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 intothe Wells Fargo third quarter 2007 earnings review prerecorded call. Before wetalk about our third quarter results, we need to make the standard securitieslaw disclosure. In today's call we will make forward-looking statements aboutspecific income statement and balance sheet items and other measures of futureresults of operations and financial condition, such as statements about creditquality and future credit losses generally and specifically that credit lossesin the home equity portfolio are likely to increase in the fourth quarter of2007 and remain elevated into 2008.
Forward-looking statements give our expectations about thefuture. They are not
guarantees and results may differ from expectations.Forward-looking statements speak only as of the date they are made and we donot undertake any obligation to update them to reflect changes that occur afterthat date.
For a discussion of some of the factors that may causeactual results to differ from expectations, please refer to our SEC filings,including the 8-K filed today which includes the press release announcing ourthird quarter results, and to our most recent annual and quarterly reportsfiled with the SEC and to the information incorporated into those documents.
Now I will turn the review over to our Chief FinancialOfficer, Howard Atkins.
Thanks Bob. The third quarter was a challenging quarter forthe industry with the downturn in the national housing market, deterioration inthe capital markets, a widening credit spreads, increases in market volatilityand changes in interest rates. While Wells Fargo is not immune to theenvironment, the diversity of our business model and our long-standing financialdiscipline resulted in solid quarterly results with a 6% increase in earnings pershare to a record $0.68 per share, double-digit revenue growth, driven bydouble-digit growth in loans, double-digit growth in core deposits, and double-digitgrowth in fee income, and continued strong operating margins including positiveoperating leverage. Many of our businesses were able to take advantage of the opportunitiesin the marketplace to attract new customers and meet more of their customers’financial needs.
I want to start with our typical review of how ourdiversified businesses performed and how broad-based our growth driverscontinued to be, in both our commercial and consumer businesses. Throughoutthis discussion of business segment results, I will include how the thirdquarter credit crunch impacted each business positively and negatively. I willthen review our credit quality across our various loan portfolios.
Let me start with our commercial businesses.
Our Wholesale and Commercial Banking Group, which servesprimarily middle market customers and select niches in the large corporatemarket, continued to perform well despite the challenging environment. This isa testament to our strategy of developing long-term, deep relationships withbusinesses 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 andfee-based businesses such as asset management, insurance and international.Cross-sell reached a new record with 6.1 products per wholesale relationshipand 7.4 products per middle market relationship.
Wholesale Banking Group’s average loans grew by 21% year-over-yearand 29% annualized linked quarter. Asset-based lending, international,commercial real estate and specialized financial services, which include our capitalmarkets activities and relationships with Fortune 500 companies, allexperienced double-digit loan growth. Average commercial and commercial realestate loans, which includes commercial loans in our wholesale segment as wellas 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 haveincreased for 16 consecutive quarters and have grown at a double-digit rate year-over-yearfor 12 consecutive quarters. The acquisition of CIT’s construction leasing businessadded $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 materialimpact on our wholesale customers. Commercial paper back-up lines remainedlargely undrawn at Wells Fargo; approximately $10 billion in commitments withonly approximately $400 million drawn at quarter end.
Wholesale Banking Group’s average core deposits were up $19billion from third quarter 2006, which included certain funds that werepreviously swept into non-deposit products. Including only the growth in thesefunds post conversion to deposits, Wholesale Banking’s average core depositswere up 37%. This growth was the result of higher balance growth from existingcustomers and new relationships, primarily in corporate banking and deposits fromforeign Central Banks and from international customers doing business in theUnited States.
The International Group once again had double-digit revenueand earnings growth from third quarter 2006. Due to volatility in the currencyand credit markets, the Foreign Exchange Group traded a record $17 billion perday in transactions during August, while quarterly volumes were up 28% from ayear ago.
We have foreign exchange trading desks in San Francisco, NewYork and Minneapolis and sales offices in 11 other markets. We also serve ourcustomers through Foreign Exchange Online, the online foreign exchange platformon our industry leading Commercial Electronic Office portal.
More than 70% of our commercial banking relationships areactive users of our online business portal. Foreign Exchange online grew revenue18% in the third quarter. We serve our retail and small business customersthrough 300 international teller locations in our banking stores, with 40% revenuegrowth in the third quarter.
The Asset Management Group, which is responsible for managingand administering a total of $645 billion in client assets, had double-digitgrowth 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, grewassets by 19% from a year ago and ended the quarter with $143 billion in fundbalances. This growth was driven by strong fund performance and new balances.Half of the Wells Fargo Advantage Funds were in the top two Lipper performancequintiles for the past three-year period.
We have minimal exposure to CLOs as an advisor or investorand we do not hold any CDO, sub-prime backed or single-seller asset-backedcommercial paper obligations in our money market mutual funds.
Total Wells Fargo trust and investment management feesacross all business segments grew 17% from the third quarter of 2006 to $777million, 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 andcross-sell. On a linked-quarter basis, insurance declined in line with normalseasonality.
Commercial real estate brokerage fees were up 62% from ayear ago, although declining from a record volume set in second quarter. Muchof the linked quarter declines in both insurance and real estate brokerage feeswere offset by related declines in expenses in these two businesses.
Our capital market activities showed good results in thequarter and were largely not impacted by the credit crunch or market dislocation.We have not significantly participated in any of the recently publicized largeleveraged buyouts; we did not create any structured investment vehicles to holdoff-balance sheet assets and have no current plans to do so; exposure to CDOsis minimal; we have no direct exposure to hedge funds; we have never made marketsin sub-prime mortgage securities and consequently did not need to write-down anyof that kind of debt security; commercial mortgages originated and held forsale were about $1.5 billion on average and experienced negligible losses inthe quarter; our modest high yield bond portfolio is well diversified, washedged and incurred minimal net losses; and we wrote down commercial loans heldfor sale by $20 million in our securities investment business, recorded inother non-interest income.
Our Community Banking Group, which includes regionalbanking, wealth management, mortgage banking and retail Internet, had a goodquarter with 12% revenue growth and 8% earnings growth from the third quarter of2006.
Regional banking, serving 11 million households, achieved arecord cross-sell of 5.5 products per household, up from 5.1 products a yearago and up from around three products in 1998. Twenty-two percent of our retailcustomers had over eight products with us, our long-term goal, up from around12% five years ago, and in our top region, 31% of our customers had over eightproducts with us.
During the third quarter, core product sales were a record $5.25million, up 9% from prior year on a comparable basis. California continued tobe one of our fastest growing states with a 16% increase in core product salesfrom the third quarter of 2006 on a comparable basis.
Sales of Wells Fargo Packages, which include a checkingaccount and at least three other products, such as a debit card, credit card, asavings account or a home equity loan, were up 13% from third quarter 2006 and werepurchased by 69% of new checking account customers.
Increased customer penetration and usage of credit and debitcards grew card fee income by 21% from the third quarter of 2006 and 34% annualizedon a linked-quarter basis. At quarter-end, 37% of our retail bank consumerhouseholds 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 andaverage balances were up 27%.
Ninety-one percent of our consumer checking accountcustomers had a debit card, up from 85% five years ago and purchase volumeincreased by 11% from a year ago. Wells Fargo’s best-in-class Rewards suite forour credit and debit card customers has contributed to both our growth inbalances and to purchase volume. In addition, customers are finding our patentpending MySpendingReport a helpful tool for understanding and managing theirspending.
Average core deposits of $306 billion included certain fundsthat were previously swept into non-deposit products. Including only the growthin these funds from the date of their conversion to deposits, or only depositsthat were new to Wells Fargo, average core deposits grew 11% from a year agoand 7% annualized on a linked-quarter basis.
Average mortgage escrow deposits were up $3 billion from thethird quarter of 2006 and down $1 billion from the second quarter of 2007.Excluding mortgage escrow balances, total average core deposits grew 13% from thethird quarter of 2006 and 9% annualized on a linked quarter basis.
Average retail core deposits, which exclude wholesalebanking and mortgage escrow deposits, were up 7% from a year ago and 1% annualizedon a linked quarter basis. The average balance per retail account declined slightlyin the third quarter as consumers were forced to pay higher interest on theirloans. However, we continued to have good account growth, positioning us wellfor the future.
Consumer checking accounts were up a net 4.8% from last yearand small business checking accounts were up a net 4.3% from last year.California continued to be our fastest growing market, with checking accountsup a net 5.9%. This is the ninth consecutive quarter where net new accounts inCalifornia exceeded the average across our footprint.
While some of our competitors in California increased theirdeposit rates during the quarter, we have not. We nevertheless have continued togrow accounts by offering our customers better service and more convenience.Although we did not raise rates on our deposit products during the thirdquarter and actually reduced rates early in the fourth quarter in response tothe Fed rate cut, our overall average cost of deposits increased during thethird quarter as the growth in interest bearing checking and savings accounts andconsumer CDs continued to exceed the growth in non-interest bearing accounts, atrend that is consistent with the national monetary aggregates.
Small business continues to be one of our best opportunitiesfor growth. Sales of store-based business solutions were up 16% from last yearon a comparable basis. Sales of Wells Fargo Business Services Packages, whichincludes a business checking account and at least three other business products,such as a business debit card, business credit card, business savings accountor business loan or line of credit, were up 31% and purchased by 43% of newbusiness checking account customers.
These strong sales results increased our cross-sell to ourbusiness banking households to 3.5, up from 3.2 a year ago. Bank loans to smallbusinesses, loans less than $100,000 on our Business Direct platform, grew 19% fromthird quarter of 2006. From December 2005 to August 2007, in-footprint singleproduct small business households declined from 29.5% to 24.1% of total smallbusiness households, an 18% improvement.
We continued to focus on delivering a great experience forour customers and measuring our progress through 50,000 store-based customersurveys a month, over 1.9 million surveys to date. For customers transacting atthe teller line, welcoming and wait time scores improved 16% and customerloyalty scores have improved 9% from third quarter 2006.
Our Wealth Management Group had an outstanding quarter withrevenue up 20% and earnings up 24% from a year ago. These results were drivenby double digit non-interest income, deposit and loan growth. Strong tradingactivity by our customers increased brokerage revenue by 31% and net incomeincreased 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, introducednew pricing during the first quarter offering 100 commission-free online tradesper year for Wells Fargo PMA customers. This relationship-based pricing offerhas increased new account openings by 15%, our self-directed assets under administrationby 52% and revenue by 36% since the third quarter of 2006.
Wells Fargo continues to be a leader in retail onlinebanking. At quarter-end, we had 9.5 million active online consumers, up 14% froma year ago. Sixty-four percent of all Wells Fargo consumer checking accountcustomers are now active online customers. We had 950,000 active online smallbusiness customers, up 19% from a year ago.
Internet sales continued to be an important channel foroverall sales growth with consumer product sales up 31%, consumer checkingaccounts up 21%, consumer savings accounts up 22% and consumer credit productsup 20% from the third quarter of 2006.
During the quarter, we launched Wells Fargo Mobile forconsumers and small business customers, allowing them to use the browser ontheir web-enabled mobile device to check account balances, view transactionhistory and transfer funds between Wells Fargo accounts.
We’ll now talk about mortgage banking. Notwithstanding thesharp downturn in the housing sector, the widening of nonconforming creditspreads and the lack of liquidity in the nonconforming secondary markets, our mortgagebanking results in the third quarter were relatively strong overall. Ourlongstanding responsible lending practices and policies, our leadership role inthe industry, our risk management discipline and most importantly, the balancewe have in our mortgage business with complementary origination and servicingstrengths, enabled us to continue to grow revenue in the third quarter while atthe same time reducing risk.
Throughout the market turmoil, Wells Fargo remained open forbusiness and our reputation, commitment to the mortgage business, and financialstrength became particularly attractive to more homeowners, more real estateagents, more builders and other referral sources.
At $95 billion, mortgage applications were down $19 billionon a linked-quarter basis, in part due to typical seasonal declines in thepost-spring home buying season, but were actually the same volume ofapplications as the year0ago quarter.
At $68 billion, originations were similarly down about 15% ona linked-quarter basis, with most of the decline in originations occurring inthe correspondent and wholesale channels as we exited the non-primecorrespondent channel in the second quarter, exited the non-prime wholesalechannel in the third quarter, and adjusted pricing on most nonconforming wholesaleand correspondent mortgage products throughout the quarter.
Less than half of our total originations have typically beenthrough the wholesale and correspondent channels, compared with typically 70% ormore non-retail for the larger peer competitors.
We remained one of the nation’s leading retail mortgageoriginators with Wells Fargo Home Mortgage retail originations totaling $29billion, the same volume as a year ago and down only 9% on a linked-quarterbasis.
The secondary market for agency-conforming mortgagesfunctioned well for most of the quarter. However, with overall secondary marketspreads widening, gain on sale margins worsened for most of the quarter, butmargins have since improved slightly.
The warehouse and pipeline, which is predominately primemortgages, was written down by $378 million in the quarter to reflect theunusual widening in largely non-conforming versus conforming secondary marketspreads. Many of these assets were then securitized and a large portionretained as securities in our available for sale investment portfolio at very attractiveyields. None of these new securities are collateralized by sub-prime loans.
In addition to the warehouse markdown, mortgage originationgains were reduced by $112 million, primarily to reflect a write-down ofrepurchased mortgage loans and an increase in the repurchase reserve.
The decline in mortgage origination fees was more than madeup by higher servicing revenue, once again demonstrating the value of ourbalanced 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 ayear ago, and also due to strong hedging results.
While servicing income was reduced by $638 million due tothe impact of over a 30 basis point decline in 30-year mortgage rates on themarket value of MSRs during the quarter, the gain on the economic hedge of theMSR was $1.2 billion.
Three factors contributed to this solid net hedging result.First, the same widening of mortgage spreads due to illiquidity and marketestimates of slower prepayments that negatively impacted the value of themortgage warehouse positively impacted the value of the MSR asset.
Second, we positioned ourselves during the height of the MBSmarket turmoil to benefit from a flight to quality by holding proportionatelymore of our economic hedges of the MSR in non-mortgage-backed security instrumentslike Treasury futures and options, swaps and options on swaps. We were able toreverse this positioning and lock in the flight-to-quality gains as the MBSmarket recovered later in the quarter.
And third, on balance we maintained a proportionately largereconomic hedge on the MSR asset in part due to the replacement of MBSsecurities, which are recorded in debt securities results, with off-balancesheet economic hedges, which are accounted for in mortgage hedging results.
At September 30, the ratio of capitalized MSR to the totalamount of mortgages serviced for others was 1.35%, the lowest ratio in eightquarters. Finally, we continued to reduce expenses in the mortgage business,with expenses down 20% annualized on a linked quarter basis, and in the processwe incurred approximately $14 million in severance and related shut-down costs.
Let me now shift to credit quality. Net credit lossesincreased to $892 million, or 1.01% of average loans annualized, up from $720million in the second quarter of 2007. Almost half of the increase in netcredit losses was concentrated in the home equity portfolio.
As indicated previously, we have been projecting higher homeequity credit losses for a while, although losses in this portfolio acceleratedin the third quarter due to the steeper-than-anticipated decline in nationalhome prices. The remainder of the increase in credit losses was concentrated inthe auto portfolio, largely due to typical seasonal factors, with modestincreases in unsecured consumer credit portfolios, largely due to growth.
Total nonperforming assets were $3.18 billion or 0.88% ofloans in the third quarter, compared with $2.72 billion or 0.79% of loans inthe second quarter. Our nonperforming loan portfolio continued to haverelatively low loss potential based on the high percentage of consumer, realestate and auto-secured loans, where we take an initial write-down to estimatednet realizable value as the loan is transferred to nonperforming status.
Loans 90 days or more past due and still accruing, excludinginsured and guaranteed GNMA balances, increased by $177 million from the secondquarter. This increase is concentrated in our consumer real estate and unsecuredportfolios and is consistent with the increases in nonperforming and net creditlosses previously mentioned.
I’d like to start by focusing on our exposure to the realestate market. Our first mortgage portfolio continued to perform very well inthe third quarter, with annualized losses of 0.11%, down from 0.13% in thesecond quarter; only $16 million in third quarter losses on the entire $67billion first mortgage portfolio.
The $67 billion of first mortgages that were on our balancesheet at September 30, 2007, consisted primarily of $23 billion of debtconsolidation loans at Wells Fargo Financial, $12 billion of home equity loansin the first mortgage position, and $31 billion of largely prime customers,relationship-based first mortgages held at Wells Fargo Home Mortgage, regionalbanking, and our Wealth Management Group.
While our disciplined underwriting standards have resultedin first mortgage delinquencies considerably below industry levels, wecontinued to tighten our underwriting standards in the third quarter.
Wells Fargo Home Mortgage closed the non-prime wholesale channelearly in the quarter, after closing the non-prime correspondent channel in thesecond quarter. Pricing was increased for nonconforming mortgage loans duringthe quarter, reflecting the reduced liquidity in the capital markets.
At quarter-end, Wells Fargo Financial had $24 billion inU.S. based real estate-secured debt consolidation loans. These loans are fordebt consolidation purposes, not for the purchase of a home. This means ourcustomers are not incurring significant new financial obligations and in fact,their total monthly credit payments are typically lower than they were prior totaking out the debt consolidation loan.
Ninety-six percent of this portfolio is in a first lienposition. Annualized net charge-offs at quarter end in this portfolio were lessthan 20 basis points, with third quarter losses of only $10 million.
Our delinquency and foreclosure rates for this portfolioremained significantly better than published industry rates for non-primemortgage portfolios. This portfolio continued to perform better than the restof the industry’s non-prime mortgage portfolios because of the nature of theproduct, the type of customers who buy this product, as well as the longstandingdiscipline with which these loans have always been underwritten and managed atWells Fargo.
Wells Fargo Financial has not originated any interest only,stated income, option ARMs or negative amortizing residential real estateloans. All U.S. based debt consolidation loans are originated by Wells FargoFinancial team members; we do not use any brokers or correspondents in thisbusiness.
Wells Fargo Financial does not do any national advertisingcampaigns. New real estate customers primarily come from outbound calling tocustomers with an existing Wells Fargo relationship and where we can clearly demonstratea tangible benefit for our customers by improving their financial situations throughdebt consolidation.
We conservatively underwrite these loans with full documentationand require income verification. The average FICO score on this portfolio was642 and 64% of the portfolio had a FICO above 620. The average loan-to-value was77%. The average loan size was $127,000. Approximately 46% of the portfolio wasfixed rate loans.
The remaining loans were 3-27 adjustable rate mortgages witha fixed payment for the first three years of the loan. We underwrite theseadjustable rate loans to the fully indexed rate to ensure the customer’sability to afford their payments. In the third quarter, 57% of new originationswere fixed rate loans. This prudent product strategy, combined with cautiousunderwriting has resulted in stable and predictable credit performance.
Our National Home Equity Group manages a portfolio of $83billion in home equity loans, including the $12 billion that are in firstposition. Net credit losses in the third quarter for the National Home EquityGroup were $157 million, or 0.77% of average loans annualized, up $68 millionfrom the second quarter when losses were 0.44% of loans annualized.
The increase in losses in this portfolio is primarily aseverity issue, not a frequency issue, and is concentrated in the highestcombined LTV loans. The increase in severity reflects the decline in national homeprices, with certain markets in the Midwest and California’s Central Valleyseeing some more stress.
The difference between frequency and severity is mostclearly demonstrated by the fact that while our losses increased, 98.7% of ourhome equity customers were still paying us on time.
The majority of the home equity portfolio, which would be loansoriginated through our retail stores or through cross-sell with Wells FargoHome Mortgage, had a slight increase in losses but within acceptable rangesthat are consistent with our risk-based pricing structure.
The bulk of the actual deterioration in the home equity portfoliohas come from our Correspondent channel, where we purchased closed loans fromthird party originators. Specifically, correspondent home equity loansrepresented about 7% of our total home equity loans outstanding but accountedfor 25% of our third quarter home equity losses with an annualized loss rate inexcess of 3%.
As this adverse trend emerged, we tightened credit standardsearlier in 2007 and completely eliminated this channel during the thirdquarter. Correspondent loans represented less than 7% of Wells Fargo’s homeequity volume in the first half of 2007.
In response to the decline in the housing market, theNational Home Equity Group has taken a number of actions to adjust pricing and totighten credit standards, including reducing the maximum loan-to-value for allsales channels. However given the current real estate market conditions, creditlosses in the home equity portfolio are likely to increase in the fourth quarterand 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 10million first mortgage and home equity loans, we closely monitor the creditperformance of this portfolio.
Over 90% of the mortgage loans we service are for primecustomers. We value and price our servicing based on expected repaymentperformance, so that we are properly compensated for the added work related topotentially higher delinquency in the sub-prime portfolios. We also priceservicing based on the origination channel, with better credit performance inour 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 foreclosureat 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 reachat-risk homeowners facing difficulty in making their payments. The allianceincludes mortgage servicers, counselors and capital market investors.
Making contact with at-risk borrowers is our biggestchallenge. Throughout the industry, of those consumers who lose a home toforeclosure, around 50% have never been in contact with their mortgageservicer. When contact occurs at the first sign of trouble, before the weightof 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 resetwith proactive calls and letters and have established a dedicated toll-free numberso 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 effortsto help find workout solutions.
Credit losses in our $28 billion auto portfolio increaseddue primarily to expected seasonality in the second half of the year. Net autolosses increased $57 million from the prior quarter. Year over year, net autolosses were down $32 million, demonstrating that credit performance hasstabilized as we continue to refine the indirect auto business model.
Delinquencies have increased due to seasonality, but loans90 days past due and still accruing continued to improve and were down 9% fromsecond quarter and down 42% from the fourth quarter peak. Over 70% of the autoportfolio had a FICO score above 620. The size of our auto portfolio wasessentially unchanged from last quarter, reflecting tightening of accountacquisition strategies to reduce loan volume in higher risk tiers. Nearly 80% ofnew originations in the third quarter had a FICO score above 620.
Two other retail portfolios that are important to our creditperformance are credit card and business direct. The $11 billion communitybanking credit card portfolio was primarily issued to our banking customerswithin our banking states. Our $11 billion business direct portfolio consistsof small loans and lines of credit originated to small business owners nationwide.
These businesses continue to produce healthy loan growth andexecute underwriting, account management and collection practices withpredictable results within acceptable risk parameters, typically better thanindustry norms.
Delinquency and net credit losses are modestly higher due toslightly higher consumer bankruptcy rates and the continued pressure of theweak residential real estate market on these unsecured portfolios.
Our commercial and commercial real estate portfolioscontinued to produce strong credit performance and healthy loan growth. Thissegment of our lending business is benefiting from our focus on deep andlong-term relationships with middle market customers, regional commercial realestate and geographically diverse small business lending.
Our $5.9 billion residential one to four family constructionand land development loan portfolio, which is less than 2% of total loans,continues to perform satisfactorily and has experienced only isolated and smallproblems.
We placed $97 million in loans to one large California residentialdeveloper on non-accrual in the third quarter, after working closely with the customerfor over a year. The $124 million increase in commercial and commercial real estatenon-accrual loans primarily reflects this one loan.
Let me now shift to capital management and balance sheetmanagement. On September 30, shareholders equity was $48 billion, up $3 billionfrom $45 billion a year ago. Our leverage, tier I capital, and total capitalratios were 7.29%, 8.21%, and 11.11% respectively.
Our capital ratios remained very strong, reflecting ourongoing focus on producing high risk-adjusted returns in all of our activitiesand in turn, giving us capacity to continue to take advantage of attractivegrowth opportunities to produce strong returns for our shareholders.
In the third quarter, we repurchased 60 million shares ofWells 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 ofPlacer Sierra Bancshares and Greater Bay Bancorp and for employee stock optionexercises, 401(k) matched contributions and other employee benefit plans.
At September 30, 49 million shares remained available for repurchaseunder Board authority.
Our merger and acquisition strategy remains focused on nicheopportunities adding to stockholder value. We will not do any acquisitionsunless 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 ourCompany’s history. With 41 banking stores across the San Francisco Bay Area,Greater Bay will enable us to better serve our community banking, commercialinsurance brokerage, specialty finance and trust customers. Given thechallenging environment, we expect to see additional acquisition and portfoliopurchase 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 toour network, bringing our total retail store count to 3,283.
We continued to add to our ATM network, adding 49 newweb-enabled ATMs and converting 199 envelope-free ATMs during the quarter. Weadded 647 platform banker FTEs from the third quarter 2006.
As indicated earlier in my remarks, the investmentsecurities portfolio, which had been increased in second quarter when yieldsrose, was reduced during the third quarter. Taking advantage of an opportunitybetween the spot MBS market and the forward securities market, the price ofabout $24 billion in mortgage-backed security sales was locked in through aforward sale rather than an outright sale of the particular securities.
While there was essentially no net impact on third quarterearnings from this combination of transactions, the modest decline in yieldsbetween the time of the forward sale and the delivery of the MBS to settle theforwards resulted in a commensurate gain on the underlying bonds, which was recognizedas gains in the available for sale securities line item, and offset by a lossin the forward hedge, which was reflected in other income trading.
As previously disclosed, the increase in average assets forthe quarter was the principle reason net interest margin declined in the thirdquarter. Late in the third quarter, $17 billion of new loans and securitieswere added at higher yields than the MBS securities that were sold, which willhelp fourth quarter net interest margin.
The company did not issue any long-term debt in the quarterin view of the temporary impact of the market’s dislocation on debt issuancecosts, which have since subsided. Temporarily elevated short-term LIBOR ratesat the peak of the dislocation adversely impacted short-term costs by about $15million.
In terms of our tax rate, there were no significant taxcosts or benefits in the quarter. The effective tax rate was 34% this quartercompared with 34% in second quarter, 33% year-to-date and 32% in the thirdquarter of 2006.
In summary, in conclusion, while we are not immune to theslowdown in the housing market or the turbulent credit markets, our results inthe third quarter demonstrated the absolute and relative advantages of ourdiversified business model, long-standing financial discipline, conservativerisk management practices and strong balance sheet and capital ratios. We arewell positioned to take advantage of the growth opportunities presented in thischallenging environment.
Thank you for listening. If you have any questions, pleasecall Bob Strickland, Director of Investor Relations, at 415-396-0523.
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