Wells Fargo & Company (NYSE:WFC)
Q3 2007 Earnings Call
October 16, 2007 8:30 am ET
Bob Strickland - Director, Investor Relations
Howard Atkins - Chief Financial Officer
Hello, this is Bob Strickland. Thank you for calling into the Wells Fargo third quarter 2007 earnings review prerecorded call. Before we talk about our third 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 and specifically that credit losses in the home equity portfolio are likely to increase in the fourth quarter of 2007 and remain elevated into 2008.
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 third 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.
Thanks Bob. The third quarter was a challenging quarter for the industry with the downturn in the national housing market, deterioration in the capital markets, a widening credit spreads, increases in market volatility and changes in interest rates. While Wells Fargo is not immune to the environment, the diversity of our business model and our long-standing financial discipline resulted in solid quarterly results with a 6% increase in earnings per share to a record $0.68 per share, double-digit revenue growth, driven by double-digit growth in loans, double-digit growth in core deposits, and double-digit growth in fee income, and continued strong operating margins including positive operating leverage. Many of our businesses were able to take advantage of the opportunities in the marketplace to attract new customers and meet more of their customers’ financial needs.
I want to start with our typical review of how our diversified businesses performed and how broad-based our growth drivers continued to be, in both our commercial and consumer businesses. Throughout this discussion of business segment results, I will include how the third quarter credit crunch impacted each business positively and negatively. I will then review our credit quality across our various loan portfolios.
Let me start with our commercial businesses.
Our Wholesale and Commercial Banking Group, which serves primarily middle market customers and select niches in the large corporate market, continued to perform well despite the challenging environment. This is a testament to our strategy of developing long-term, deep relationships with businesses rather than one-off transactions.
Net income grew 6% from a year ago. Revenue grew 12%, reflecting strong growth in commercial loans and business deposits and fee-based businesses such as asset management, insurance and international. Cross-sell reached a new record with 6.1 products per wholesale relationship and 7.4 products per middle market relationship.
Wholesale Banking Group’s average loans grew by 21% year-over-year and 29% annualized linked quarter. Asset-based lending, international, commercial real estate 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 includes commercial loans in our wholesale segment as well as commercial loans in other segments such as small business, increased 16% from third quarter 2006 and 24% annualized on a linked quarter basis.
Our commercial and commercial real estate loans have increased for 16 consecutive quarters and have grown at a double-digit rate year-over-year for 12 consecutive quarters. The acquisition of CIT’s construction leasing business added $2.6 billion to quarterly average loans, or about a third of the total 24% linked-quarter growth.
The disruption in the capital markets has not had a material impact on our wholesale customers. Commercial paper back-up lines remained largely undrawn at Wells Fargo; approximately $10 billion in commitments with only approximately $400 million drawn at quarter end.
Wholesale Banking Group’s average core deposits were up $19 billion from third quarter 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 Banking’s average core deposits were up 37%. This growth was the result of higher balance growth from existing customers and new relationships, primarily in corporate banking and deposits from foreign Central Banks and from international customers doing business in the United States.
The International Group once again had double-digit revenue and earnings growth from third quarter 2006. Due to volatility in the currency and credit markets, the Foreign Exchange Group traded a record $17 billion per day in transactions during August, while quarterly volumes were up 28% from a year ago.
We have foreign exchange trading desks in San Francisco, New York and Minneapolis and sales offices in 11 other markets. We also serve our customers through Foreign Exchange Online, the online foreign exchange platform on our industry leading Commercial Electronic Office portal.
More than 70% of our commercial banking relationships are active users of our online business portal. Foreign Exchange online grew revenue 18% in the third quarter. We serve our retail and small business customers through 300 international teller locations in our banking stores, with 40% revenue growth in the third quarter.
The Asset Management Group, which is responsible for managing and administering a total of $645 billion in client assets, had double-digit growth in revenue, earnings and
assets under management. Assets under management were up 14% from third quarter 2006.
Wells Fargo Advantage Funds, our mutual fund business, grew assets by 19% from a year ago and ended the quarter with $143 billion in fund balances. This growth was driven by strong fund performance and new balances. Half of the Wells Fargo Advantage Funds were in the top two Lipper performance quintiles for the past three-year period.
We have minimal exposure to CLOs as an advisor or investor and we do not hold any CDO, sub-prime backed or single-seller asset-backed commercial paper obligations in our money market mutual funds.
Total Wells Fargo trust and investment management fees across all business segments grew 17% from the third quarter of 2006 to $777 million, representing about 17% of total fee income in the third quarter. Insurance fee income grew 5% from a year ago, driven by new customer growth and cross-sell. On a linked-quarter basis, insurance declined in line with normal seasonality.
Commercial real estate brokerage fees were up 62% from a year ago, although declining from a record volume set in second quarter. Much of the linked quarter declines in both insurance and real estate brokerage fees were offset by related declines in expenses in these two businesses.
Our capital market activities showed good results in the quarter and were largely not impacted by the credit crunch or market dislocation. We have not significantly participated in any of the recently publicized large leveraged buyouts; we did not create any structured investment vehicles to hold off-balance sheet assets and have no current plans to do so; exposure to CDOs is minimal; we have no direct exposure to hedge funds; we have never made markets in sub-prime mortgage securities and consequently did not need to write-down any of that kind of debt security; commercial mortgages originated and held for sale were about $1.5 billion on average and experienced negligible losses in the quarter; our modest high yield bond portfolio is well diversified, was hedged and incurred minimal net losses; and we wrote down commercial loans held for sale by $20 million in our securities investment business, recorded in other non-interest income.
Our Community Banking Group, which includes regional banking, wealth management, mortgage banking and retail Internet, had a good quarter with 12% revenue growth and 8% earnings growth from the third quarter of 2006.
Regional banking, serving 11 million households, achieved a record cross-sell of 5.5 products per household, up from 5.1 products a year ago and up from around three products in 1998. Twenty-two percent of our retail customers had over eight products with us, our long-term goal, up from around 12% five years ago, and in our top region, 31% of our customers had over eight products with us.
During the third quarter, core product sales were a record $5.25 million, up 9% from prior year on a comparable basis. California continued to be one of our fastest growing states with a 16% increase in core product sales from the third 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, a savings account or a home equity loan, were up 13% from third quarter 2006 and were purchased by 69% of new checking account customers.
Increased customer penetration and usage of credit and debit cards grew card fee income by 21% from the third quarter of 2006 and 34% annualized on a linked-quarter basis. At quarter-end, 37% of our retail bank 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 20% from a year ago and average balances were up 27%.
Ninety-one percent of our consumer checking account customers had a debit card, up from 85% five years ago and purchase volume increased by 11% from a year ago. Wells Fargo’s best-in-class Rewards suite for our credit and debit card customers has contributed to both our growth in balances and to purchase volume. In addition, customers are finding our patent pending MySpendingReport a helpful tool for understanding and managing their spending.
Average core deposits of $306 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 7% annualized on a linked-quarter basis.
Average mortgage escrow deposits were up $3 billion from the third quarter of 2006 and down $1 billion from the second quarter of 2007. Excluding mortgage escrow balances, total average core deposits grew 13% from the third quarter of 2006 and 9% annualized on a linked quarter basis.
Average retail core deposits, which exclude wholesale banking and mortgage escrow deposits, were up 7% from a year ago and 1% annualized on a linked quarter basis. The average balance per retail account declined slightly in the third quarter as consumers were forced to pay higher interest on their loans. However, we continued to have good account growth, positioning us well for the future.
Consumer checking accounts were up a net 4.8% from last year and small business checking accounts were up a net 4.3% from last year. California continued to be our fastest growing market, with checking accounts up a net 5.9%. This is the ninth consecutive quarter where net new accounts in California exceeded the average across our footprint.
While some of our competitors in California increased their deposit rates during the quarter, we have not. We nevertheless have continued to grow accounts by offering our customers better service and more convenience. Although we did not raise rates on our deposit products during the third quarter and actually reduced rates early in the fourth quarter in response to the Fed rate cut, our overall average cost of deposits increased during the third quarter as the growth in interest bearing checking and savings accounts and consumer CDs continued 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 16% from last year on a comparable basis. Sales of Wells Fargo Business Services Packages, which includes 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 31% and purchased by 43% of new business checking account customers.
These strong sales results increased our cross-sell to our business banking households to 3.5, up from 3.2 a year ago. Bank loans to small businesses, loans less than $100,000 on our Business Direct platform, grew 19% from third quarter of 2006. From December 2005 to August 2007, in-footprint single product small business households declined from 29.5% to 24.1% of total small business households, an 18% improvement.
We continued to focus on delivering a great experience for our customers and measuring our progress through 50,000 store-based customer surveys a month, over 1.9 million surveys to date. For customers transacting at the teller line, welcoming and wait time scores improved 16% and customer loyalty scores have improved 9% from third quarter 2006.
Our Wealth Management Group had an outstanding quarter with revenue up 20% and earnings up 24% from a year ago. These results were driven by double digit non-interest income, deposit and loan growth. Strong trading activity by our customers increased brokerage revenue by 31% and net income increased 51% from the third quarter of 2006.
Brokerage assets under administration reached record levels, increasing 15% from a year ago. WellsTrade, our on-line brokerage service, introduced new pricing during the first quarter offering 100 commission-free online trades per year for Wells Fargo PMA customers. This relationship-based pricing offer has increased new account openings by 15%, our self-directed assets under administration by 52% and revenue by 36% since the third quarter of 2006.
Wells Fargo continues to be a leader in retail online banking. At quarter-end, we had 9.5 million active online consumers, up 14% from a year ago. Sixty-four percent of all Wells Fargo consumer checking account customers are now active online customers. We had 950,000 active online small business customers, up 19% from a year ago.
Internet sales continued to be an important channel for overall sales growth with consumer product sales up 31%, consumer checking accounts up 21%, consumer savings accounts up 22% and consumer credit products up 20% from the third quarter of 2006.
During the quarter, we launched Wells Fargo Mobile for consumers and small business customers, allowing them to use the browser on their web-enabled mobile device to check account balances, view transaction history and transfer funds between Wells Fargo accounts.
We’ll now talk about mortgage banking. Notwithstanding the sharp downturn in the housing sector, the widening of nonconforming credit spreads and the lack of liquidity in the nonconforming secondary markets, our mortgage banking results in the third quarter were relatively strong overall. Our longstanding responsible lending practices and policies, our leadership role in the industry, our risk management discipline and most importantly, the balance we have in our mortgage business with complementary origination and servicing strengths, enabled us to continue to grow revenue in the third quarter while at the same time reducing risk.
Throughout the market turmoil, Wells Fargo remained open for business and our reputation, commitment to the mortgage business, and financial strength became particularly attractive to more homeowners, more real estate agents, more builders and other referral sources.
At $95 billion, mortgage applications were down $19 billion on a linked-quarter basis, in part due to typical seasonal declines in the post-spring home buying season, but were actually the same volume of applications as the year0ago quarter.
At $68 billion, originations were similarly down about 15% on a linked-quarter basis, with most of the decline in originations occurring in the correspondent and wholesale channels as we exited the non-prime correspondent channel in the second quarter, exited the non-prime wholesale channel in the third quarter, and adjusted pricing on most nonconforming wholesale and correspondent mortgage products throughout the quarter.
Less than half of our total originations have typically been through the wholesale and correspondent channels, compared with typically 70% or more non-retail for the larger peer competitors.
We remained one of the nation’s leading retail mortgage originators with Wells Fargo Home Mortgage retail originations totaling $29 billion, the same volume as a year ago and down only 9% on a linked-quarter basis.
The secondary market for agency-conforming mortgages functioned well for most of the quarter. However, with overall secondary market spreads widening, gain on sale margins worsened for most of the quarter, but margins have since improved slightly.
The warehouse and pipeline, which is predominately prime mortgages, was written down by $378 million in the quarter to reflect the unusual widening in largely non-conforming versus conforming secondary market spreads. Many of these assets were then securitized and a large portion retained as securities in our available for sale investment portfolio at very attractive yields. None of these new securities are collateralized by sub-prime loans.
In addition to the warehouse markdown, mortgage origination gains were reduced by $112 million, primarily to reflect a write-down of repurchased mortgage loans and an increase in the repurchase reserve.
The decline in mortgage origination fees was more than made up by higher servicing revenue, once again demonstrating the value of our balanced mortgage business model. Mortgage servicing income grew due to volume, the owned servicing portfolio of $1.5 trillion at quarter-end was up 11% from a year ago, and also due to strong hedging results.
While servicing income was reduced by $638 million due to the impact of over a 30 basis point decline in 30-year mortgage rates on the market value of MSRs during the quarter, the gain on the economic hedge of the MSR was $1.2 billion.
Three factors contributed to this solid net hedging result. First, the same widening of mortgage spreads due to illiquidity and market estimates of slower prepayments that negatively impacted the value of the mortgage warehouse positively impacted the value of the MSR asset.
Second, we positioned ourselves during the height of the MBS market turmoil to benefit from a flight to quality by holding proportionately more of our economic hedges of the MSR in non-mortgage-backed security instruments like Treasury futures and options, swaps and options on swaps. We were able to reverse this positioning and lock in the flight-to-quality gains as the MBS market recovered later in the quarter.
And third, on balance we maintained a proportionately larger economic hedge on the MSR asset in part due to the replacement of MBS securities, which are recorded in debt securities results, with off-balance sheet economic hedges, which are accounted for in mortgage hedging results.
At September 30, the ratio of capitalized MSR to the total amount of mortgages serviced for others was 1.35%, the lowest ratio in eight quarters. Finally, we continued to reduce expenses in the mortgage business, with expenses down 20% annualized on a linked quarter basis, and in the process we incurred approximately $14 million in severance and related shut-down costs.
Let me now shift to credit quality. Net credit losses increased to $892 million, or 1.01% of average loans annualized, up from $720 million in the second quarter of 2007. Almost half of the increase in net credit losses was concentrated in the home equity portfolio.
As indicated previously, we have been projecting higher home equity credit losses for a while, although losses in this portfolio accelerated in the third quarter due to the steeper-than-anticipated decline in national home prices. The remainder of the increase in credit losses was concentrated in the auto portfolio, largely due to typical seasonal factors, with modest increases in unsecured consumer credit portfolios, largely due to growth.
Total nonperforming assets were $3.18 billion or 0.88% of loans in the third quarter, compared with $2.72 billion or 0.79% of loans in the second quarter. Our nonperforming 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 nonperforming status.
Loans 90 days or more past due and still accruing, excluding insured and guaranteed GNMA balances, increased by $177 million from the second quarter. This increase is concentrated in our consumer real estate and unsecured portfolios and is consistent with the increases in nonperforming and net credit losses previously mentioned.
I’d like to start by focusing on our exposure to the real estate market. Our first mortgage portfolio continued to perform very well in the third quarter, with annualized losses of 0.11%, down from 0.13% in the second quarter; only $16 million in third quarter losses on the entire $67 billion first mortgage portfolio.
The $67 billion of first mortgages that were on our balance sheet at September 30, 2007, consisted primarily of $23 billion of debt consolidation loans at Wells Fargo Financial, $12 billion of home equity loans in the first mortgage position, and $31 billion of largely prime customers, relationship-based first mortgages held at Wells Fargo Home Mortgage, regional banking, and our Wealth Management Group.
While our disciplined underwriting standards have resulted in first mortgage delinquencies considerably below industry levels, we continued to tighten our underwriting standards in the third quarter.
Wells Fargo Home Mortgage closed the non-prime wholesale channel early in the quarter, after closing the non-prime correspondent channel in the second quarter. Pricing was increased for nonconforming mortgage loans during the quarter, reflecting the reduced liquidity in the capital markets.
At quarter-end, Wells Fargo Financial had $24 billion in U.S. based real estate-secured debt consolidation loans. 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 total monthly credit payments are typically lower than they were prior to taking out the debt consolidation loan.
Ninety-six percent of this portfolio is in a first lien position. Annualized net charge-offs at quarter end in this portfolio were less than 20 basis points, with third quarter losses of only $10 million.
Our delinquency and foreclosure rates for this portfolio remained significantly better than published industry rates for non-prime mortgage portfolios. This portfolio continued to perform better than the rest of the industry’s non-prime mortgage portfolios because of the nature of the product, the type of customers who buy this product, as well as the longstanding discipline with which these loans have always been underwritten and managed at Wells Fargo.
Wells Fargo Financial has not originated any interest only, stated income, option ARMs or negative amortizing residential real estate loans. All U.S. based debt consolidation 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 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 through debt consolidation.
We conservatively underwrite these loans with full documentation and require income verification. The average FICO score on this portfolio was 642 and 64% of the portfolio had a FICO above 620. The average loan-to-value was 77%. The average loan size was $127,000. Approximately 46% of the portfolio was fixed rate loans.
The remaining loans were 3-27 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 third quarter, 57% of new originations were fixed rate loans. This prudent product strategy, combined with cautious underwriting has resulted in stable and predictable credit performance.
Our National Home Equity Group manages a portfolio of $83 billion in home equity loans, including the $12 billion that are in first position. Net credit losses in the third quarter for the National Home Equity Group were $157 million, or 0.77% of average loans annualized, up $68 million from the second quarter when losses were 0.44% of loans annualized.
The increase in losses in this portfolio is primarily a severity issue, not a frequency issue, and is concentrated in the highest combined LTV loans. The increase in severity reflects the decline in national home prices, with certain markets in the Midwest and California’s Central Valley seeing some more stress.
The difference between frequency and severity is most clearly demonstrated by the fact that while our losses increased, 98.7% of our home equity customers were still paying us on time.
The majority of the home equity portfolio, which would be loans originated through our retail stores or through cross-sell with Wells Fargo Home Mortgage, had a slight increase in losses but within acceptable ranges that are consistent with our risk-based pricing structure.
The bulk of the actual deterioration in the home equity portfolio has come from our Correspondent channel, where we purchased closed loans from third party originators. Specifically, correspondent home equity loans represented about 7% of our total home equity loans outstanding but accounted for 25% of our third quarter home equity losses with an annualized loss rate in excess of 3%.
As this adverse trend emerged, we tightened credit standards earlier in 2007 and completely eliminated this channel during the third quarter. Correspondent loans represented less than 7% of Wells Fargo’s home equity volume in the first half of 2007.
In response to the decline in the housing market, the National Home Equity Group has taken a number of actions to adjust pricing and to tighten credit standards, including reducing the maximum loan-to-value for all sales channels. However given the current real estate market conditions, credit losses in the home equity portfolio are likely to increase in the fourth quarter and remain elevated into 2008.
While we do not retain any significant credit risk on our $1.4 trillion residential mortgage servicing portfolio, which serves over 10 million first mortgage and home equity loans, we closely monitor the credit performance of this portfolio.
Over 90% of the mortgage loans we service are for prime customers. We value and price our servicing based on expected repayment performance, so that we are properly compensated for the added work related to potentially higher delinquency in the sub-prime portfolios. We also price servicing based on the origination channel, with better credit performance in our retail originations versus third party origination channels.
While delinquencies and foreclosures are increasing, only 0.66% of our servicing portfolio -- in other words, less than 1% -- was in foreclosure at quarter end, which is below the industry average.
We work hard at keeping people in their homes. In fact, Wells Fargo last week helped to launch the national HOPENOW alliance to reach at-risk homeowners facing difficulty in making their payments. The alliance includes mortgage servicers, counselors and capital market investors.
Making contact with at-risk borrowers is our biggest challenge. Throughout the industry, of those consumers who lose a home to foreclosure, around 50% have never been in contact with their mortgage servicer. When contact occurs at the first sign of trouble, before the weight of past due payments, we have a greater chance of helping our customers find options.
We are reaching out to ARM customers 6 months prior to reset with proactive calls and letters and have established a dedicated toll-free number so customers can connect easily with a Wells Fargo team member. In the last 18 months, we have doubled our team members that directly assist customers with active efforts to help find workout solutions.
Credit losses in our $28 billion auto portfolio increased due primarily to expected seasonality in the second half of the year. Net auto losses increased $57 million from the prior quarter. Year over year, net auto losses were down $32 million, demonstrating that credit performance has stabilized as we continue to refine the indirect auto business model.
Delinquencies have increased due to seasonality, but loans 90 days past due and still accruing continued to improve and were down 9% from second quarter and down 42% from the fourth quarter peak. 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 higher risk tiers. Nearly 80% of new originations in the third quarter had a FICO score above 620.
Two other retail portfolios that are important to our credit performance are credit card and business direct. The $11 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 produce healthy loan growth and execute underwriting, account management and collection practices with predictable results within acceptable risk parameters, typically better than industry norms.
Delinquency and net credit losses are modestly higher due to slightly higher consumer bankruptcy rates and the continued pressure of the weak residential real estate market on these unsecured portfolios.
Our commercial and commercial real estate portfolios continued to produce strong credit performance and healthy loan growth. This segment of our lending business is benefiting from our focus on deep and long-term relationships with middle market customers, regional commercial real estate and geographically diverse small business lending.
Our $5.9 billion residential one to four family construction and land development loan portfolio, which is less than 2% of total loans, continues to perform satisfactorily and has experienced only isolated and small problems.
We placed $97 million in loans to one large California residential developer on non-accrual in the third quarter, after working closely with the customer for over a year. The $124 million increase in commercial and commercial real estate non-accrual loans primarily reflects this one loan.
Let me now shift to capital management and balance sheet management. On September 30, shareholders equity was $48 billion, up $3 billion from $45 billion a year ago. Our leverage, tier I capital, and total capital ratios were 7.29%, 8.21%, and 11.11% respectively.
Our capital ratios remained very strong, reflecting our ongoing focus on producing high risk-adjusted returns in all of our activities and in turn, giving us capacity to continue to take advantage of attractive growth opportunities to produce strong returns for our shareholders.
In the third quarter, we repurchased 60 million shares of Wells Fargo common stock. Year to date, we have repurchased 137 million shares, all but 11 million of which have been used to complete the acquisition of Placer Sierra Bancshares and Greater Bay Bancorp and for employee stock option exercises, 401(k) matched contributions and other employee benefit plans.
At September 30, 49 million shares remained available for repurchase under Board authority.
Our merger and acquisition strategy remains focused on niche opportunities adding to stockholder value. We will not do any acquisitions unless they meet our longstanding financial criteria for accretion and returns.
On October 1st, we completed the acquisition of Greater Bay Bancorp, with $7.4 billion in assets, and the third largest bank acquisition in our Company’s history. With 41 banking stores across the San Francisco Bay Area, Greater Bay will enable us to better serve our community banking, commercial insurance brokerage, specialty finance and trust customers. Given the challenging environment, we expect to see additional acquisition and portfolio purchase opportunities.
Our preferred use of capital is to invest in our businesses, particularly to build and strengthen our distribution. In the third quarter of 2007, we opened 20 banking stores and converted 39 Placer Sierra Bancshares stores to our network, bringing our total retail store count to 3,283.
We continued to add to our ATM network, adding 49 new web-enabled ATMs and converting 199 envelope-free ATMs during the quarter. We added 647 platform banker FTEs from the third quarter 2006.
As indicated earlier in my remarks, the investment securities portfolio, which had been increased in second quarter when yields rose, was reduced during the third quarter. Taking advantage of an opportunity between the spot MBS market and the forward securities market, the price of about $24 billion in mortgage-backed security sales was locked in through a forward sale rather than an outright sale of the particular securities.
While there was essentially no net impact on third quarter earnings from this combination of transactions, the modest decline in yields between the time of the forward sale and the delivery of the MBS to settle the forwards resulted in a commensurate gain on the underlying bonds, which was recognized as gains in the available for sale securities line item, and offset by a loss in the forward hedge, which was reflected in other income trading.
As previously disclosed, the increase in average assets for the quarter was the principle reason net interest margin declined in the third quarter. Late in the third quarter, $17 billion of new loans and securities were added at higher yields than the MBS securities that were sold, which will help fourth quarter net interest margin.
The company did not issue any long-term debt in the quarter in view of the temporary impact of the market’s dislocation on debt issuance costs, which have since subsided. Temporarily elevated short-term LIBOR rates at the peak of the dislocation adversely impacted short-term costs by about $15 million.
In terms of our tax rate, there were no significant tax costs or benefits in the quarter. The effective tax rate was 34% this quarter compared with 34% in second quarter, 33% year-to-date and 32% in the third quarter of 2006.
In summary, in conclusion, while we are not immune to the slowdown in the housing market or the turbulent credit markets, our results in the third quarter demonstrated the absolute and relative advantages of our diversified business model, long-standing financial discipline, conservative risk management practices and strong balance sheet and capital ratios. We are well positioned to take advantage of the growth opportunities presented in this challenging environment.
Thank you for listening. If you have any questions, please call Bob Strickland, Director of Investor Relations, at 415-396-0523.
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