Wells Fargo: John Stumpf's Letter to Shareholders Is a Must-Read

It’s no secret I’m an aficionado of the letters to shareholders CEOs write every year for inclusion at the beginning of their companies’ annual reports. They are a terrific opportunity for a CEO to step back from the day-to-day details of running his business to review the year just past, and to discuss the key issues and problems he sees ahead. (This doesn’t mean I think most CEO letters are actually good, by the way. Most aren’t. Still, there’s nothing like a leaden, cliché-ridden letter, full of self-serving blather explaining away a prior year’s lousy results to serve as a red flag that a given company figures to be a truly lousy investment.)

Anyway, given the disruption the banking industry went through in 2008, I’ve been particularly looking forward to reading this year’s crop of letters. There’s a lot to be discussed, obviously. I’m interested to see which CEOs are truly candid and insightful about what went on, and which take excuse-making and scapegoating to new heights.

It’s early yet, but, so far, I’ve been disappointed. Even the gold standard among CEO letters, the one Warren Buffett writes every year to holders of Berkshire Hathaway (BRK.A), didn’t get into many big issues or discuss the future the way I’d hoped. (I would have liked to read Buffett’s thoughts on the rating agencies, for instance, given Berkshire’s stake in Moody’s (MCO).) I’m definitely looking forward to reading what Jamie Dimon (JPM) has to say. And Bob Wilmers of M&T Bank (MTB), as well. The best letter so far, though, comes from John Stumpf at Wells Fargo (WFC).

I strongly encourage you to read the Wells letter, but not because Stumpf provides any blazing macro insights. That’s not Wells’s game. Rather, Stumpf’s letter is worthwhile because it explains in plain English the principles that make Wells Fargo not just a great banking organization but one of America’s great companies. (And yes, to all you corporate bashers out there, there are still a number of great companies around!) Here are some highlights:

Management keeps it simple. Wells Fargo is a huge organization, both geographically and as measured by the number of banking products it offers. Yet the company is successful largely because, despite its size, it nonetheless manages to keep things simple. If Wells doesn’t understand a product (an option ARM, say) it simply won’t offer it. Stumpf notes that the Wells Fargo vision does not require any complex mathematical models. Tell that to the guys in the financial products division of AIG!

Management is honest. Candid admission of error in CEO letters is rare, yet right up front, Stumpf concedes, “We made some mistakes but kept our credit discipline.” Nor does Stumpf sugarcoat his outlook for the future. “If you’re a pessimist, there’s a lot for you to like about 2009,” he writes. “It will be a rough year for our economy and our industry. Consumer loans will continue under stress, chargeoffs [uncollectible debt] probably will continue to rise.” Contrast that with what you’ll read in letters from banks that lost money in 2008 (which Wells Fargo did not.) You’d never guess they’re buried under problem loans! Wells Fargo is not in denial.

The company wants to build value, not an empire. In 2008, Wells Fargo doubled its assets with the acquisition of Wachovia. But in discussing the deal, Stumpf emphasizes that Wells didn’t do it simply to bulk up. “Size alone means nothing to us,” he writes. Then Stumpf repeats a mantra coined more than a decade ago by his predecessor, Dick Kovacevich: “You don’t get better by getting bigger, you get bigger by getting better”. Somebody please tell that to AIG, Bank of America, and Citigroup!

Management is truly focused on its teammates. In most shareholder letters, CEOs feel the need to buck up the rank and file with some gratuitous comment that “our employees are our greatest asset” or “our people are our greatest competitive strength.” They don’t mean a word of it, of course. Wells Fargo does. The company has long believed it can differentiate itself with superior employee performance; the record of the last 20 years shows that it can—and has. Stumpf writes, “we call them team members (an asset in which to invest), not employees (an expense to be managed).” At Wells, that investment has paid off. According to survey data gathered by Gallup, Wells Fargo’s community banking group has 8.7 team members who say they’re engaged in their work for each team member that’s actively disengaged. This compares with 2.5 engaged-to-disengaged team members five years ago, and a national average of 1.5 to 1. I believe the deep commitment of Wells’s employees is a key factor in the company’s long-term success.

Management is focused on serving costumers. If you read the letter, you can’t help but be impressed with Stumpf’s authentic emphasis on customer service. Wells’s management is proud of the customer experience the company delivered last year. At the same time, Wells knows service levels are a long way from perfect; Stumpf is honest in saying so.

Management is focused on the integration of Wachovia. You might remember that when the Wells Fargo-Norwest merger happened in 1998, management laid out an integration plan that was slated to go more slowly than most other bank-merger integrations of the era. Norwest-Wells management took some heat over the perceived delays. But in the end, Wells Fargo was the only one of the dozen big deals of the time to achieve its earnings objectives in the following two years. The other eleven, meanwhile, missed their initial earnings projections by an average of 13%! Their haste led to service glitches and revenue erosion. By contrast, Wells’s first priority was holding the franchise together and avoiding merger disruption. Stumpf makes it clear that the company is approaching the Wachovia integration the same way it went about integrating Wells Fargo with Norwest. I expect it will have similar success.

Congratulations to John Stumpf for writing an informative letter in plain English. I continue to hope (and wish) to read more that are this good.

Comments

[ArtfulDodger]

Mr. Tom Brown:

I appreciate your pointing us to Stumpf's letter. I enjoyed it.

Thank you for your work. Please keep it up.

2009 Mar 22 08:45 AM

[Philip Gvinter]

I think that Mr. Stumpf should tread lightly as the statements made in the letter to shareholders dance in a gray area which can be considered securities fraud. Wells Fargo, like every other major banking institution completely compromised their credit standards. During the mortgage boom Wells Fargo was one of the largest buyers of Jumbo loans with no income or asset documentation and unsustainable debt to income ratios. Wells Fargo also compromised their credit standards by lending out staggering amounts of money on Home Equity loans and lines of credit secured by California residential properties with equally unsustainable debt to income ratios and serious questions about the sustainability of the property values. Wells also had a HUGE subprime origination operation. While WFC's credit standards were roughly on par with those of JPM and significantly better than CFC's or the residential lending units of BSC and LEH they were somewhat more loose than the credit standards of BAC and even C. The major difference between WFC, C and BAC is the fact that WFC stuck to the core business of banking, C became a financial supermarket with a ton of off balance sheet liability from SIVs and BAC took the middle ground and overpaid for CFC and ML in order to create a financial supermarket with less off balance sheet exposure but more direct consumer lending exposure than C. WFC made a tremendous error in purchasing WB. The loss estimates for WB are still too low and the lack of quality in their mortgage portfolio extends far beyond the Golden West Option ARMs and into the prime jumbo, home equity, construction, credit card and other consumer loan portfolios.

2009 Mar 22 10:15 AM

[MLKlein]

Customer service? Here are two recent examples of "customer service" at WFC in our family:

Daughter number one opens a checking account and gets a debit card. Thinking (incorrectly) that if she is overdrawn the bank will stop authorizing payment on the debit card if she has no money, she processes a series of small debit purchases over a weekend. While this assumption is wildly optimistic and not consistent with dad's advice, it is most probably made by many teens as they learn to manage their finances. End result; $53.07 in charges triggered $689.00 in OD fees. Wells position; close account, report to credit agencies, not budge on fees until dad gets involved and then agree to "settle" for $275 with no guarantee of clearing credit report. Extortion?

Second example: Daughter number two opens a Wells account without discussion with dad. Dad finds out that the "banker" gives daughter free checking. That's great, except that the free checking account is linked to a savings account that automatically pulls money out of the checking account every month. Looks fine until one realizes that daughter is a student with irregular income. Dad queries about what happens if the debit hits and there are insufficient funds in the checking to satisfy the automatic debit. Daughter can not explain what happens and tells dad that she never got a clear answer to this question at the bank. Dad now gets involved and closes the linked accounts.

Solution to both issues: US Bank. USB has a second chance account for daughter #1 and has an appropriate fee free account for daughter #2.

My opinion is that if we are going to support banks with deposit insurance and for the larger ones, the full faith and credit of the USA, it is time that we expect a higher standard of care when it comes to customer service. This starts with training that promotes doing right by the customer first. That requires that the banker actually understands what the customer needs and sells a solution not a product. This shift in the bank's selling paradigm is particularly relevant on the lending side of the bank's business where in most banks, lenders are let loose on customers to sell loan "products" with little or no formal training. Given the this sales attitude, we shouldn't wonder when the asset side of a bank's balance sheet blows up.

2009 Mar 22 11:05 AM

[searcher]

Paula Paula Paula. Your comments are pure agenda blather. All the 'facts' still don't support a conclusion much less your conclusion. An assertion preceded by a cut and paste parade is not a chain of inference.

2009 Mar 22 12:21 PM

[Oregonrain]

I read parts of the Wells letter. You know to me it sounded like they had had a great year. Until of course you look at those nasty numbers. I have made money darting in and out of this stock. As of now and for a long time I have been out.

They have performed better than their peers for sure...but overall I think this is just more bla bla bla...from a CEO to tell the truth.

2009 Mar 22 06:28 PM

[Lavalson]

"A must-read piece of garbage" is a better assessment of Stumpf's letter to the shareholders which Tom Brown's article emulates in content.

2009 Mar 22 09:35 PM

[Mr. Ed, Jr.]

Maybe we should hold off on congratulating Wells Fargo on their letter-writing abilities until we see how things go with all of those mortgages and a tremendous amount of HELOC's Wells wrote in Nevada and California. Especially with ARM resets coming up-- and more this time than the last big wave of them. And both of those states are over 10% unemployment now, even using suspect government numbers.

2009 Mar 22 11:26 PM

[Stone Fox Capital]

Agree Mr. Ed. It might be premature to congratulate WFC. They are an excellent bank but the game isn't over yet. I'd bet that WFC survives and thrives, but I'm not into gambling so for now I'm just watching on the sidelines. Asset managers seem the most appealing now with the moves by the Treasury.

2009 Mar 22 11:53 PM

[ArtfulDodger]

Fellow Commentators:

My family has had many of the same problems you're relating about banks with phone companies, cell phone companies, cable companies, power companies, many small businesses, and especially credit card companies.

Are all the people running these businesses the same as "the evil bankers?"

It seems to me that we have a serious integrity problem across the business world.

And then there's our government—is there anybody left standing in it that has integrity?

Remember the WMD that turned out not to be?

Remember Obama's promise to spend $280b on the nation's "crumbling infrastructure," an amount which magically dropped to $28b over three years?

I liked Stumpf's letter insofar as his method of running a business is good, but I can't judge how honest he is.

But there can be no doubt that we have a serious honesty problem in business and government in the USA.

2009 Mar 23 01:04 AM

[User 305589]

I guess you can back all these claims up? For instance, that Well's writedowns and loss estimates for WB were 'still far too low'? I would really like to see the numbers here.
Or did you just grab them from some blogs or some media articles?

On Mar 22 10:15 AM Philip Gvinter wrote:

> I think that Mr. Stumpf should tread lightly as the statements made
> in the letter to shareholders dance in a gray area which can be considered
> securities fraud. Wells Fargo, like every other major banking institution
> completely compromised their credit standards. During the mortgage
> boom Wells Fargo was one of the largest buyers of Jumbo loans with
> no income or asset documentation and unsustainable debt to income
> ratios. Wells Fargo also compromised their credit standards by lending
> out staggering amounts of money on Home Equity loans and lines of
> credit secured by California residential properties with equally
> unsustainable debt to income ratios and serious questions about the
> sustainability of the property values. Wells also had a HUGE subprime
> origination operation. While WFC's credit standards were roughly
> on par with those of JPM and significantly better than CFC's or the
> residential lending units of BSC and LEH they were somewhat more
> loose than the credit standards of BAC and even C. The major difference
> between WFC, C and BAC is the fact that WFC stuck to the core business
> of banking, C became a financial supermarket with a ton of off balance
> sheet liability from SIVs and BAC took the middle ground and overpaid
> for CFC and ML in order to create a financial supermarket with less
> off balance sheet exposure but more direct consumer lending exposure
> than C. WFC made a tremendous error in purchasing WB. The loss estimates
> for WB are still too low and the lack of quality in their mortgage
> portfolio extends far beyond the Golden West Option ARMs and into
> the prime jumbo, home equity, construction, credit card and other
> consumer loan portfolios.

2009 Mar 23 06:11 AM

[User 305589]

Dear Mr or Mrs Klein, how old are your daughters? Can't they read or write and/or ask the questions? Can't you explain it to them, in addition, or go along with them to the bank? Do they need a checking account at all?
How come that it has become so common these days to blame banks and their staff for each and everything that went wrong? How about the responsibilities of the people (and your daughters and their parents, i.e. you, in that case) for their own actions?
I agree that banks (or any business) should be solution oriented, not product oriented. But what about people getting self-responsible again (as were our grandparents) instead of calling for government, regulators, lawyers etc. to help them to get rid of the consequences of their very own actions and inactions.
The point is, this crisis could never have developed into this size if the 'evil bankers' were not matched on the other side by dumb or greedy or simply careless people.


On Mar 22 11:05 AM MLKlein wrote:

> Customer service? Here are two recent examples of "customer service"
> at WFC in our family:
>
> Daughter number one opens a checking account and gets a debit card.
> Thinking (incorrectly) that if she is overdrawn the bank will stop
> authorizing payment on the debit card if she has no money, she processes
> a series of small debit purchases over a weekend. While this assumption
> is wildly optimistic and not consistent with dad's advice, it is
> most probably made by many teens as they learn to manage their finances.
> End result; $53.07 in charges triggered $689.00 in OD fees. Wells
> position; close account, report to credit agencies, not budge on
> fees until dad gets involved and then agree to "settle" for $275
> with no guarantee of clearing credit report. Extortion?
>
> Second example: Daughter number two opens a Wells account without
> discussion with dad. Dad finds out that the "banker" gives daughter
> free checking. That's great, except that the free checking account
> is linked to a savings account that automatically pulls money out
> of the checking account every month. Looks fine until one realizes
> that daughter is a student with irregular income. Dad queries about
> what happens if the debit hits and there are insufficient funds in
> the checking to satisfy the automatic debit. Daughter can not explain
> what happens and tells dad that she never got a clear answer to this
> question at the bank. Dad now gets involved and closes the linked
> accounts.
>
> Solution to both issues: US Bank. USB has a second chance account
> for daughter #1 and has an appropriate fee free account for daughter
> #2.
>
> My opinion is that if we are going to support banks with deposit
> insurance and for the larger ones, the full faith and credit of the
> USA, it is time that we expect a higher standard of care when it
> comes to customer service. This starts with training that promotes
> doing right by the customer first. That requires that the banker
> actually understands what the customer needs and sells a solution
> not a product. This shift in the bank's selling paradigm is particularly
> relevant on the lending side of the bank's business where in most
> banks, lenders are let loose on customers to sell loan "products"
> with little or no formal training. Given the this sales attitude,
> we shouldn't wonder when the asset side of a bank's balance sheet
> blows up.

2009 Mar 23 06:24 AM

[Did U Think The Ponzi Schem...]

Why is there even any discussion? WFC is insolvent. Nouriel Roubini said so of the largest US banks, and Meredith Whitney called WFC the best short on Wall St. The con man CEO of WFC continues to keep the con game going.

Let's chart 12-14 months from now. WFC will be on its knees just like C and BAC.

2009 Mar 23 06:24 AM

[User 305589]

Ok, roubini had to backpedal and state that he cannot talk about individual banks - only about the banking sector as a whole. Whitney - hm. She has made some great calls, but does it mean she will get it right every time? Certainly not. wells the greates short among the banks? please! perhaps, because it is one of the last which hasn't become a near-penny stock yet?
I'd be much more concerned about JPM and GS. But of course their friends in high places shoveled a couple dozen billion dollars into them via AIG's 'bailout', which, in essence was a GS bailout engineered by a former GS-CEO (hank paulson).
I certainly would not make a high bet on wells, but to bet against them? not so smart imho.

btw, Tom, how is it that you are so positive about wells, yet your fund has no position in it?


On Mar 23 06:24 AM Did U Think The Ponzi Scheme Would Last? wrote:

> Why is there even any discussion? WFC is insolvent. Nouriel Roubini
> said so of the largest US banks, and Meredith Whitney called WFC
> the best short on Wall St. The con man CEO of WFC continues to keep
> the con game going.
>
> Let's chart 12-14 months from now. WFC will be on its knees just
> like C and BAC.

2009 Mar 23 06:47 AM

[Iwantmymoney]

More blah to me. If they are so great at customer service how come I still can't get back my $10G from them after numerous correspondence for almost a year. I am now going to sue. They are crappy!

2009 Mar 23 06:47 AM

[RevRico]

Wow... now THIS was valuable information. THanks for sharing

On Mar 22 11:05 AM MLKlein wrote:

> Customer service? Here are two recent examples of "customer service"
> at WFC in our family:
>
> Daughter number one opens a checking account and gets a debit card.
> Thinking (incorrectly) that if she is overdrawn the bank will stop
> authorizing payment on the debit card if she has no money, she processes
> a series of small debit purchases over a weekend. While this assumption
> is wildly optimistic and not consistent with dad's advice, it is
> most probably made by many teens as they learn to manage their finances.
> End result; $53.07 in charges triggered $689.00 in OD fees. Wells
> position; close account, report to credit agencies, not budge on
> fees until dad gets involved and then agree to "settle" for $275
> with no guarantee of clearing credit report. Extortion?
>
> Second example: Daughter number two opens a Wells account without
> discussion with dad. Dad finds out that the "banker" gives daughter
> free checking. That's great, except that the free checking account
> is linked to a savings account that automatically pulls money out
> of the checking account every month. Looks fine until one realizes
> that daughter is a student with irregular income. Dad queries about
> what happens if the debit hits and there are insufficient funds in
> the checking to satisfy the automatic debit. Daughter can not explain
> what happens and tells dad that she never got a clear answer to this
> question at the bank. Dad now gets involved and closes the linked
> accounts.
>
> Solution to both issues: US Bank. USB has a second chance account
> for daughter #1 and has an appropriate fee free account for daughter
> #2.
>
> My opinion is that if we are going to support banks with deposit
> insurance and for the larger ones, the full faith and credit of the
> USA, it is time that we expect a higher standard of care when it
> comes to customer service. This starts with training that promotes
> doing right by the customer first. That requires that the banker
> actually understands what the customer needs and sells a solution
> not a product. This shift in the bank's selling paradigm is particularly
> relevant on the lending side of the bank's business where in most
> banks, lenders are let loose on customers to sell loan "products"
> with little or no formal training. Given the this sales attitude,
> we shouldn't wonder when the asset side of a bank's balance sheet
> blows up.

2009 Mar 23 10:27 AM

[biomedlives]

"I believe the deep commitment of Wells’s employees is a key factor in the company’s long-term success." I believe that statement is true for any corporation. Thus it amazes me that executives can argue that high compensation and bonuses are necessary to retain the best high-level people while cutting the salaries and benefits of the rank-and-file people in R&D, customer service, sales, marketing, manufacturing... On the whole, the latter group has more impact on the success or failure of the company than the high-level people.

2009 Mar 23 11:55 AM

[Bar Lock]

I was a fan of WF up until they aquired Wachovia. Anything the CEO says about keeping things simple and not handling products they don't understand is negated by the toxic World Savings paper that was lurking on the Wachovia balance sheet.

2009 Mar 23 12:19 PM

[wobatus]

While the bank's behavior may be egregious, I think the real way to dealo with this problem is a better educated, more vigilant consumers.


On Mar 22 11:05 AM MLKlein wrote:

> Customer service? Here are two recent examples of "customer service"
> at WFC in our family:
>
> Daughter number one opens a checking account and gets a debit card.
> Thinking (incorrectly) that if she is overdrawn the bank will stop
> authorizing payment on the debit card if she has no money, she processes
> a series of small debit purchases over a weekend. While this assumption
> is wildly optimistic and not consistent with dad's advice, it is
> most probably made by many teens as they learn to manage their finances.
> End result; $53.07 in charges triggered $689.00 in OD fees. Wells
> position; close account, report to credit agencies, not budge on
> fees until dad gets involved and then agree to "settle" for $275
> with no guarantee of clearing credit report. Extortion?
>
> Second example: Daughter number two opens a Wells account without
> discussion with dad. Dad finds out that the "banker" gives daughter
> free checking. That's great, except that the free checking account
> is linked to a savings account that automatically pulls money out
> of the checking account every month. Looks fine until one realizes
> that daughter is a student with irregular income. Dad queries about
> what happens if the debit hits and there are insufficient funds in
> the checking to satisfy the automatic debit. Daughter can not explain
> what happens and tells dad that she never got a clear answer to this
> question at the bank. Dad now gets involved and closes the linked
> accounts.
>
> Solution to both issues: US Bank. USB has a second chance account
> for daughter #1 and has an appropriate fee free account for daughter
> #2.
>
> My opinion is that if we are going to support banks with deposit
> insurance and for the larger ones, the full faith and credit of the
> USA, it is time that we expect a higher standard of care when it
> comes to customer service. This starts with training that promotes
> doing right by the customer first. That requires that the banker
> actually understands what the customer needs and sells a solution
> not a product. This shift in the bank's selling paradigm is particularly
> relevant on the lending side of the bank's business where in most
> banks, lenders are let loose on customers to sell loan "products"
> with little or no formal training. Given the this sales attitude,
> we shouldn't wonder when the asset side of a bank's balance sheet
> blows up.

2009 Mar 23 01:12 PM

[Ransome]

People must understand that the bank bailout and recovery from bad assets must be paid by the customers. Most banks have learned that the credit card model with high fees for mistakes is the key to success. As a defensive measure, never have automatic debit from any account. You might consider a smaller bank that has not so many expensive troubles. You will see the abuse of credit scores become more prevalent as this is the hammer (extortion) to resolve issues. Unfortunately, selling products is the norm and these products need to be considered carefully with respect to fees and your behavior. The less you are like a computer, the more expensive life becomes.

2009 Mar 23 02:56 PM

[horrid]

I have not seen the Annual Report- can you separate out Wachovia's messes (pick a pay mortgages and a Big Wall St style division) from Wells Fargo's?
Wells does manage very differently internally- looks for profits not revenues, bases performance bonuses on attaining of yearly plan profits, little tolerance for losses even in cyclical businesses, tends to stay away from tech and very cyclical corp clients as well.
Wells had been flirting with Wachovia for years- attracted by the geographic complementarity of their basic banking businesses. Unfortunately, by Sept 2008, Wachovia included World bank and a sizeable Wall St investment banking division.
My hope is that the Wells old-fashioned banking style can prevail over the messes they have acquired- it will take patience and discipline to mold the bank back into the type of company it was before the merger, that is for sure.
I also hope that they improve their customer service at the "stores".

2009 Mar 23 03:33 PM