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Wells Fargo & Company at Lehman Brothers 10th Annual Financial Services Conference - Final
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| Copyright: | CCBN, Inc. and FDCH e-Media, Inc. | | Source: | FD (FAIR DISCLOSURE) WIRE | | Wordcount: | 6836 |
JASON GOLDBERG, ANALYST, LEHMAN BROTHERS: Good morning and welcome to
day two of our Financial Services conference. Very pleased to have
kicking off today's session Wells Fargo, a company that makes the
Financial Services conferences complete, given they operate in over
80 different businesses within the financial services business, kind
of allowing them to overcome [cylical] trends and benefit from the
secular opportunities. e Given this diversity of this business has
led to double-digit EPS growth in 17 out of the last 20 quarters. And
in a fair amount those quarters, they had to face fairly significant
kind of macro environment headwinds.
From the Company we are very pleased to have Howard Atkins, their
Chief Financial Officer, and Bob Strickland, Director of Investor
Relations. Howard?
HOWARD ATKINS, CFO, SR. EVP, WELLS FARGO CORPORATION: Thank you,
Jason, and good morning, everyone. I assume it was a late night last
night. So again, good morning and thank you for your interest in
Wells Fargo.
Since this presentation discusses our expectations about the future,
I am obligated to tell you that a number of factors, many beyond our
control. could cause actual results to differ materially from
management's current expectations. Some of these factors are
described in our most recent Form 10-K and Form 10-Q filed with the
SEC.
For a little over a decade, Wells Fargo has developed, refined and
executed a highly profitable growth business model that we believe is
unique among financial services companies, essentially bringing
practices of highly successful growth-focused retailers to financial
services, which we believe is one of the largest and yet most
opportunity-rich industries.
Despite the recent challenges faced by our industry, we have
continued in 2006 and so far in 2007 to grow earnings at our
long-term goal, continuing a track record of double-digit earnings
growth that extends back 5, 10, 15 and 20 years.
Given our long-standing focus on achieving strong, risk-adjusted
returns in everything that we do, the (inaudible) which we invest in
our businesses and our proven success in achieving synergies across
80-plus businesses, our operating margins have been wider and more
sustainable than our peers, and we continue to gain share of market
and share of wallet relative to our peers.
And before turning to our first-quarter results, fiscal 2007 first
quarter, let me give you some deeper perspective on our Company and
why we have been able to pull away from the pack. Some people say
that it's harder to grow as you get bigger. We don't really subscribe
to that at Wells Fargo. We are now the 18th largest publicly traded
company of any kind in the United States. Yet in 2006, earnings at
Wells Fargo were 11%, the same as our compound growth rate since
2002. And despite doubling our size over the last five or six years,
we still earn only 3.5% or so of total financial services profit. So
we believe there is significant room to yet grow in the financial
services space.
Our Company has been achieving double-digit earnings per share growth
not just for one, two or even five years, but for the past 10, 15, 20
years, time periods which have included about every different
economic cycle you can think of. Whatever the timeframe, we have
found that the key to driving double-digit bottom-line growth is
generating double-digit top-line growth. And you can see the
correlation on this slide in front of you, (inaudible) between
revenue growth and earnings per share growth. And we have done this
now consistently, both top-line and bottom-line, for a very long
period of time.
During the past five years, we grew revenue at 100% compound annual
growth rate. Importantly, we doubled the growth rate of the U.S.
banking industry. Among the top 13 large banks in the United States,
we now earn $1 out of every $10 in revenue.
Our strong revenue growth has been driven by many factors. For
example, excluding 1-to-4 family first mortgages, which is a loan
category that was affected by the sale of a significant amount of
ARMs over the past couple of years, our total loans have grown at a
compound annual growth rate of 16% since 2002, and included 14%
growth just last year.
During the past five years, we have gained market share in both
consumer and commercial lending. In consumer lending, we have grown
roughly twice the industry's growth rate. And last year, once again,
we had one of the best growth rates among large banks. And
importantly, the quality of this growth has been very high relative
to the competition.
For example, [publicly developing] in our consumer loan portfolio has
been [hard-based]. We haven't experienced actually any outsized
growth of any one single category; rather, all the various consumer
loan segments of Wells Fargo have had steady, solid growth. The
breadth of this growth across segments mirrors the breadth of our
business model and reflects our success at retail cross-sell, not
pricing or relaxation of terms. In fact, if anything, we have
actually tightened our already strong underwriting practices in each
of these consumer loan segments during the past few years.
Commercial loans comprise about a third of our total loan portfolio,
and here too we have had strong, consistent growth relative to our
peers -- at 8%, again nearly double the industry's average over the
past five years.
Now while competition has been very high in the commercial loan
market, we have been successful at building commercial relationships
throughout this period and as the leading commercial relationship
bank in the western part of the United States, we tend to win more of
the available lending opportunities because we have already built
such deep and durable relationships with non-lending products and
services.
As with the consumer, the quality of our commercial loan growth has
been consistently high, with the wholesale lending businesses
increasing across the board and with our consistently disciplined
underwriting standards during this period. Most of this business
tends to be middle-market relationship-based with risk-adjusted
spreads that are higher than in the large corporate market. And you
can see from this slide the leading position that we have in
virtually every aspect of commercial lending.
We have had strong, consistent core deposit growth for many years,
and most of our 9% compound growth rate over the past four or five
years has been organic, not through acquisitions or deposits of
institutions. Core deposits grew 10% in 2006. So despite the slowdown
of the U.S. money supply last year, our core deposit growth actually
accelerated, meaning that we picked up market share.
Consumer checking accounts represent 4.7% in the fourth quarter
compared to the fourth quarter of 2005. And we were particularly
pleased late last year with the growth in consumer checking accounts
in our largest market, California, which were up a net 5.6%, despite
the competition for accounts and customers in the California market.
While we have substantial market share of deposits -- over 5% of the
nation's deposit market -- and 13% share roughly within our retail
footprint of the western part of the country, we believe there is
still plenty of room to grow deposits. And even within our own
footprint, our regional footprint, no one in our footprint yet owns
the deposit market.
At 10% core deposit growth in 2006, we had one of the best deposit
growth rates among our peer group. Over the past five years, we have
increased our deposit market share, as you can see from the
right-hand side of this slide, more than any other peer bank. So now
we make over 5% of the nation's deposits, despite the fact that we
primarily operate in the western half of the country. In fact, we are
one of only a handful of large banks that have actually grown deposit
market share without significant acquisitions in the last five years.
Our low-cost deposit base is due primarily to our mix of deposits,
with the vast majority being non-interest-bearing checking accounts
or very low-cost transaction savings accounts. While pricing pressure
has increased in some of our markets on the deposit side, we have
been able to attract new customers as well as retain existing
customers without having to aggressively increase our pricing.
Only two banks that we compare ourselves to have lower average
deposit costs than Wells Fargo, as you can see from this slide, and
both of those institutions have had much lower deposit growth than
Wells Fargo. So we believe we are again encouraged in this deposit
growth and we are not having to pay aggressively to get that deposit
growth.
With over a 12% market share, we are the nation's second-largest
mortgage originator overall, and we are the nation's largest retail
originator, with comparatively less dependence on third-party
origination channels than our largest competitors. We focus on the
retail channel because of the economics of that channel and our
ability to more effectively cross-sell to the customers that we do
mortgage business with in that channel.
While refi activity has slowed over the past couple of years,
purchase mortgage volume has remained strong and has even grown, in
our case at about a 9% compound annual growth rate during this
period. So people are still out there buying homes in the United
States, and, if anything, we may be actually picking up some market
share in the mortgage market.
We are the largest servicer of mortgages in the United States, with a
market share of just over 13%. At year-end, our mortgage servicing
portfolio totaled $1.4 trillion and our gross servicing fees reached
$1 billion in the fourth quarter alone. We have a tremendous
opportunity to cross-sell the 7.7 million households for whom we now
service a first mortgage.
While we have done a great job at selling the additional product, 83%
of those 7.7 million mortgage customers still have less than five
products with us that our average retail banking client has. So you
can see the tremendous opportunity yet in front of us to cross-sell
the new 7.7 million customers that we acquired in the last five or
six years.
We are making great progress towards our stated goal of increasing
earnings from investments. Insurance from 15% of the Company to 25%
of the Company. Assets under management and administration have grown
to over $1 trillion at Wells Fargo. Compound annual growth rate of
17% since 2002. With $126 billion of mutual fund assets under
management, our Wells Fargo Advantage Fund family is now the
third-largest bank mutual fund family and the 18th largest mutual
fund family in the United States.
Our insurance business has also grown steadily since the 2001
acquisition of Accordia, which at that time made us the nation's
largest bank-owned insurance agency and the fifth largest insurance
broker in the world. Our insurance noninterest income has grown at a
compound annual growth rate of 13% since 2002, including steadily
growing insurance sales to existing Wells Fargo small-business and
commercial relationships.
Payments businesses. The move from paper to plastic is
well-documented, and the payments business is becoming increasingly
important for Wells Fargo. In February of this year, electronic
collection transactions surpassed paper collection transactions at
Wells for the first time. We have seen great growth in our client
business, with increased penetration and usage of debit and credit
cards.
The payments business is a global business for Wells Fargo; this is
not just in the United States. We offer Automatic Clearing House to
13 countries. We move money globally among 46 countries for our
customers. Importantly, we have the largest proprietary consumer
remittance distribution network in the world among major U.S. banks,
and we have a leading position in customer foreign exchange
transactions.
Our commercial real estate has tremendous experience and expertise,
and was ranked number one in the United States market share in
transactions and number two by volume last year. On the real estate
advisory side, an increasingly important aspect of the company,
Eastdil Secured, our real estate investment banking group, ranked
number one in market share in 2006 with offices, malls and shopping
centers and hotels. Eastdil has seen dramatic loans and transaction
volume over the past five years -- compound growth rate of 51% during
that period -- and hit a record $90 billion of advised transactions
in 2006.
We sell our products and services to our customers through what we
believe is one of the best, most extensive multichannel distribution
systems in our industry. Our customers can interact with Wells Fargo
when, where and how they want. And you can see from this slide that
we have been adding to this distribution network over the past five
years. Over a thousand stores (inaudible) added to our system, which
is, as I mentioned before, one of the most extensive branch
distribution systems in the country.
We have also been adding to our sales force across the country by
hiring additional platform bankers, private bankers and licensed
bankers, as well as sales and service team members at Wells Fargo
Financial, our principal finance company, and at our mortgage
company.
With respect to Internet distribution, we were a pioneer in online
banking with our original offering back in 1995. Our online channel
continues to be important for us today, offering more services to a
broader group of consumers and businesses than any other competitor
in the United States. At the end of March, over 9 million retail
customers were active users of wellsfargo.com, two thirds of our
consumer checking account customers.
Our customers are increasingly using our sites for much more than
just self-service transactions. Online product sales have grown
dramatically over the past five years, with a compound annual growth
rate during that period of 55%. About a quarter of all consumer
product sales -- a quarter of everything that we sold in the consumer
market -- in 2006 was sold online.
Our 20-year acquisition strategy is unchanged, with a focus on
in-footprint (inaudible) banking and distribution. And at this point,
we have all of the products and services that we need. So to the
extent we do anything with the non-bank channel, it is really, again,
mostly fill-in skills and services.
We have maintained our strict financial criteria -- a minimum 16%
internal rate of return, and accretive within three years based on
consumer (inaudible). We have always used these financial criteria
and we will continue to use those same financial criteria.
All of the 61 acquisitions we've made since 2000 have either been
small acquisitions of depository institutions within our retail
footprint or fill-in acquisitions of non-bank companies that allowed
us to acquire particular niche skills, products and services at, we
believe, very attractive financial terms for our shareholders.
We recently announced just a week or two ago that we have signed an
agreement to acquire Greater Bay Bancorp. This is a bank with $7.5
billion in assets, 41 locations in the greater Bay Area around San
Francisco. And this acquisition also includes the [15th] largest
retail insurance broker and Matsco Financial, a national specialty
lender, primarily to veterinarians and dentists in the United States.
The reason I bring this up, this is exactly the kind of fill-in
acquisition that we love to do at Wells Fargo. It exceeds our
internal rate of return requirements, increases our deposit market
share to over 20% in the Greater San Francisco Bay area, and is in
market, and we believe is keeping its size, very manageable to
integrate.
Let me turn to the first quarter of 2007, our perspective. The first
quarter, we continued to differentiate ourselves from the pack with
another quarter of double-digit revenue and double-digit earnings
growth; even stronger operating margins than the industry-leading
margins we have always maintained; and additional gains in our market
positions in most of our products and services.
We were especially pleased with the first quarter by the breadth of
the strength that we saw in these results across our 80 some odd
businesses. Virtually every business line at Wells Fargo did well in
the first quarter of 2007. So let me take you through some examples.
First, not only did we have double-digit loan growth again
(inaudible), but again, every major category of loans grew at least
10% in the quarter, both consumer and commercial and products within
both consumer and commercial loan categories.
Our loan growth in the first quarter continued to outperform our
peers. We had 13% versus an 8% average for the peer group that you
see on this slide. And once again, taking you through some of the
business lines, we had really good balance in the quarter between our
consumer and commercial business operations.
For example, our wholesale banking group, which serves primarily
middle-market and selected corporate customers, once again had strong
results in the quarter, with net income up 13% from a year ago,
driven again by 15% revenue growth. Our wholesale banking business
(inaudible) accounts got 27% of our consolidated earnings.
Wholesale banking customers have record cross-sell of six products
and our middle-market commercial customers had average cross-sell of
over seven products. Our number one market share position in the
western United States and our success of cross-sell is driving
broad-based, strong growth in fee income, which in turn makes us
somewhat less dependent on loan growth to maintain earnings growth.
In addition to 15% loan growth, asset management, trust, insurance,
real estate advisory and capital markets all had a strong quarter in
the first quarter.
In our consumer market, retail banking, for our consumer customers,
cross-sell increased again in the first quarter to a record 5.3
products, up from 4.9 products a year ago. Core product sales were up
13% from the prior year on a comparable basis to a record 5 million
sales at our consumer banking business during the first quarter.
And to give you some idea of how strong a quarter that is, what 5
million sales represents and how well our cross-sell business model
is being executed, it was only four or five years ago that we had 5
million sales in an entire year. And we continue to successfully sell
debit and credit cards to our customers and usage is increasing. The
purchase volume on our credit cards was up 19% in the quarter, and
debit card purchase volume was up 13%.
We also continue to be successful in selling Wells Fargo packages,
which are products which include a checking account and at least
three other products, including a debit card, a credit card, a
savings account or a home-equity loan. Package sales were up 29% from
a year ago, and were purchased by 65% of new checking account
customers.
Despite the slowdown in the overall housing market in the last couple
of quarters, our mortgage company actually had relatively strong
growth in the first quarter. Mortgage applications for the first
quarter (technical difficulty) were up 19% from the prior year and
25% on a linked-quarter basis. We ended the quarter with an
application pipeline of $57 million, up 19% from the start of the
quarter.
And part of the growth in mortgage at Wells Fargo is heavier refi
activity, which is connected with the fact that these long-term
interest rates are still at historically low or relatively low
levels. But part of the growth also reflects a continuation of decent
volume of home purchases in our markets, and possibly some increased
share for Wells Fargo as mortgage brokers direct business to strong
providers like us.
Our mortgage servicing portfolio of $1.4 trillion was up 34% from a
year ago, and gross servicing fees of $1.1 billion during the quarter
were up 41% from a year ago. So we actually had, in terms of volume
of business, a very strong quarter in the first quarter in terms of
mortgage.
Deposit growth -- we continued to see good deposit growth in the
first quarter, with average core deposits up 10% year-over-year.
Again, consumer checking accounts up a net 5.2%; small business
checking accounts up a net 4.5% from last year. We were particularly
pleased once again with the growth in consumer checking accounts in
California, which were actually up 6.5%. I think that is a record in
the California market, again, despite the competition in that market.
This was the seventh consecutive quarter where net new accounts in
California exceeded our average across the entire footprint.
With 10% growth in the first quarter, our deposit growth continued to
be among the best in our peers, almost double, and almost double the
average of our top peers in terms of deposit (technical difficulty).
Small business continues to be an important driver of growth at Wells
Fargo. We are the nation's largest lender to the small-business
market. Loans under $100,000 to small-business customers through our
Business Direct platform were up 19% in the quarter from a year ago.
And store-based business solutions, which we call business sales,
were up 19% as well.
While our cross-sell rate for small business customers has improved
to 3.4, given the fact that we are at over 5 in the consumer market
and over 6 in the wholesale market generally, we still see a huge
opportunity ahead of us to deepen our relationship with our
small-business customers. So that is going well -- to go.
Our wealth management, formerly called private client services, grew
earnings 29% in the first quarter. Brokerage assets under
administration were up 17% and brokerage revenue increased 25%.
WellsTrade, our online brokerage service, introduced new pricing
during the first quarter, which offers 100 commission-free online
trades per year. In the six weeks following the announcement of the
new pricing, the WellsTrade account openings were 134% higher than
the comparable period last year.
Another reason for our continued success in the consumer segment is
our focus on customer service. And we strive for customer loyalty at
Wells, not just customer satisfaction. In regional banking, we
perform over 50,000 customer telephone interviews per month as part
of our focus on the customer experience. For customers transacting at
our teller lines, welcoming and wait time survey scores have improved
20%, and customer loyalty scores have improved 12% since the first
quarter of 2006.
We have also learned that team member engagement, as we call it,
directly impacts the customer experience. The Gallup organization
helps us survey our team members to assess their level of engagement
with Wells Fargo. We do this survey at least once a year. In 2006,
the ratio of engaged to actively disengaged team members at our
regional banking group rose to 7.1-to-1, up from 5.8-to-1 in 2005.
This was a rate -- 7.1-to-1 is more than three times the U.S. average
of 1.9-to-1. And this puts Wells Fargo in the top quartile of all
companies in the Gallup team member engagement database in terms of
team member engaged.
Now I've talked to you a lot about growth so far. Our growth is not
coming at the expense of our operating margins. In fact, our
industry-leading operating margins continue to grow and continued to
grow into the first quarter, and remain at the top of the industry.
Our operating leverage, once again was positive, with revenue growth
of 10.4% and expense growth of 8.9%. So again, we continue to get
both double-digit revenue growth at an expense growth rate below our
revenue growth rate.
And our return on assets of 1.89 is at the top of the industry. Our
return on equity of nearly 20%, again, we are among the highest in
U.S. banking, and improved from both the fourth quarter of --
improved from the fourth quarter of 2006.
Our industry-leading net interest margin hit 4.95% for the first
quarter. And you can see how it has performed versus our peers over
the past year, increasing 10 basis points while our peer average
declined 11 basis points in the last year. To give you a little bit
longer perspective on this, our net interest margins go back to the
middle of 2004, which is just before the Fed started tightening
interest rates in the States. Our margin has actually increased since
the second quarter of 2004 -- by 12 basis points, while our peer
group margin has declined by 33 to 34 basis points on average.
There are a couple of reasons why our margin has increased at a time
when everybody else's (inaudible) is decreasing. The primary one is
related to our (inaudible) of growing core deposits at relatively low
rates has been the major factor, but was also positively impacted by
our sale of adjustable rate mortgages and bonds in our securities
portfolio starting in 2004, before short-term and long-term rates
went up. And that was completed a year or so ago. So that was a
significant help to our net interest margin.
Let me now shift to credit quality. Credit results, Wells Fargo in
the first quarter were actually in line with our expectations. Most
of the year-over-year increase in credit losses that we experienced
was actually from growth and normal seasoning within our regional
pricing expectations, where we originally made our (inaudible) loans.
Although there were three other factors contributing to the increase
in losses between the first quarter of 2006 and the first quarter of
2007.
First, in the year-ago quarter, we were still experiencing relatively
high recoveries from prior charge-off periods. And additionally,
personal bankruptcies dropped in the first quarter of 2006 to
lower-than-average levels following the fourth quarter 2005, that
spike in bankruptcies just before the change in the bankruptcy laws
in the United States. So we had a bump-up in bankruptcy filings in
the fourth quarter '05, and they came right back down in the first
quarter of '06.
While trending down from the fourth quarter of 2006 peak, auto losses
were still at relatively elevated levels for the first quarter of
2007, although we have made great progress in getting an issue that
materialized late in the early part of 2006 in the auto sector,
getting that behind us. And we have seen certainly some deterioration
in some segments of our home-equity loan portfolio. Our most recent
(inaudible) we recorded were substantially impacted by auto losses,
which flattened in the first quarter.
Let me walk you through some of these loan portfolios so you get a
good feel for exactly how well credit is behaving at Wells Fargo.
Starting with the auto portfolio, with respect to our $28 billion
auto portfolio, this (inaudible) has really good underlying credit
characteristics. Over 70% of our auto portfolio has a FICO score
above 620 and 70% of the portfolio has a FICO -- I'm sorry 00 70% of
the portfolio has a FICO above 620.
We have also experienced a decline in delinquencies, with the amount
of loans 30 days or more past due actually having declined about 25%
from December 2006 through the end of March 2007. As I mentioned, we
did have somewhat of a self-inflicted issue in the auto sector in the
middle of last year, and we have taken a number of actions to correct
that problem, including adopting payment and collection standards and
practices appropriate for customer segments in this portfolio, of
significantly increasing collections staff and managers, and slowing
actually the growth in auto loans, primarily in the higher risk
segment of the auto lending business.
With respect to our mortgage business overall, the vast bulk of all
residential mortgage loans originated by Wells Fargo are originated
for sale rather than originated for the bank's own portfolio. As an
example, over 80% of mortgage loans originated throughout the Company
during 2006 were originated for sale. And so accordingly, somebody
else, not Wells Fargo, is taking the credit and the interest rate
risk, while we retain the servicing fees.
These are typically clean sales. We have always been very disciplined
about reps and warranties. We have reserved for early payment
defaults; and actually [built] our reserve for early payment defaults
in the first quarter. And we had virtually nonexistent retained
interest in the loans that we sell.
Of the $125 billion of mortgage loans held on our balance sheet, $21
billion was U.S.-based debt consolidation at Wells Fargo financial;
$79 billion was home-equity; and $22 billion was relationship ARMs,
primarily to prime customers, not subprime customers.
Our aggregate exposure to residential real estate is actually lower
in the first quarter than it has been in several years, currently
representing about a quarter of the total assets of the Company
versus about 36% from a year ago. And if anything, as we have gone
through the last year or two, including the first quarter, we have
tightened standards for particularly nonprime and near-prime lending
activities.
At March 31, Wells Fargo Financial's U.S.-based debt consolidation
real-estate secured portfolio, was $21 billion. And we believe that
real estate loans at our consumer finance company are different from
the typical consumer finance, let alone subprime consumer finance
businesses that we -- that are among our peers for several reasons.
Most notably, this lending is for debt -- it is really a debt
consolidation product rather than for the purchase of a mortgage
loan. For the most part what that means is that the borrower is
actually not increasing the borrower's debt burden. In fact, it
constitutes consolidation activity in many cases; the borrower is
actually reducing the borrower's own debt service.
The credit quality of the average borrower both tend to be more
near-prime for us in this business, with an average FICO score on
this portfolio of 640. And over two thirds of the portfolio having a
FICO over 620. The average loan to value was 75% in the first
quarter.
Again, we believe the risk in this particular portfolio in real
estate is very, very low. We have never offered interest-only option
ARMs or other negative amortizing loans. Credit in this portfolio has
always been underwritten to the borrower's capacity to repay, not
just to the collateral. We have always originated this business out
of our store network, rather than acquiring it from third parties. We
never offer teaser rates.
And if you think that all of the actions that we have taken on the
underwriting side in this business have contributed to the solid
performance of this portfolio, to give you some metrics here. Loans
30 days past due, 90 days past due and net charge-offs all actually
improved in the first quarter from the end of 2006. And annualized
net charge-offs in this portfolio were running below 25 basis points
in the first quarter.
At the end of the first quarter, 16% of our $79 billion national home
equity (inaudible) portfolio was a first lien position. And
approximately 54% of that portfolio was at a second lien position,
but behind a Wells Fargo first mortgage. The average FICO score was
746, which is very high, and the average combined loan-to-value was
58% based on outstanding balances and 69%, including unused
commitments.
Now, home-equity losses, as I mentioned earlier, increased during the
first quarter, primarily, in our view, in response to the soft real
estate market. While the frequency of losses in our portfolio -- in
this particular portfolio -- was as expected, the severity was a
little bit greater than expected due to, principally, declining home
values in several markets in the United States.
You may remember, if you follow us, we actually began taking steps
several years ago to control (inaudible) portfolio by tightening
underwriting standards, principally loan-to-value ratios, at about 20
metropolitan areas across the United States. And the fact that we did
so is actually helping contain losses today, as home prices come down
in some of those markets.
Now our $9 billion community banking credit card portfolio is
primarily sold to our banking customers and within our banking
footprint. The average FICO score in this portfolio, again, very
high; it is 738. And our remaining card portfolio of $5.5 billion was
originated through Wells Fargo Financial, again, with a relatively
average high FICO score of 675.
I'll turn quickly to capital management. Our capital ratios continue
to remain strong and actually are above the peer group average,
largely because our earnings have grown at a faster rate in the last
2, 3, 4, 5 years than our assets have grown. While loan growth has
been very robust during this period, as I mentioned earlier, we sold
all of our lowest-yielding ARMs and long-term investment securities
(inaudible) during the early stages of the Fed tightening, and that
is the principal reason why our assets have not grown as fast as our
earnings have grown.
Now philosophically, our capital management objective is to
opportunistically deploy and raise capital for high risk-adjusted
returns for our shareholders over time. So we are very, very focused
on the return on capital and are opportunistic in the way we deploy
capital.
One of the major opportunities we had in the first quarter of 2007,
we simply buy Wells Fargo shares, which we did a lot of. In the first
quarter, we repurchased 47 million shares, which was up significantly
from the 11 million shares purchased in the fourth quarter of 2006.
With such strong and consistent results, we have been able to return
over 60% of our earnings on average to our shareholders through stock
repurchase and dividends, without compromising our double-digit
growth rate or our industry-leading credit ratings.
In the first quarter of 2007, we actually returned [114%] of our
earnings to stockholders, both again through dividends and the major
share repurchase activity we had at that time. And again, we believe
that made a lot of sense at the time, given the relatively low level
of our share price late in the first quarter.
Wells Fargo was among only 3% of more than 10,000 North American
listed dividend-paying common stocks classified as a dividend
achiever, which is a publicly-traded company that has increased its
dividends over the last 10 or more consecutive years. Our dividend
payout at Wells Fargo is the 12th highest dividend payout among all
public companies in the United States.
Our total annual shareholder return stock appreciation dividend
reflects the level and consistency of our growth and our financial
performance. Our total annual compound stockholder return of 14% in
the past five years was more than double the S&P 500 during that
period. And at 15%, our total shareholder return was almost double
for the past 10 years, and we far outpaced the S&P in the past 15
and 20 years.
So far this year, our stock has been one of the better performing
among our peer group, and has outperformed the peer index -- peer
banking index, I should say, as you can see from this chart.
We continue to earn recognition for our results. As you probably
know, Wells Fargo Bank is the only bank in the United States -- one
of only two banks worldwide -- to have the highest AAA credit rating
from both Moody's and S&P. You can see some of the other
important metrics that we look at in terms of the value of the
Company's brand and our reputation in financial services.
So in sum, we continue to achieve from 2006 and into 2007 actually
very strong results. Business growth has been accelerating in many
cases; margins remain very strong. If anything, we have gotten even
more balanced across our 8 some odd businesses, so it is not one or
two businesses that are really driving our results; maintaining good
growth across our businesses.
We have always maintained a very strong balance sheet, as far as the
philosophy of the Company. And if anything I would say, from my
perspective, in terms of liquidity, capacity, capital and so on, the
balance sheet is about as strong as it has been in the last five
years. So with that, I don't know if we -- do you think we have
enough time --?
JASON GOLDBERG: Actually, we have time for one or two quick
questions.
UNIDENTIFIED AUDIENCE MEMBER: I guess, Howard, you talk about capital
on the balance sheet, and you know -- despite buying back stock in
the first quarter, you are still well above your peers in terms of
capital; actually, a lot of them have brought them down and you have
stayed up there, I guess. Given the success of the model (inaudible)
why do you want (inaudible) -- something you tend to look at?
HOWARD ATKINS: Well, I think -- you know, in thinking about capital,
as I mentioned before, what we are trying to do is really get the
highest risk adjusted returns we can get. Our principal focus in
doing so is reinvesting capital back in the business. The reason for
that is that we have pretty consistently earned a 20% ROE. So, you
know, if we can continue to get 20% returns on reinvesting in the
business, we (inaudible) do that all the time.
The next best thing is acquisition. I mentioned before we maintain at
least a 15% internal rate of return. We are not going to compromise
on our rate of return (inaudible) area; that's why you don't see us
do big deals. you don't see us in markets doing acquisitions all the
time. Frankly, we don't really need to do acquisitions, the Company
having gotten 10% (inaudible) growth now (inaudible) a lot of
acquisitions.
But we would like to do more within our footprint, as I mentioned
before, if we can get the right returns. The Greater Bay acquisition
is an example of that. And then the share repurchase, again, we think
we tend to operate very opportunistically.
So what we are not trying to do with our capital is simply get rid of
every basis point, quote, unquote, of excess capital at every moment
in time. What we are trying to do is be patient for U.S. shareholders
to get the best returns we can get, and as opportunity materializes,
as it did in the first quarter.
So, you know, since you talk about share repurchase, we didn't
purchase a lot of shares in the fourth quarter last year. When our
share price dropped down in the first quarter, we came into the
market and came in very aggressively. We think that is smart for our
shareholders, to wait and (inaudible) opportunistically (inaudible).
You know, I don't know what the next round of great use of capital
will be, but I think the important point is that we are positioned to
take advantage of good opportunities as they materialize.
JASON GOLDBERG: Please join me in thanking Howard for his
presentation.
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