Edited Transcript of Wells Fargo (WFC) Q2 2014 earnings conference call
Company: Wells Fargo & Co. (WFC)
Event Name: Q2 2014 Earnings Conference Call
Event Date & Time: July 11, 2014 10:00 AM ET
WFC Q2 2014 webcast audio
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 second quarter earnings conference call. (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 – Director, Investor Relations
Thank you, Regina and good morning everyone. Thank you for joining our call today where our Chairman and CEO, John Stumpf and our CFO, John Shrewsberry will discuss second quarter results and answer your questions.
Before we get started, I would like to remind you that our second quarter earnings release and quarterly supplement are available on our website at wellsfargo.com. I would 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 our call over to our Chairman and CEO, John Stumpf.
John Stumpf – Chairman & Chief Executive Officer
Thank you, Jim, and good morning to everyone. Thank you for joining us today. The second quarter was another strong quarter for Wells Fargo. We earned $5.7 billion in the quarter by our continued focused on creating long-term shareholder value to meeting our customers’ financial needs, including growing loans and deposits and deepening our relationships with our customers.
Let me highlight our growth during the second quarter compared with a year ago. We generated earnings of $5.7 billion, up 4% from a year ago, and earnings per share of $1.01 per share, up 3% from a year ago.
We had strong and broad based loan growth and our core loan portfolio was up $51.3 billion or 7%. Our credit performance continued to improve with total net charge-offs down $435 million or 38% from a year ago, and our net charge-off ratio was only 35 basis points annualized on average loans.
Our outstanding deposit franchise continued to generate strong growth with total deposit up $97 billion or 9%. We’ve grown deposits by an average of $265 million everyday over the past year.
We deepened relationships across our company. Retail Banking cross-sell was 6.17 products per household. Wholesale Banking cross-sell was 7.2 products and wealth, brokerage and retirement cross-sell was 10.44 products. We reduced expenses from a year ago while we continued to invest in our businesses, including strengthening our risk management infrastructure.
We also followed through our commitment to maintain strong capital ratios while returning more capital to shareholders. In the second quarter, we increased our common stock dividend by 17% and continued to reduce our share count. We returned a net $3.6 billion to shareholders in the second quarter, up significantly from $1.6 billion a year ago.
I am also proud that during the second quarter, Wells Fargo was ranked the most respected bank in the world and the 11th most respected company overall according to Barron’s Magazine 2014 ranking of the world’s most respected companies. This recognition is a result of our dedicated team members remaining focused on our consistent vision and their commitment to meeting our customers’ financial needs.
While the economic recovery remains uneven, there are many indicators that economic growth is accelerating and we remain optimistic about the opportunities the recovery provides to Wells Fargo and for our customers. The strong improvement employment in June demonstrated the strength in the labor market with unemployment at the lowest levels since September 2008.
The housing market rebound remained on track with home prices up 8% from a year ago and up 25% from the low in June 2011. Despite these increases, home affordability continued to remain attractive due to historically low mortgage rates and rising household incomes.
In June, the Conference Board’s measure of consumer confidence reached a six year high and vehicle sales reached an eight year high. The economy is also benefiting from strong energy production with domestic crude oil production running at the highest level in 26 years and our reliance on foreign energy sources has been falling for nearly a decade.
I am confident that the economic recovery and our diversified business model will continue to provide opportunities for future growth as we remain focused on helping our customers meet their financial needs.
Now John Shrewsberry, our CFO will provide more details on our second quarter results. John?
John Shrewsberry – Chief Financial Officer
Thanks, John. And good morning everyone. My comments will follow the presentation included in the quarterly supplement starting on Page 2. John and I will then answer your questions.
Wells Fargo had a very strong quarter as demonstrated by fundamental drivers of long-term growth. We earned $5.7 billion in the second quarter, down $167 million from the first quarter but keep in mind our results last quarter included a $423 million discrete tax benefit and $0.08 per share impact.
Our pre-tax income grew $303 million from the first quarter. Revenue grew from first quarter, including both net interest income and non-interest income. Core loans grew 8% annualized and average deposits grew 9% annualized. We grew pre-tax, pre-provision profit for the third consecutive quarter and credit quality continued to improve. Capital remains strong and we returned more capital to shareholders.
I will highlight the drivers of this growth throughout the call today.
As John highlighted and as you can see on Page 3, we had strong year-over-year growth in loans and deposits. Our growth in EPS and net income reflected this benefit along with the reduction in expenses and an improvement in credit quality. Our results were driven by momentum across many of our businesses. One way to demonstrate this business momentum is through noninterest income growth. Mortgage fees while up from first quarter were down $1.1 billion from a year ago due to lower refinancing volume. Excluding mortgage fees, fee income was up 9% from a year ago reflecting broad based growth in retail brokerage, deposit service charges, card fees, commercial real estate brokerage commissions, trust and investment management, merchant processing and market sensitive revenue. That’s the benefit of our diversification. We have over 90 businesses focused on meeting our customers’ financial needs.
We also grew net interest income from a year ago. And as you know growing net interest income measured in dollars has been our focus as deposits and other sources of liquidity have grown more rapidly than loan demand or other attractive investment opportunities.
Page 4 highlights our revenue diversification. While our balance between net interest income and noninterest income has been consistent, the drivers of noninterest income can vary each quarter. For example, equity investments were 9% of our fee income in the first quarter but declined to 4% in the second quarter. Other businesses such as deposits, investment banking and mortgage contributed more to fee income this quarter resulting in overall fee income growth demonstrating the benefit of our diversified business model.
Let me highlight some of the key drivers of our second quarter results from a balance sheet and income statement perspective starting on Page 5.
Our balance sheet is never been stronger; capital liquidity, asset quality, funding mix are all exceedingly strong. We increased average earnings assets by 3% from the first quarter by growing loans, increasing short-term investment in trading assets and purchasing securities. In addition, our credit quality continued to improve.
Investment securities increased $8.7 billion from first quarter reflecting $17 billion of purchases primarily U.S. Treasuries and federal agency debt, partially offset by run off. We also improved our liquidity position in response to continued heightened regulatory expectations. We issued $7.8 billion of liquidity related long-term debt and increased liquidity related short-term funding by $5.9 billion. Total short-term investments grew to $238.7 billion which helps us meet our regulatory obligations and provides dry powder to grow loans and invest in securities.
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