that make good sense for us, economically for our stockholders. As you know and you know Wells Fargo well, we are cautious. It would have to make a lot of sense for us, and if all we get out of this is sore toes, that's fine also, but there - because we don't have to do something. But the deals we've done so far, we like a lot. It brings customers. It brings earnings assets. And of course, we're not going to do these things unless they're good economically for us. So that's just one of the opportunities we have going forward and I suspect we'll see more things. And again, if we do some, they'll be done the right way, and if we don't do any, that's also fine.
  
• Could you give us a sense of what you think in terms of mitigating some of the Durbin headwind on what you could accomplish with regards to implementing deposit fees in 2012? (A) Well, Erika, we have talked a lot about the fact that in most cases our customers pay for all the convenience we offer them through more products and services with us and that's always been the case around here. And in fact, if you look at the hit we took in the fourth quarter now that the debit interchange numbers are all through, that's actually a little than the 250 after tax that we had talked about because we're doing more business and we actually have more accounts now. But we're always looking at ways to tighten our belt, offer more value, look at ways that customers how they want to pay as for the services we provide and that's an ongoing process.

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