Wells Fargo & Company (WFC)

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Wells Fargo & Company (WFC)

Q4 2012 Results Earnings Call

January 11, 2013 10:00 AM ET

Executives

Jim Rowe - Director, Investor Relations

John Stumpf - Chairman and CEO

Tim Sloan - Chief Financial Officer

Analysts

John McDonald - Sanford Bernstein

Erika Penala - Bank of America/Merrill Lynch

Moshe Orenbuch - Credit Suisse

Ed Najarian - ISI Group

Joe Morford - RBC Capital Markets

Betsy Graseck - Morgan Stanley

Paul Miller - FBR Capital Markets

Matt O’Connor - Deutsche Bank

Fred Cannon - KBW

Ken Usdin - Jefferies & Company

Chris Kotowski - Oppenheimer

Mike Mayo - CLSA

Marty Mosby - Guggenheim

Nancy Bush - NAB Research

Chris Mutascio - Stifel Nicolaus

Andrew Marquardt - Evercore Partners

Presentation

Operator

Good morning. My name is Regina, and I will be your conference operator today. At this time, I would like to welcome everyone to the Wells Fargo Fourth Quarter Earnings Conference Call. (Operator Instructions) After the speakers’ remarks, there will be a question-and-answer session. (Operator Instructions)

I would now like to turn the call over to Jim Rowe, Director of Investor Relations. Mr. Rowe, you may begin your conference.

Jim Rowe

Thank you, Regina, and good morning, everyone. Thank you for joining our call today during which our Chairman and CEO, John Stumpf; and our CFO, Tim Sloan, will review fourth quarter and full year results and answer your questions.

Before we get started, I would like to remind you that our fourth quarter earnings release and quarterly supplement are available on our website at wellsfargo.com. I’d also like to caution you that we may make forward-looking statements during today’s call that are subject to risks and uncertainties.

Factors that may cause actual results to differ materially from expectations are detailed in our SEC filings; including the Form 8-K filed today containing our earnings release and quarterly supplement. Information about any non-GAAP financial measures referenced, including a reconciliation of those measures to GAAP measures can also be found in our SEC filings, in the earnings release, and in the quarterly supplement available on our website.

I will now turn the call over to our Chairman and CEO, John Stumpf.

John Stumpf

Thank you, Jim. Happy new year everyone and thanks for joining us today. We’re excited to share our strong results for the quarter and for the year. We just completed our 12th consecutive quarter of EPS growth with record quarterly earnings in the fourth quarter of $5.1 billion, 24% from a year ago. These strong quarterly results are just part of an outstanding year of achievement for Wells Fargo.

Let me start by highlighting all that was accomplished during 2012. We earned a record $18.9 billion in 2012, up 19% from 2011, and we also grew earnings per share by 19%. We generated 6% revenue growth and pre-tax pre-provision increased by 13%. We improved our efficiency ratio by 250 basis points to 58.5% for the year.

We grew total loans by $30 billion, up 4% while reducing our liquidating portfolio by $18 billion. Our liquidating portfolio is now half the size it was four years ago at the time of the Wachovia merger. We now have over $1 trillion of deposits, up 9% from a year ago.

Credit quality continued to improve but charge-offs is down $2.3 billion. We achieved a record retail banking cross-sell of over six products for household. We grew return on assets by 16 basis points and increased return on equity by 102 basis points. We increased capital levels growing our estimated tier 1 common equity under Basel III to 8.18%.

We increased our dividend by 83% and repurchased approximately 120 million shares of common stock. In addition to these financial metrics, we also continued to grow organically and through acquisition purchasing loan portfolios and several businesses which not only brought new customers to Wells Fargo but allowed us to better meet the financial needs of all of our customers.

The housing market began a steady rebound during 2012 while many measures of activity and prices remained low by historical standards and a complete recovery will still take some time. There is no doubt that a corner was turned which is a real positive for our economy and for Wells Fargo.

We originated $524 billion in residential mortgages in 2012, helping over 2 million homeowners refinance or purchase a new home. Our industry, our regulators and our elected officials made progress this past year in helping to restore some stability to the housing market. Early in the year we finalized an agreement with the AGs and federal agencies regarding mortgage servicing, foreclosure and origination issues.

We also reached the settlement with the Department of Justice regarding origination practices and as we just announced, we reached the settlement associated with Independent Foreclosure Reviews which will end the large quarterly expenses associated with the Consent Order.

And regarding the draft, the qualified mortgage definition that was just published yesterday, we are still reviewing the details. But so far, it looks like the CFPB issued a rule that should benefit consumers across America by providing strong protection, while also ensuring that credit is available. By putting these issues behind us, we can focus more of our resources on serving our customers and creating long-term franchise value.

We generate strong results in 2012 even with regulatory changes and an uncertain economic and political environment. As we start the New Year, we believe we will benefit from some signs of growth that we are seeing in the economy, jobs are being created and home prices are increasing.

However, there is still a lot of work that needs to be done. The last minute agreement that averted the fiscal cliff was a good step but it did not fix our country’s long-term problems. We need to work on both sides of the equation, spending reductions and revenue increases.

We need to increase clarity, certainty and confidence, and we can do this if the private and public sectors work together with the unified focus on strengthening our nation’s financial and economic future, uncertainty is the enemy of business and we simply cannot afford that today.

We know our customers especially in the small and middle market segments needs certainty and clarity. They have cash and the desire to grow. We need confidence so they can feel encourage to invest and hire again.

With all that we accomplished last year, I believe Wells Fargo has never been better positioned and I’m very optimistic about the year ahead. Wells Fargo is over 160 years old and we continue to manage our company for the long-term. The vision that has guided us for decades, meeting our customer’s financial needs will continue to drive our growth in the year ahead.

Thank you again for joining us today. And now Tim Sloan, our Chief Financial Officer will provide more details on our financial results. Tim?

Tim Sloan

Thanks, John, and good morning, everyone. My remarks will follow the presentation included in the first half of the quarterly supplement, starting on page two, and then John and I will take your questions.

As John mentioned, Wells Fargo had a very strong quarter, with record earnings of $5.1 billion, up 24% from year ago. Earnings per share were a record $0.91, up 25% from the fourth quarter of last year. We’ve now achieved 12 consecutive quarters of earnings per share growth and the seven consecutive quarters of record EPS.

Total revenue of $21.9 billion was up 7% from year ago. We grew revenue on a year-over-year basis every quarter in 2012. We also generated positive operating leverage. Pre-tax pre-provision profit increased 12% from year ago and we continue to have strong credit performance.

We generated strong deposit in loan growth. Our ROA was 1.46%, up 21 basis points from year ago and our ROE was 13.35%, up 138 basis points from year ago. Our capital levels remained strong with our estimated Tier 1 common equity ratio under Basel III growing to 8.18%.

As you can see on page three, our fourth quarter results build on the strong performance we achieved throughout the year. As John highlighted and as the charts on this slide demonstrate, we had an outstanding year of growth across a variety of measures. Revenues grew by 6%. Net income grew by 19%. We had solid growth in loans and strong deposit growth. Our ROA was 1.41% for the year and ROE was 12.95%.

We are in a much better position today than we were year ago and we look forward to taking advantage of all of the opportunities ahead of us. Our continued strong quarterly and annual performance reflected the benefit of our customer focused business model and our diversified sources of growth. The combination of our scale and our level of diversification is a significant advantage for our company.

Before I review the drivers of our results this quarter let me spend some time discussing some noteworthy items that impacted our results as highlighted on slide five. Taken together, these items had little impact on our bottom-line but they did cause some unevenness in some of our line items.

Our gains on equity investments this quarter totaled $715 million. Our private equity business has been a core part of Wells Fargo for a long time and by its very nature results in this business can vary. The results in the fourth quarter were $393 million higher than the previous 7 quarter average reflecting strength in our private equity business, including the gain on the sale of Becker Underwood. The $393 million of above average equity gains equates to $0.05 of EPS.

Our total operating losses this quarter reflected $644 million of incremental accrual to fully reserve for our costs associated with the independent foreclosure review settlement that was announced earlier this week and additional remediation related costs. This accrual reduced EPS by $0.09. We contributed $250 million to the Wells Fargo Foundation reducing EPS by $0.03 continuing our commitment of giving back to the communities that we serve.

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