Wells Fargo and Co (WFC)’s 4th Quarter 2014 Earnings Conference Call Transcript

Let me highlight some key drivers of our 4^th Quarter results from the balance sheet and income statement perspective, starting on page 5. I will discuss the drivers of our strong loan and deposit growth later in the call. Short term investments in fed [inaudible 7:26] funds sold declined $3.5 billion from 3^rd Quarter due to the deployment of liquidity in the loans and investment securities. This is the first time since the 4^th Quarter of 2011 that we have had a linked quarter decline. Investment securities increased $24 billion from the 3^rd Quarter due to $35 billion of purchases, partially offset by run-off in maturities. The majority of our purchases were US Treasury and federal agency securities.

Turning to the income statement on page 6, revenue grew $230 million during the quarter, with growth in net interest income and stable non-interest income. Expenses increased in the quarter, reflecting higher personnel costs, continued investments in our businesses and risk related initiatives, and some typically higher 4^th Quarter expenses. Our results in the quarter also reflected lower income tax expense which was down $123 million.

As shown on page 7, we continued to have strong broad-based loan growth in the 4^th Quarter, our 14^th consecutive quarter of year over year growth. The core loan portfolio grew by $60.4 billion or 8% from a year ago and was up $26 billion or 13% annualized from the 3^rd Quarter. Loan growth in the 4^th Quarter included $6.5 billion from financing related to the sale of our government guaranteed student loans as well as the Dillard’s credit card portfolio acquisition. Our liquidating portfolio decreased $20.1 billion from a year ago and it is now only 7% of our total loans, down from 22% at the end of 2008. Total average loan yields remained fairly stable, declining just two basis points from the 3^rd Quarter.

On page 8, we highlight our loan portfolios that has strong year over year growth. C&I loans were up $36.4 billion or 15% from a year ago, with broad-based growth that I will highlight on the next page. Core one to four family first mortgage loans grew $14.4 billion or 7% from a year ago, reflecting continued growth in high quality conforming mortgages – pardon me – non conforming mortgages primarily jumbo loans. The credit quality of our core mortgage portfolio is outstanding, with only six basis points of annualized credit loss in the 4^th Quarter. Auto loans were up $4.9 billion, or 10% from last year. While we continued to benefit from the strong auto market, new originations were down from a year ago, reflecting our continued risk and pricing discipline in a competitive market. Credit card balances were up $4.2 billion or 16% from a year ago, benefiting from a combination of organic account and loan growth as well as the benefit of Dillard’s portfolio acquisition.

Slide 9 demonstrates the diversity of businesses that contributed to the growth in C&I loans. Let me highlight just a few. Asset backed financing increased $16.7 billion, which included $6.5 billion from financing related to our government guaranteed student loan sale. Corporate banking grew $5.8 billion, driven by new customer growth and higher utilization rates from existing customers. Capital finance grew $3.8 billion, reflecting new customer growth.

As you can see on page 10, we had over $1.1 trillion of average deposits in the 4^th Quarter, up $22.7 billion or 8% annualized from the 3^rd Quarter. Our average deposit costs declined 1 basis point to 9 basis points in the 4^th Quarter. Our strong growth in checking customers continued in the 4^th Quarter, with primary consumer checking customers growing 5.2% from a year ago, and primary small business and business banking customers increasing 5.4%. Our success reflected the advantages Wells Fargo offers including broad based and industry leading distribution channels, enhanced product offerings that make it easier for customers to do more business with us and improved customer retention.

We continued to grow net interest income on a tax equivalent basis, up $255 million from the 3^rd Quarter, reflecting strong growth in average earning assets up $43.5 billion or 3%. Our net interest margin declined 2 basis points from the 3^rd Quarter due to strong deposit growth, which resulted in higher average balances of cash and short term investments and from actions we took in the 3^rd Quarter which resulted in higher average balances in liquidity related funding. The impact of all other balance sheet growth and reprising benefit of the margin by 3 basis points due to a larger investment portfolio and stronger loan originations. Increased interest income from variable sources benefited the margin by 1 basis point. Our balance sheet remains asset sensitive so we are well positioned to benefit from higher rates. But as we have demonstrated by growing net interest income throughout the year, we are not relying on rates to increase to generate growth. Of course the 1^st Quarter will be impacted by too fewer days in the quarter.

Total non-interest income was stable from 3^rd Quarter, as higher trust and investment fees, card fees, commercial real estate brokerage commissions and a $217 million gain on the sale of government guaranteed student loans was offset by a $396 million decline in market sensitive revenue driven by lower equity gains and lower mortgage banking revenue and deposit service charges. The decline in deposit service charges in the 4^th Quarter was primarily due to the lower over draft related fees resulting from changes we implemented in early October designed to provide customers with more real time information to manage their deposit accounts and avoid over drafts.