Wells Fargo Q2 2007 Earnings Call Transcript

| About: Wells Fargo (WFC)
Wall Street Breakfast

Wells Fargo & Co. (NYSE:WFC)

Q2 2007 Earnings Call

July 17, 2007 8:00 am ET


Bob Strickland - SVP & IR

Howard Atkins - Sr. EVP & CFO

Bob Strickland

Hello, this is Bob Strickland. Thank you for calling into the Wells Fargo Second Quarter 2007 Earnings Review Prerecorded Call. Before we talk about our second quarter results, we need to make the standard securities law disclosure.

In today's call, we will make forward-looking statements about specific income statement and balance sheet items and other measures of future results of operations and financial condition, such as statements about credit quality and future credit losses generally.

Examples of forward-looking statements made in today's call include the expectation that earnings asset growth in second quarter 2007 will increase net interest income and reduce net interest margin; the expectation that losses in the home equity portfolio will be higher but manageable throughout 2007; the expectation that actions taken with respect to the bond portfolio late in second quarter 2007 will add to third quarter 2007 earnings but reduce the leverage ratio; and the belief that recent regulatory guidelines issued for subprime lending will not have a significant impact on Wells Fargo financials operation or on our credit losses or earnings.

Forward-looking statements give our expectations about the future, they are not guarantees, and results may differ from expectations. Forward-looking statements speak only as of the date they are made and we do not undertake any obligation to update them to reflect changes that occur after that date.

For a discussion of some of the factors that may cause actual results to differ from expectations, please refer to our SEC filings including the 8-K filed today, which includes the press release announcing our second quarter results, and to our most recent annual and quarterly reports filed with the SEC and to the information incorporated into those documents.

Now, I will turn the review over to our Chief Financial Officer, Howard Atkins.

Howard Atkins

Thanks, Bob. Wells Fargo produced another very strong quarter, despite the challenges the industry has been facing this year. Once again, earnings per share grew 10% to a record $0.67 per share from $0.61 per share in the second quarter of 2006. This is the 17th quarter out of the past 20 that we have grown earnings per share at a double-digit rate.

Achieving double-digit growth in the current environment is difficult in any industry, not just banking, but the diversity of our revenue sources once again differentiated us from the rest of the industry. Results were driven by an ideal combination of double-digit revenue growth, positive operating leverage and relatively stable credit quality.

Business performance was strong and well balanced across our broadly diverse business segments with most of our 80 plus consumer and commercial businesses producing double-digit earnings or revenue growth or both.

Total revenue in the second quarter increased 13% from a year ago, the largest quarterly revenue increase in the last two years. Businesses that generated double-digit year-over-year revenue growth included asset management, business direct, capital markets, corporate trust, credit and debit cards, global remittance services, home equity, consumer finance, insurance, international, personal credit management, real estate brokerage and wealth management.

Operating leverage, once again was positive with expenses increasing 11%, two percentage points below our 13% revenue growth. Virtually all of the year-over-year expense growth was directly or indirectly related to stronger sales and revenue. During the past year, we have opened 99 new regional banking stores and 20 new offices within and outside our traditional footprint to serve existing and new commercial relationships.

In the process, we've added over 4,000 new team members, up 3% from a year ago, largely sales and service professionals. Sales commissions and related compensation increased in many of our fee-based businesses such as insurance, wealth management and real estate brokerage, all of which had particularly strong revenue growth year-over-year.

Non-personnel expenses were relatively flat and declined in some categories, reflecting our ongoing discipline in containing expenses that don't directly add to revenue growth. Operating margins remain strong. We continue to have the highest net interest margin among our peers at 4.89%, up 13 basis points from a year ago.

After having sold all of our lower yielding ARMs and securities over a year ago, when long-term interest rates were substantially lower than today, we began to invest again in longer-term securities late in the second quarter of 2007, as long-term interest rates rose substantially, adding approximately $30 billion in securities at attractive yields, substantially higher than the yields at which we sold our lowest yielding ARMs and long-term securities between mid 2004 and mid 2006.

About half of the recently added securities were in the mortgage company, which periodically uses mortgage-backed securities to hedge the interest rate risk in the mortgage-servicing portfolio. The additional assets are expected to increase net interest income growth, but the higher average earning asset growth is likely to reduce net interest margin in the third quarter.

At 1.82% our return on assets after all expenses and credit costs remained one of the highest among large banks and improved 11 basis points from the second quarter of 2006 despite the increase in charge-offs from a year ago. At 19.6% our return on equity remained one of the highest in the industry reflecting our double-digit earnings growth and our focus on achieving high risk-adjusted returns in all of our business activities.

Reflecting the breadth and balance of our business model both our commercial and consumer businesses contributed to these consistently strong results.

Let me give you some key details. First, our wholesale banking, our wholesale and commercial banking group, which serves primarily middle market customers and select niches in the large corporate market, had another record quarter. Net income grew 13% from a year ago, driven by 20% revenue growth.

Growth in commercial loans and business deposits was strong as was growth in fee-based businesses such as insurance, capital markets, real estate brokerage and asset management. Wholesale banking group's average loans grew by 16% year-over-year and 18% annualized linked quarter.

Asset-based lending, real estate, international and specialized financial-services, which include our capital markets activities and relationships with Fortune 500 companies, all experienced double-digit loan growth.

Average commercial and commercial real estate loans, which included commercial loans in our wholesale segment, as well as, commercial loans in other segments such as small business increased 12% from the second quarter of 2006 and 15% annualized on a linked quarter basis.

Commercial and commercial real estate loans have increased for 15 consecutive quarters and have grown at a double-digit rate for 11 consecutive quarters. Wholesale banking group's average core deposits were up $18 billion from the second quarter of 2006, which included certain funds that were previously swept into non-deposit products. Including only the growth in these funds post conversion to deposits, wholesale's average core deposits were up 32%.

This growth was the result of higher balance growth from existing customers and new relationships, primarily in corporate banking and deposits from international customers doing business in the United States. Eastdil Secured, our real estate brokerage and investment banking company had a record quarter with revenue and income more than doubling from the first quarter of 2007.

During the quarter, Eastdil advised on over $65 billion of real estate debt and equity transactions and continued to earn fees as the advisor to Blackstone Group in its $39 billion acquisition of Equity Office Properties Trust. The international group had double-digit revenue and earnings growth compared to the second quarter of 2006.

Despite historically low volatility, the foreign exchange group arranged almost $13 billion in transactions per day in the second quarter, up 10%. We have one of the largest foreign exchange sales operations in the country with centers in San Francisco, New York, Minneapolis and 11 other markets offering pricing to our commercial, wealth management and retail customers in over 100 currencies.

The wholesale services group continued to be a leader in technology by becoming the first major U.S. financial services company to offer mobile service for medium and large businesses, providing access to information about their accounts and transaction activities on mobile devices.

By making it easier for our customers to do business with us, we continue to earn more of their business, through the first half of 2007; we have already received over 20% more checks through our Check21 solutions.

Including our award winning Desktop Deposit service. Than we did the entire year of 2006, and active Commercial Electronic Office portal users were up 29% from 2006, and customers now initiate and receive more payments electronically than through checks. The Asset Management Group, which is responsible for managing and administering a total of $606 billion in client assets. Had record results with double-digit growth in revenue, earnings and assets under management.

Assets under management were up 17% from second quarter of 2006, Wells Fargo Advantage Funds; our mutual fund business grew assets by 20% from a year ago. And ended the quarter with $134 billion in fund balances, this growth was driven by strong fund performance and new balances; over half of the Wells family of mutual funds we're in the top two Lipper Performance quintiles. Total Wells Fargo trust and investment management fees grew 24% from the second quarter of 2006. Let me now turn to community banking.

Our Community Banking Group, comprised of regional banking, wealth management, mortgage banking and retail Internet had another strong quarter with 11% revenue growth and net income up 14%. Regional banking had a great quarter with record cross sell and improving customer experience scores.

The average retail bank household had 5.4 products with Wells Fargo, a new record, up from five products a year ago and up from three products in 1998. 21% of our retail customers had over eight products with us our long-term goal.

Up from 12% five years ago and in our top region 30% of our customers had over eight products with us. During the second quarter core product sales increased 9% from the prior year on a comparable basis to a total of $4.79 million sales.

Platform banker FTEs increased 7% during the same time period; California continued to be one of our fastest growing states with a 14% increase in core product sales from the second quarter of 2006 on a comparable basis; sales of Wells Fargo Packages, which include a checking account and at least three other products such as a debit card, credit card, savings account or home equity loan were up 21% from the second quarter of 2006, and purchased by 66% of new checking account customers; our success in selling and increasing usage of our credit and debit cards among our customers increased card fees by almost $100 million, or 24% from the second quarter of 2006.

At quarter end 36% of our retail bank customer, consumer households had a Wells Fargo credit card, up from 34% a year ago, and up from 24% five years ago; purchase volume on these cards was up 18% from a year ago, and average balances were up 21%. 91% of our consumer checking account customers had a debit card up from 85% five years ago. And purchase volume increased by 13% from a year ago. Average core deposits of $301 billion included certain funds that were previously swept into non-deposit products.

Including only the growth in these funds from the date of their conversion to deposits or only deposits that were new to Wells Fargo. Average core deposits grew 11% from a year ago, and 14% annualized on a linked quarter basis; average mortgage escrow deposits were up $5.8 billion from the second quarter of 2006, and up $2.8 billion from the first quarter of 2007. Excluding mortgage escrow balances, total average core deposits grew 12% from the second quarter of 2006 and 11% annualized on a linked quarter basis.

Average retail core deposits, which exclude wholesale banking and mortgage escrow deposits were up 6% from a year ago, and 8% annualized on a linked quarter basis; consumer checking accounts were up a net 4.9% from last year. And small business checking accounts were up a net 4.4% from last year.

California continued to be our fastest growing market with checking accounts up a net 6%; this is the eighth consecutive quarter where net new accounts in California exceeded the average across our footprint. While we maintained one of the highest ratios of non-interest bearing deposits to total deposits among large banks in the United States.

Growth in interest-bearing checking and savings accounts and consumer CDs, continue to exceed the growth in non-interest bearing accounts. A trend that is consistent with the national monetary aggregates. Small business continues to be one of our best opportunities for growth sales of store-based business solutions were up 17% from last year on a comparable basis.

And sales of Wells Fargo Business Services Packages, which include a business checking account, and at least three other business products such as a business debit card, business credit card, business savings account or business loan or line of credit were up 41%; these strong sales results increased our cross sell to our business banking households to 3.4 up from 3.1 a year ago. Bank loans to small businesses loans less than $100,000 on our business direct platform. Grew 18% from the second quarter of 2006.

We continue to focus on delivering a great experience for our customers, and measuring our progress through 50,000 store-based customer surveys a month over 1.8 million surveys to date; for customers transacting at the teller line welcoming and wait time scores improved 22%, and customer loyalty scores have improved 11% from the second quarter of 2006. Our Wealth Management Group once again had a strong quarter with 17% revenue growth, and 23% earnings growth from a year ago.

Revenue from brokerage increased 31%, and earnings were up 91% from a year ago driven by an increase in productivity from our financial consultants; this productivity lift helped brokerage assets under administration reach record levels, up 19% from the second quarter of 2006.

WellsTrade, our online brokerage service introduced new pricing during the first quarter, which offers 100 commission free online trades per year for Wells Fargo PMA customers, since the new pricing in February new account openings have increased almost 100% over the same period last year. Wells Fargo continues to be a leader in online banking. At quarter end we had 9.3 million active online consumers up 17% from a year ago.

63% of all Wells Fargo consumer checking account customers are now active online customers, we had 5.3 million bill pay customers up 32% from a year ago; we had 907,000 active online small-business customers, up 19% from a year ago.

Internet sales continue to be an important channel for overall sales growth with consumer product sales up 36%. Consumer checking accounts up 30%, consumer savings accounts up 40%, and consumer credit products up 16% from the second quarter of 2006. Mortgage applications in the second quarter were running at relatively high levels up 6% from a year ago.

Despite the increase in mortgage rates from last year, mortgage refi applications were up 24% from a year ago; at $68 billion purchase mortgage applications were close to the $71 billion in purchase applications taken during the home buying season last spring, mortgage applications in the second quarter were about the same as the high volume of applications taken in the first quarter of 2007. And the application pipeline at the end of the second quarter of $56 billion was also roughly the same as the unclosed pipeline at the end of the first quarter.

Mortgage originations were up 18% from the first quarter, with most of the growth in the retail channel, the mortgage-servicing portfolio continued to grow as it has for 46 consecutive quarters. Despite ups and downs in interest rates and origination activity, our owned servicing portfolio was $1.4 trillion at quarter end, up 30% from a year ago, about 11% due to the servicing portfolio acquired from Washington Mutual last year.

Gross servicing fees of $1 billion were up 23% from a year ago, but were down 4% on a linked quarter basis primarily because of the sale of $1.4 billion in excess servicing rights.

Excess servicing essentially represents an interest only strip above the normal amount of the traditional servicing fee. The sale was undertaken at about breakeven to further reduce the interest rate risk in the servicing portfolio.

Mortgage banking non-interest income was $689 million, down $101 million from first quarter. The impact of higher interest rates on the value of MSRs, net of hedging costs was a $225 million net loss.

The net gain on mortgage loan origination and sale activities was positively impacted by higher gain on sale margins during the quarter, and also included a $135 million increase in the fair value of servicing associated with mortgage loans held for sale at quarter end.

The anticipatory actions we took in February to further strengthen our residential real estate underwriting standards and some pricing improvements on these loans in the second quarter resulted in only a $35 million of revenue reduction on non-prime loans reflected in net gains on mortgage loan origination sales activities compared to $90 million in revenue reduction taken in the first quarter.

Total non-prime residential real estate secured originations were down $2.7 billion from the second quarter of 2006. Revenue at our consumer finance company Wells Fargo financial, increased 10% from a year ago driven by a 14% increase in loans.

Growth in revenue and loans was somewhat more moderate than in prior periods as we began shifting several quarters ago toward the lower risk end of the spectrum on credit products we offer in our auto segment.

Let me now shift to credit quality. Overall, credit quality was in line with our expectations. Total credit losses were stable in the quarter at $720 million compared with $715 million in the first quarter, and $726 million in the fourth quarter of 2006.

Loss rates declined slightly from 0.90% of average loans in the first quarter to 0.87% in the second quarter. Total non-performing assets were also relatively flat at $2.71 billion or 0.79% of loans in the second quarter, compared with $2.67 billion or 0.82% of loans in the first quarter.

Our non-performing loan portfolio continued to have relatively low loss potential based on the high percentage of consumer real estate and auto secured loans where we take an initial write down to estimated net realizable value as the loan is transferred to non-performing status.

Loans 90 days or more past due and still accruing, excluding insured and guaranteed Ginny Mae balances, declined by $43 million or 4% from first quarter and were down 6% from the peak in the fourth quarter of 2006.

As I've done in prior quarters I will provide additional credit metrics on our major loan portfolios. But, first I want to highlight some areas, where we have minimal exposure, and have proactively taken steps to reduce our risk and enhance our credit performance.

We do not retain any credit residuals on any of the prime or non-prime mortgage loans we sell or securitize. A small portion of mortgage loans sold is subject to early payment default risk. In the second quarter we added $35 million to our repurchase reserve for estimated early payment default on all previously sold mortgages.

While we do not retain the credit risk on the majority of our $1.4 trillion residential mortgage servicing portfolio serving 10 million loans, we closely monitor the credit performance of the entire portfolio. Almost 90% of the mortgage loans we service are for prime customers.

We value and price our prime and subprime servicing based on expected repayment performance so that we are properly compensated for the added work related to potentially higher delinquency in the subprime portfolios.

We also price servicing based on the origination channel with better credit performance in our retail originations versus correspondent wholesale channels. While delinquencies and foreclosures are increasing, only 0.56% of our servicing portfolio, in other words less than 1% is in foreclosure, which is below the industry average.

We work closely with our servicing customers to try and keep them in their homes and work with national industry groups to promote and encourage customers to contact their lenders with possible problems.

We have very little ARM reset risk across our loan and servicing portfolios. The bulk of the first mortgages we originate are sold to investors; the bulk of any mortgages we retain are either relationship ARMs, where the customer typically has substantial deposit balances and or multiple products with us, or in our consumer finance business debt consolidation mortgages where the borrower's debt service is not increased by the mortgage loan.

In both cases our ARM reset risk and credit exposure generally is minimal and much less than the industry overall. Less than 15% of our total ARM loans held on our balance sheet are scheduled to reset in the next 18 months.

We have never offered or retained negative am or option ARMs with lower initial teaser rates, which is where the greatest risk exists for other providers in the industry.

In our home equity and home mortgage businesses, we have further tightened correspondent and broker underwriting requirements, primarily reducing stated income and reduced documentation programs. We also discontinued purchasing subprime loans from correspondents at Wells Fargo Home Mortgage during the quarter.

We have negligible direct exposure to hedge funds. Lending directly to private equity sponsors is immaterial and not a strategic focus of our business. Borrowers owned by private equity firms are primarily financed through our asset-based or specialized lending units. These loans constitute less than 2% of our total loans.

We have consciously avoided participating in high profile or controversial financings of this type. Most of our nonprime loans are originated and held at Wells Fargo Financial. Financial has two principal consumer credit portfolios, auto and real estate.

We continue to see an improvement in the credit performance of our $28 billion auto portfolio with net charge-offs down $42 million from the first quarter and down $88 million from the third quarter 2006 peak. 90 days past due continued to improve and were down 25% from the first quarter and are down 37% from the fourth-quarter peak.

While the actions we have taken to improve collections capacity and efficiency drove this improved performance, the auto industry typically experiences seasonal declines in credit performance in the second half of the year and we will carefully monitor our delinquency and loss performance and continue to adjust our auto loan origination and collection process as necessary.

Over 70% of the auto portfolio had a FICO score above 620. The size of our auto portfolio was essentially unchanged from last quarter reflecting tightening of account acquisition strategies to reduce loan volume in the higher risk tiers. Nearly 80% of new originations in the second quarter had FICO scores above 620.

At quarter end, Wells Fargo Financial had $22 billion in U.S.-based real estate secured debt consolidation loans. This portfolio has performed better than the rest of the industry's nonprime mortgage portfolios, because of the nature of the product, the type of customers who buy this product as well as the long-standing discipline with which these loans have always been underwritten and managed at Wells Fargo.

These loans are for debt consolidation purposes, not for the purchase of a home. This means our customers are not incurring significant new financial obligations and in fact their monthly payments are typically lower than they were prior to taking out the debt consolidation loan. 96% of this portfolio is in a first lien position.

Wells Fargo Financial, does not do any interest only, stated income, option ARMs, or negative amortizing loans. All loans are originated by Wells Fargo financial team members we do not use any brokers or correspondents in this business.

Wells Fargo Financial does not offer teaser rates and does not do any national advertising campaigns. New real estate customers primarily come from outbound calling to customers, with an existing Wells Fargo relationship. And, where we can clearly demonstrate a tangible benefit for our customers by improving their financial situations.

We conservatively underwrite these loans with full documentation and require income verification. The average FICO score on this portfolio was 642. And 65% of the portfolio had a FICO score above 620. The average loan to value was 76% the average loan size was $124,000.

Approximately 45% of the portfolio was fixed rate loans. The remaining loans are 327 adjustable-rate mortgages with a fixed payment for the first three years of the loan. We underwrite these adjustable-rate loans to the fully indexed rate to ensure the customer's ability to afford their payments.

In the second quarter, 60% of new originations were fixed rate loans. This prudent product strategy combined with cautious underwriting has resulted in stable and predictable credit performance.

Our delinquency and foreclosure rates for this portfolio remained significantly better than published industry rates. Annualized net charge-offs at quarter end in this portfolio were below 20-basis points, with second-quarter losses of only $10 million.

We have been proactive in mitigating the credit risk in this portfolio by obtaining private mortgage insurance on a significant portion of our higher loan to value loans. The recent regulatory guidelines issued for subprime lending will not have a significant impact on Wells Fargo Financial's operations.

Since many of those guidelines have always been part of our normal business practices. This portfolio is 6% of our total loan portfolio, and will not materially impact our credit losses or earnings.

The $61 billion of first mortgages that were on our balance sheet at June 30, 2007 consisted of $22 billion of debt consolidation loans at Wells Fargo Financial, $12 billion of home equity loans in the first mortgage position, and $27 billion of largely prime, relationship-based first mortgages held at Wells Fargo Home Mortgage regional banking and our wealth management group.

We do not offer or portfolio any negative amortizing or option ARMs. We obtain mortgage insurance on higher loan to value loans at Wells Fargo Financial and Wells Fargo Home Mortgage and we continue to monitor regional economic and real estate trends and modify underwriting standards as needed.

The credit performance of our real estate secured portfolio also benefits, because Wells Fargo continues to be among the most experienced, most customer focused and highest rated loan servicers for both prime and nonprime loans.

High-quality servicing improves customer service and has been demonstrated to result in lower foreclosures and losses. Charge-offs in our $61 billion one-to-four family first mortgage portfolio improved slightly from the first quarter to 13 basis points, only $19 million in second-quarter net losses on the entire first mortgage portfolio.

At quarter end 15% of our $81 billion National Home Equity Group portfolio was in the first lien position and approximately 58% of the portfolio in a second lien position was behind a Wells Fargo first mortgage.

The average FICO score was 748. The average combined LTV was 60% based on outstanding balances and 72% including unused commitments. 59% of the portfolio was fixed rate and 74% of new production during the quarter was fixed rate.

Home equity losses have increased in response to current soft real estate market conditions in some markets. While the frequency of losses was as expected, the severity has increased due to declining home values in some of the markets we serve.

Over two years ago we tightened underwriting standards in about 20 standard metropolitan areas that we felt had the greatest risk of home price declines. While that has mitigated our exposure, we are seeing some deterioration in other markets primarily in the Midwest and California's Central Valley.

Weakness in the home equity portfolio is particularly apparent in the 2006 vintage sourced through third party channels, where current combined loan to values have risen above 90% in part due to the decline in local home values.

This particular segment represents only 3% of the total home equity portfolio. In response we have tightened underwriting standards and increased focus on collections for our third party loans. We have benefited from our geographically diverse portfolio and we believe our underwriting practices are sound and collection resources adequate and well managed for the current environment.

While charge-offs have increased from the historically low and unsustainable rates at year-end in this portfolio, non-performing loans and 90 days past due remained flat in the second quarter.

Given current trends in many residential housing markets, we expect higher but manageable losses throughout 2007 in the home equity portfolio. Two other retail portfolios that are important to our credit performance are credit card and business direct.

The $10 billion community banking credit card portfolio was primarily issued to our banking customers within our banking states. Our $11 billion business direct portfolio consists of small loans and lines of credit originated to small-business owners nationwide.

These businesses continue to execute underwriting, account management and collection practices that have produced healthy loan growth and predictable results, typically better than industry norms, over an extended period of time.

Our commercial and commercial real estate portfolios continue to benefit from exceptional credit results, healthy loan growth and wide geographic diversity. We finance a modest level of residential one to four family construction and land development, less than 2% of total loans, with minimal exposure to stressed property types, such as condo conversions, and we have no exposure to large sub prime mortgage originators.

Our risk profile in the wholesale businesses, continue to benefit from low exposure to the airline and automobile industries. We have not significantly participated in the recently publicized large leveraged buyouts to private equity firms.

And in the sub prime CDO market our lending exposure related to collateralized debt obligations is minimal.

The $57 million increase in commercial and commercial real estate non-accrual loans reflected $26 million of normal level of activity for the wholesale businesses and $31 million from a portfolio purchased by our equipment finance business.

We consider the $634 million of total commercial and commercial real estate non-accrual loans at quarter end a reasonable and manageable level for a $132 billion loan portfolio.

Let me now shift to capital. On June 30th shareholders equity was $47 billion, up $5 billion from $42 billion a year ago. Our leveraged Tier 1 capital and total capital ratios were 7.9%, 8.57%, and 11.72% respectively.

We expect the bond portfolio actions we took late in the second quarter will add to third-quarter earnings and average assets, but will modestly reduce the leverage ratio. Our capital ratios remain very strong reflecting our ongoing focus on producing high risk-adjusted returns in all of our activities. And in turn gives us capacity to continue to take advantage of attractive opportunities to produce strong returns for our shareholders.

So far this year we have opportunistically stepped up our share repurchase activity. In the second quarter we repurchased 30 million shares of Wells Fargo common stock. Year-to-date we have repurchased 77 million shares compared with 59 million shares repurchased in all of 2006.

At June 30th approximately 60 million shares remained available for repurchase under Board authority. During the quarter we also issued $1 billion of attractively priced retail preferred securities, a low-cost way to add to permanent capital.

Our M&A strategy remains focused on niche opportunities that add to value and we will not do any acquisitions unless they meet our long-standing financial criteria for accretion and returns.

In the second quarter we acquired Placer Sierra Bancshares, a Northern California based bank holding company with $2.6 billion in assets and more than 650 team members serving consumer and small and medium-size businesses from 50 locations throughout California.

We acquired CIT Construction adding capability to provide commercial financing to the infrastructure construction industry. And we also announced the acquisition of Greater Bay Bancorp with $7.4 billion in assets, our third-largest bank acquisition in our company's history. Greater Bay will enable us to better serve our community banking, commercial insurance brokerage and specialty finance and trust customers.

Our preferred use of capital is to invest in our businesses, particularly to build and strengthen our distribution. In the second quarter of 2007, we opened 21 regional banking centers.

We continue to add to our ATM network adding 41 new Web enabled ATMs and converting 330 envelope-free ATMs during the quarter. We added almost 1000 platform banker FTEs from the second quarter of 2006.

As I highlighted last quarter, the adoption of FIN 48 will cause more volatility in our effective tax rate from quarter to quarter. Our effective tax rate was 34% this quarter compared with 30% last quarter and 34% a year ago.

In conclusion, we once again achieved double-digit earnings per share and double-digit revenue growth, while achieving positive operating leverage. These outstanding results were driven by strong and well-balanced growth across our broadly diversified business segments. Our long-standing discipline managing risk was reflected in our relatively stable credit quality.

Thank you for listening. And if you have any questions, please call Bob Strickland, Director of Investor Relations, at 415-396-0523.

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