Wells Fargo Earnings Call Nuggets: Share Count and Excess Liquidity

Wells Fargo & Co (NYSE:WFC) recently reported its fourth quarter earnings and discussed the following topics in its earnings conference call.

Share Count

John McDonald – Sanford Bernstein: Tim, I was wondering on the share count. In 2012 the share count was flat, despite about $4 billion of share repurchases. Just kind of wondering what’s the strategy with regard to share count, is it just offset – use buybacks to offset employee issuance or to really steadily reduce the net shares outstanding?

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Timothy J. Sloan – SEVP and CFO: Well, you’re absolutely right, John. This last year in terms of our total purchases, that’s what we were able to accomplish to keep shares about flat. We’re hopeful that over time as we continue to return more capital to shareholders that we will have the ability to increase the amount of shares that we can repurchase, but that’s subject to the capital plan that we just submitted. So, over the long-term we like to do better than what we did this year.

John McDonald – Sanford Bernstein: In terms of the gross issuance, was there anything unusually high about your issuance this year or was 2012 kind of a normal year for employee issuance?

Timothy J. Sloan – SEVP and CFO: I would say it was a relatively normal year. As you know, having our team members received some of their compensation based upon the shares is really important to make sure that team members and shareholders are very aligned in terms of the long-term growth of the Company.

John McDonald – Sanford Bernstein: Then on expenses, should the look back expenses start to come out immediately well beginning in the first quarter…?

John G. Stumpf – Chief Executive Officer: Yeah. I wouldn’t assume that they would be completely gone in the first quarter. There was going to be some cleanup this month and maybe trailing into next. They’ll clearly come down materially. I don’t know what the exact number is going to be. They’ll be completely out of the run rate in the second quarter.

John McDonald – Sanford Bernstein: On the mortgage side as originations come down, if that happens into 2013, how quickly can the mortgage expenses come out?

John G. Stumpf – Chief Executive Officer: Well, we’ve got some good track record in doing that. Our mortgage folks have seen cycles before you saw what we were able to accomplish in 2011 in the second quarter and then also in 2010. There is a bit of a lag. So, I would say there is about 60 to 90 day lag so call it a one quarter lag, but we can move pretty quickly.

John McDonald – Sanford Bernstein: Then one thing on the margin, on the 5 basis point of pressure that you attributed to rates and spreads coming down, should we assume that that pace continues for that piece. There is obviously a lots of moving parts in the net interest margin, but for that piece of it, does that hold that kind of 5 basis point pressure?

John G. Stumpf – Chief Executive Officer: Oh, John, I wish I could give you a guarantee of what specifically the impact will be. It does seem to have moderated a bit, but it’s really a function of the mix of loan growth and also of securities purchases, but it seems like it’s moderating a bit.

Timothy J. Sloan – SEVP and CFO: Remember John, we’ve been very thoughtful about reinvesting, but we saw some opportunities late in the year that are still settling and we also saw a great loan growth in the fourth quarter. So, all those things have an impact.

John McDonald – Sanford Bernstein: Those MBS balances you mentioned making toward the end of the fourth then into the first quarter, Tim, those are funded with the cash balance is right, they are only earning about 25 basis points a year increasing yield there right?

Timothy J. Sloan – SEVP and CFO: That’s correct. But it was 16.

John McDonald – Sanford Bernstein: 16 that you have done so far.

Timothy J. Sloan – SEVP and CFO: No, I am talking about 16 basis points, in terms of deposit cost.

Excess Liquidity

Erika Penala – Bank of America Merrill Lynch: My first question is on the excess liquidity, I guess the first part of it, of the $27 million an average growth (indiscernible) that you saw this quarter, how much of that do you think you sticky and if you think most of that is sticky. I appreciate the commentary that you made about if loan growth continues at this pace you can absorb some of that liquidity, but that still leaves you with some excess. Could you give us a sense of what your deployment strategy is going to be for the next year?

John G. Stumpf – Chief Executive Officer: Well, Erika, you raised a really good point and that is we did see very outsized deposit growth and the fact is matter is that good portion of that deposit growth came toward the end of quarter and whenever that happens, we want to be careful to watch that deposit growth over time to make sure that, we do think it is sticky. What’s interesting is that notwithstanding that we’ve had periods like this over the last couple years, one in point would be the third quarter 2011, but that deposit growth has been maintained here. So, we’re optimistic that we can maintain a good portion of that deposit growth, my guess is we probably maybe difficult to maintain all of it. So, it creates a real opportunity for us because the way that we think about deposit growth is not just to fund our loan growth or fund investment, it’s broadening the relationships and brining new relationships into the Company and so that gives us an opportunity not only to invest and increase spread income over time, but to be able to broaden those relationships so that we can grow fee income which is really what you saw this quarter. We saw broad based fee growth and the way that we think about that fee growth this quarter is that it’s reflective of all the deposit growth that we’ve had over the last couple of years which has been pretty exciting…

John G. Stumpf – Chief Executive Officer: Let me add to that, Erika. First of all, we feel no urgency to have to put something to work that might not be economic for us. We had excess liquidity last summer and today MBS is our 30, 40, 50 basis points richer or higher yield. As Tim mentioned, virtually all these deposits are part of relationships. We are here to serve customers and these deposits – I think we are moving share today. And this is going to benefit this company for years and years and years to come, and a lot of that revenue does show up on the non-interest income side. If you think back four years ago, we had about $650 billion of non-CD deposits in this company. Today, we have $950 billion. There has been periods of faster growth, slower growth, but we are moving share, and I couldn’t be (happier) about this.

Erika Penala – Bank of America Merrill Lynch: My second question, if I could, is a follow-up to John’s. Again, we appreciate the comments on the first quarter with regards to the seasonality in pay as well as some of the $125 million is still going to linger in the run rate, but as we think about the second quarter and I take the $12.9 billion that you posted, take out the IFR settlement of 644, the charitable contribution of 250, and take out the 125 is $11.88 billion a good sort of run rate base for the second quarter. Obviously, there are moving parts, you mentioned the mortgage – production related expenses and investment in franchise, but is $11.88 billion a good starting point for the second quarter?

Timothy J. Sloan – SEVP and CFO: Erika, the math that you just did is reasonable. However, I don’t know what our expense run rate is going to be in the second quarter. What I do know is that we are going to continue to focus on reducing expenses and improving our expense efficiency ratio. If revenues are up, I would expect expenses to be a little bit higher and that’s a good thing as long as we are delivering those revenues at a reasonable return and seeing an improvement in the expense efficiency ratio. But again we have been very clear. We still believe that our expenses are too high, but we are focused on improving the expense efficiency ratio as opposed to providing a target in terms of the hard dollar cost in any quarter.

John G. Stumpf – Chief Executive Officer: Tim is absolutely right. We are not going to be slavish to any absolute number. But as Tim mentioned, takeaway two things; expenses are still too high, we will focus on that; and I would love to see expenses go up if it’s appended to increase revenues.

A Closer Look: Wells Fargo Earnings Cheat Sheet>>