Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Wells Fargo & Company (NYSE:WFC)

Wells Fargo Acquisition of Wachovia (NASDAQ:WB) Conference Call

October 3, 2008 9:30 am ET

Executives

Richard M. Kovacevich – Chairman of the Board

Robert K. Steel – Chief Executive Officer Wachovia

John G. Stumpf – President, Chief Executive Officer and Director

Howard I. Atkins – Chief Financial Officer and Senior Executive Vice President

[Bruce Selso]

Analysts

Matthew O’Connor – UBS Securities

Nancy Bush – NAB Research, LLC.

Michael Mayo - Deutsche Bank Securities

Christopher Mutascio - Stifel Nicolaus & Company, Inc.

Brian Foran - Goldman Sachs

Jason Goldberg - Barclays Capital

John McDonald - Sanford Bernstein C. Bernstein & Co.

[Mike Holson - The Boston Company]

[Corey Gilcrest - Marsh Company]

David Hilder - Putnam Investments

Operator

Welcome to the Wells Fargo conference call. (Operator Instructions) It is now my pleasure to introduce your host, Dick Kovacevich, Chairman of Wells Fargo.

Richard M. Kovacevich

This is of course a very exciting moment in the long history of Wachovia and Wells Fargo. We all know these are challenging times but combining the strengths of Wachovia with the strengths of Wells Fargo produced a financial institution with the breadth of product line and distribution that is the also in the most attractive and growing markets, it is simply unique and unparalleled.

Wachovia’s number on industry position in service with Wells Fargo’s number one ranking in sales and cross selling is unbeatable. But, most importantly our competitive advantage is our people. We share a common culture with strong ethical values of doing what’s right. We share a focus on customers, giving them sound financial advice and the very best in service. We are committed to our communities, big and small, east and west, north and south. We expect to continue creating significant value to our shareholders.

I’ve been around a long time and if there’s anything that I’ve learned in over 30 years in this business is that the winners will be those with the best people, people who are not only outstanding professionals, but who care. Who care for their customers, their team members, communities and their owners. We have, with Wachovia and Wells Fargo, the best people so we will indeed be the best financial institution in each of our markets and one of America’s great companies.

Now, let me introduce Bob Steel, CEO of Wachovia. In the most challenging financial environment in my life time, Bob has done an incredible job as the leader of Wachovia. We couldn’t be more pleased to be joining forces with Bob and his team and his company.

Robert K. Steel

This transaction represents a compelling value for Wachovia’s shareholders, customers, colleagues and communities and also poses no cost to the United States tax payers. During these turbulent times that Dick just mentioned, our combination at Wachovia, we’re the only bank in the United States to have the highest possible credit ratings from Moodys and S&P will result in industry leading safety and soundness for the combined organization. All of which accrue to the benefits of our clients.

As Dick said, combining the number one sales and service cultures in US banking should allow us a great opportunity to leverage our premier cost-to-cost banking presence in 39 states. Now, let me turn it over to John Stumpf of Wells Fargo.

John G. Stumpf

Before I get started, I need to remind you that on this call we will make forward-looking statements about the expected cost savings and other financial benefits of the merger, the expected integration costs and the plans for the combined company. A number of factors could cause actual results to differ materially from our expectations and projections. Please refer to our 2007 10-K and our second quarter 2008 10-Q filed with the Securities and Exchange Commission for a discussion of some of these factors.

Now, let me get to the transaction overview. We are paying $7.00 per share for Wachovia, total consideration just slightly over $15 billion. As Dick mentioned, this is a whole company transaction, nothing is left behind. It requires no FDIC or government support and we expect it to close in the fourth quarter. We’re also anticipating a capital raise of up to $20 billion during the fourth quarter and primarily common.

When we looked at this deal, as we always do at Wells Fargo, our revenue and credit assumptions were conservative. The people who look at it, run it, all of the traditional things that we have used are time honored here, were in place. The synergies we believe will be a $5 billion in that number on an annual basis, it’s about 10% of the combined costs of the expenses of the two organizations.

We will have merger costs around $10 billion and we target the closing for the fourth quarter. The due diligence has all been completed and the remaining approvals we need are regulatory approvals and shareholders’ approvals from Wachovia.

The new Wells Fargo is just so compelling to look at the numbers. We will have an industry leading 6,675 banking stores. We will have an industry leading core deposits, or total deposits of just over $700 billion. And, what you probably already know, these are in some of the best markets in the country, growth markets. The next page shows this unparalleled market position where you see Wachovia is. We have some overlap especially in places like Texas and California; again, two growth states.

If you move on, this deposit dynamo, this new company will give us number one share in some of our very largest markets, California, Florida, on a retail basis Texas, New Jersey, it goes on and on; again, a wonderful distribution. And these states happen to be the fastest growing. As we project out growth rates, population growth from 2007 to 2012 again, we have dominate positions in some of the very fastest growing states.

This strong retail distribution and customer base is really again, exemplified on this page, not only banking stores but ATMs and what it really is, is it provides wonderful distribution and convenience for our customers. It’s all about serving them. So, if you look at not only banking stores of 6,675 but if you take total stores which include our Wells Fargo Financial stores, the combined mortgage stores of the companies and so forth, it’s over 10,000, in fact, 10,761 stores.

If you look at retail households, we serve over 26 million retail households and we have 15 million of those customers are actively online. In our states, we essentially have some overlapping states. We’re now 24 plus 21 with overlap equals 39.

Let me conclude my remarks by talking about some of the significant competitive advantages that these companies have individually and will have collectively. This is really about a hand in glove strategy. We talked about the strong presence in growth markets. Wells happens to be the number one small business lender. Wachovia, a powerhouse in wealth management, number 10 wealth manager. As Dick mentioned earlier, in our consumer banking, one has world class sales and one has world class service. And again, terrific synergies and terrific ways to learn from each other.

Wells is the number one commercial banking presence in the west. Wachovia the number one commercial banking presence in the southeast. Insurance, we’re the largest bank owned insurance company. On the Wachovia side, the largest distributor of annuities, and it goes on and on. The news is compelling on a number of spaces. Even more compelling, we look at how these two companies will take banking and taking financial service frankly to a whole new level.

With those comments I will thank you and turn it over to Howard.

Howard I. Atkins

Obviously, an important element of this transaction is credit specifically and asset valuation generally. Our people have had a chance now to review in some detail the various loans and securities portfolios of the Wachovia Corporation, some $498 billion in loans and the securities portfolios. We have indicated for those of you who have it, on page 11 of our IR presentation which has been posted on our website.

The losses that we estimate in the asset portfolios of the company which on current estimates total $74 billion. The $74 billion figure is comprised of both credit and rate marks. The bulk of that estimated loss will be taken in the form of purchase accounting adjustments at close. The balance of that $74 will be realized in the form of charge offs over time. So, that number again includes both purchase accounting adjustments and remaining estimated life of loan losses.

We will continue to provide updates through our public disclosure as we move forward to completing the transaction and obviously we’ll provide additional disclosure over time to track against that number for the public. Clearly associated with the balance sheet is our capital position. Wells Fargo as of June 30, 2008 had tangible common of $33 billion. We estimate based on the estimated purchase accounting marks that Wachovia will net-net bring over about $17 billion, $16 to $17 billion worth of capital.

After the write downs for credit impaired assets and after the approximately $20 billion of capital raise that John mentioned, we estimate at this point that the resulting tangible common of the company combined will be about $50 million. When we think through this and include the marks, the capital raise at the end of this year, immediately post close we see the combined capital ratios of the organization roughly the same, slightly lower at that point than Well Fargo’s capital ratios before the transaction. So, currently we’re estimating our tier one risk based capital at 7.5% compared with 8.2% at the end of June and total capital for the combined organization at the start being 11%, roughly the same as Wells’ standalone capital ratio at the end of June, 2008.

As John mentioned in doing our calculations and our models we, as usual were very conservative in our assumptions with respect to credit, with respect to deposit run off, with respect to how we see the balance sheet and we currently estimate that approximately 10% of the combined 2008 non-interest expenses will be saved in the form of synergies. That works out to about $5 billion pre-tax annually. We see the majority of those synergies being achieved by the end of 2010 and we will provide as we go forward details on the drivers of those savings. Obviously, we’ll be working very closely with the company to determine the game plan to make all that happen.

John also indicated that we currently expect approximately $10 billion of merger costs and that will be largely realized again in the first year or so of the transaction. With all of these assumptions with respect to the balance sheet, with respect to synergies, with respect to capital, etc., we expect to exceed the long standing financial criteria that Wells has always indicated to the public. As you know, we always try to achieve an IRR of at least 15% and accretion by the third year of a transaction and as we see this wonderful combination we fully expect to exceed both of those criteria meaningfully over the course of time.

With that, John if you have any final remarks? If not, we will open up for questions.

John G. Stumpf

I think we go to questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Matthew O’Connor – UBS Securities.

Matthew O’Connor – UBS Securities

Just to clarify, on page 11, the $74 billion of accumulative losses and markets value adjustments, that’s a pre-tax number, correct?

Howard I. Atkins

Correct.

Matthew O’Connor – UBS Securities

I was just trying to back in to how much you’re taking up front of call it $50 billion after tax and it seems like it’s around $30 billion. Is that in the ballpark?

Richard M. Kovacevich

I don’t think we disclose how much we are taking up front versus and we don’t know.

Matthew O’Connor – UBS Securities

But you did say the majority of that $74 –

Howard I. Atkins

The majority of that $74 as we currently see it would be taken up front in purchase accounting. But, we’re still estimating exactly what that number is going to be.

Matthew O’Connor – UBS Securities

Second question, even post the $20 billion of capital raise, while you’re capital ratio is still well above the required level, it seems like it will probably be a little bit below where you probably want them to be. So, how do you anticipate rebuilding from there?

Howard I. Atkins

I think two things will occur, obviously over time the strength of the earnings of the company will clearly drive these ratios higher. And secondly, as we combine the two balance sheets we will also take a look at the various assets on both of our balance sheets. As you know Matt, we have always had an approach of making sure that we keep the best risk adjusted return assets on our balance sheets and as we comb through the portfolios we would expect to see run off and potential exiting of certain assets over time.

Matthew O’Connor – UBS Securities

That’s a good segway in to how do you anticipate managing the Option ARM book that Wachovia has? Are you thinking about refinancing as much of it away as possible? Selling it? Seeing what you can do with the TARP program if that goes through?

Howard I. Atkins

All of the above Matt.

Operator

Your next question comes from Nancy Bush – NAB Research, LLC.

Nancy Bush – NAB Research, LLC.

Howard, the statement on page 2 of the press release which is, “This is expected to add to Wells Fargo’s earnings per share in the first year of operations excluding an integration costs, write downs, transaction charges and credit reserve bills.” That’s kind of the banking equivalent of, “Other than that how did you like the show Mrs. Lincoln?” You’re talking now about this thing being accretive in year three so when we strip out all these costs does it then become accretive in year three?

Howard I. Atkins

Yes.

Nancy Bush – NAB Research, LLC.

Second question, is there anything that you can do, or anything you want to do immediately in terms of products, or whatever to get this thing jump started?

John G. Stumpf

Nancy, I don’t see anything that is so obvious. Both companies have a broad product line and we’ve done, not a deal of this size but we’ve done many, many other things, mergers in the past and we always learn about, “You do this a little different than we do,” and it can help and so forth but there’s not any big gaping hole for example, in our product delivery, some wiz bank product that’s going to somehow put these companies together.

Nancy Bush – NAB Research, LLC.

I mean are you going to like hang banners out front in the Wachovia stores? Or, is there really any need to do that?

John G. Stumpf

We’ll work with our local market leaders. We do lots of different things like sharing ATM machines when it’s available and eliminating fees. We do a lot of things to help welcome. The key here is to make sure the team, both teams, are excited and engaged because it’s all about our people and about our customers. So we’ll do all those things.

Richard M. Kovacevich

I think there’s no question Nancy that combining the companies and the strength and safety and soundness that is represented by that combination is very likely to demonstrate growth that may not have been the case with the two companies separately.

Secondly, there are various strengths that companies have in particular product lines, the Wachovia securities for example and their brokerage distribution. And we find that when you have that kind of strength and the certain strengths that Wells Fargo has, once we get together and team together, you can take advantage of those strengths that neither one of us have individually. And usually that results in some pretty impressive growth.

Nancy Bush - NAB Research, LLC

One final question for Howard. The marks on the assets, how did you derive these? How confident are you? I mean, the marks on the option arm portfolio were quite conservative but very different from what Wachovia had initially been projecting. How did you come up with these?

Howard I. Atkins

The standard way Nancy. We had our people look at each of these portfolios in some depth. Our credit folks know these portfolios and had a chance to pour over them. These numbers will change as we get closer to close but we’re confident we’re in the ballpark.

Nancy Bush - NAB Research, LLC

Do you feel that they represent the worst case scenario for these portfolios?

Howard I. Atkins

One can always define worse on the different scenarios but given conditions as we see them and given the review that we’ve done of these portfolios, we think that these are pretty good marks.

Operator

Your next question comes from Michael Mayo - Deutsche Bank Securities.

Michael Mayo - Deutsche Bank Securities

Norwest/Wells Fargo went well and Dick you always said it took five years to integrate. If you did another merger of equal types transactions, who knows, it might take 10 years to integrate. So I guess those are your own words back at you. Can you talk about the integration risk and doing this deal during tough times and how you’ll try to mitigate that risk?

Richard M. Kovacevich

I’d almost say that we are still deriving benefits from the combination with Wells Fargo. You’re going to have the initial surge of just making sure the systems get combined, the benefits planned, all the plumbing if you will that is critical that it gets done well so you don’t lose customers. And as you’re doing that you’re integrating the cultures, the product lines, the cross selling, etc. and indeed this will not happen quickly. But we are convinced that with the quality of the teams that we have, quite frankly the experience that both companies have had in merging with large organizations, that we’ll do it right, we’ll take whatever time it takes to do it right. That will be the primary objective.

And because of the compelling values here we will still be able by taking the amount of time necessary to do it right still deliver compelling values to not only our stockholders but to our customers, to our communities, etc. So what we said is if we ever did anything like this, it would have to be done with financial dynamics that allowed us to do it right and make sure that it is positive for all those various constituencies, and we think the financial transaction here allows that to happen in spades.

John G. Stumpf

Mike I would add this. Both companies have gone through and have done acquisitions well from an integration perspective and I can speak more broadly about Wells Fargo, but we don’t have for example eight big ones in the queue and this happens to be the ninth one coming behind. So there’s not integration fatigue if you will. We are thoughtful about this going into it and as Dick mentioned, doing it well is critical and the financial projections we have allows us to take the time to do it well so customers and team members come first.

Michael Mayo - Deutsche Bank Securities

How did you come up with $20 billion of additional capital that you need? There’s a lot of add-on questions to that but why $20 billion? Some people say if you take the same marks on your own portfolio as you are taking on Wachovia or that were taken on WaMu, maybe you would need to raise even more than $20 billion of capital. And also along with that, is Warren Buffet going to purchase any common shares and what’s the timing for any stock issuance?

Howard I. Atkins

The $20 billion was really a combination of simply what we felt was necessary to bring the consolidated capital ratios at the start of this wonderful combination to levels that we feel are appropriate for managing the combined company on the one hand, and secondly a number that we felt was doable in the market place given the power of this transaction. We’ll continue to evaluate that number as we get closer to the deal.

And again keep in mind the powerful internal rate of capital generation from this combined organization over time, both from our own IROE as well as from all the synergies and accretion that’s in this transaction. So it wasn’t just a function of where we were on day one but our expectations of how these capital ratios will be increasing over a period of time.

Michael Mayo - Deutsche Bank Securities

And Warren Buffet?

Howard I. Atkins

We think this will be an attractive security to own and we’re confident that it’ll get good reception. And Warren can speak to it for himself on his interest.

Operator

Your next question comes from Christopher Mutascio - Stifel Nicolaus & Company, Inc.

Christopher Mutascio - Stifel Nicolaus & Company, Inc.

Dick with this deal do you now stay on longer than the 65-year-old retirement age? And then two, Howard going back to the sentence that Nancy referred to about it would be accretive year one exclusive of all these things. One thing was the credit reserve build. If you take a $74 billion hit from a purchase accounting adjustment for Wachovia, presumably that would be the credit reserve build in and of itself for Wachovia. So is the credit reserve build you’re talking about in the release for legacy Wells Fargo or is that for further losses above and beyond the purchase accounting adjustments for Wachovia?

Howard I. Atkins

On the second question, remember the $74 billion is not just credit. It’s credit and rate, number one. And number two, it will include lifetime losses over the estimated lives of these portfolios. So not all of that will be in the form of a credit reserve build on day one.

John G. Stumpf

On the first question, I have asked Dick to stay on and help.

Christopher Mutascio - Stifel Nicolaus & Company, Inc.

Assuming that you all were invited to the party this past weekend, and I make the assumption that maybe you passed this weekend and went to Citi on Monday, what changed your mind in five days to do the deal now?

Richard M. Kovacevich

Any deal of this size and complexity is either very difficult or almost impossible to do in a short timeframe. As we always do, we will not do any deals that we are not comfortable that the financials are going to increase shareholder value and that we understand the risks that are involved and we understand the opportunities that are involved.

And it took us the amount of time why we’re here today to make sure that that was the case and that all the normal things that you would expect in this kind of a situation in terms of opportunities and synergies and credit risks and even in the mundane areas of taxes. And all of these things have to be understood, considered and we have to be comfortable before we will ever make a decision. It took this much time to be that comfortable and that’s why we’re here today.

Operator

Your next question comes from Brian Foran - Goldman Sachs.

Brian Foran - Goldman Sachs

You’re taking $12 billion against the commercial real estate portfolio, which would be a 26% cumulative loss rate. Is that primarily coming out of the $12 billion of resi construction that Wachovia has or are you also worried about the commercial construction and mortgage side? And secondly, just some clarification on page 12. You reference it TCE adjusted for 24 month extension of deferred tax asset exclusion. Can you just clarify what that is and what the tangible common ratio would be if you don’t get regulatory approval for that adjustment?

Howard I. Atkins

Again, we expect regulatory approval on that. It’s not a big adjustment on the capital ratios.

Brian Foran - Goldman Sachs

On the commercial mortgage?

John G. Stumpf

Certainly the greatest part of that is the residential construction. We’ve gone name by name. And as you know, Wells Fargo has the best commercial real estate talent in the United States and we feel that that is a mark that takes into account the environment that we’re in today and what we see as the possible risk in the portfolio. The residential area of course is where the greatest risks are so the majority is that but with also a name-by-name look at borrowers of the entire portfolio.

Operator

Your next question comes from Jason Goldberg - Barclays Capital.

Jason Goldberg - Barclays Capital

A couple of headlines flowing across I would hope you could react to; the first thing, Citi Believes It Has Exclusive Rights to the Wachovia Branch Operations and secondly, Fed Cautious About Wells Fargo Bid for Wachovia. If you could just talk to conversations with Citi and how that deal was structured with respect to this transaction? Why you think believe this deal supersedes that and any rights Citi may have, any breakup fees, etc.? And secondly, any comments you’ve had with the regulators with respect to this transaction?

Richard M. Kovacevich

We think that this deal is solid. We’re not aware of any merger agreements that had been consummated at the time. And as far as other issues, I haven’t seen anything in terms of issues that Citi has or doesn’t have. We feel very confident that this transaction has been done appropriately and we’ll continue and be consummated and we’ll go forward with it.

Jason Goldberg - Barclays Capital

The other headline saying Fed Cautious About Wells Fargo Bid for Wachovia. Any discussions you’ve had with regulators?

John G. Stumpf

We’ve obviously had discussions with regulators and I haven’t seen any quotes. We believe that the regulators would also be comfortable with what has transpired here.

Jason Goldberg - Barclays Capital

Could you talk about in terms of where you fall with respect to the 10% deposit caps?

Howard I. Atkins

We believe that we do not exceed the 10% deposit cap but we are obviously close.

Jason Goldberg - Barclays Capital

You mentioned a 39.9% preferred issuance. Can you just give more comments around that and the reasons for that?

John G. Stumpf

The Wachovia Board has given us this 39.9% of preferred which simply increases the probability that this transaction gets consummated quickly and we get positive shareholder votes.

Operator

Your next question comes from John McDonald - Sanford Bernstein C. Bernstein & Co..

John McDonald - Sanford Bernstein C. Bernstein & Co.

Howard, could you just try to elaborate on what determines how much of the $74 billion gets taken upon closing and how much of it’s spread out? What are the factors there that you need to go through?

Howard I. Atkins

At this point really it’s just a continued review of the individual portfolios. Accounting to a certain extent will determine how much of the estimated loss gets taken upfront versus over time. Each of the portfolios has different answers.

John McDonald - Sanford Bernstein C. Bernstein & Co.

It seems like there’s a couple of questions, a little confusion just about the accretion. The statement in the press release about accretive in the first year and then slide there. Are you talking about the expected majority of credit costs being incurred the next two years and then transaction would mean fully to EPS after that? Could you reconcile those two?

Richard M. Kovacevich

Maybe I’m confused by the question. I think what we’re trying to say is that there is obviously going to be a lot of upfront costs such that not only it won’t be accretive, it’ll be a net loss as we take these one-time costs. We don’t know exactly which quarters or which years they are taking but we believe the vast majority of all of those costs will be done after two years.

What we are saying is that if you exclude what we think are simply one-time costs that aren’t reoccurring that will be the operating income if you want to, and we’re not using that in the technical sense. We’re just saying that the net income less these one-time costs will be accretive in those first two years but in year three it will be nicely accretive period. Whatever latent costs that we still have in year three will be more than absorbed by all the other benefits and that we will not need to say excluding something to be accretive in year three.

And by the way, we have always used year three as our criteria when something becomes accretive because we always have these integration costs. We take our time to make sure we do it right. I can’t think of anything worse than disrupting the market place, losing customers and so on because you’re trying to get some number in year one or year two.

I can remember, probably you all are so young you don’t, but when we did the Wells Fargo/Norwest merger and I said it was going to take us three years to integrate this company where everybody else was saying they were going to do it a year at 40% cost saves, there was a resounding boo at the New York Plaza. I think you all and certainly all the market says that the way you should do integration is the way the Norwest/Wells Fargo merger was done. In fact I remember [Bud Baker] calling me at the Wachovia First Union and asking how we did it.

We are just confident. We will not change our policy about doing it right because the cost of doing it wrong has been so observed in the market place. I can tell you the old Wells Fargo people will not allow us to do it differently because they suffered through the problem when you do something faster than is appropriate. What I would just argue or at least suggest to you is go back to what we did in Norwest/Wells Fargo merger and I think if you weren’t there, if you ask your grandparents, they will tell you that that’s the way it should be done.

John McDonald - Sanford Bernstein C. Bernstein & Co.

I think I was around in 1998. But thanks for making me feel young. A question that’s just a follow up Howard on the statement there in the press release about excluding integration costs, write-downs, transaction charges and credit reserve build. I think you told us transaction charges and integration costs. So the write-downs and credit reserve build, is that the part about how much of the $74 billion will come through not on closing but in regular -?

Howard I. Atkins

Correct. As Dick said, what we’re trying to get at there is if you look at all of the things that one could throw into the category of one-time connected with getting the integration done including credit reserve build over that time period, if one can strip those things through, we see the combination being accretive from the start and then year three accretive outright.

John McDonald - Sanford Bernstein C. Bernstein & Co.

Assuming that you’re going to try to get the capital rates done in the near term? Is that a fair assumption?

Howard I. Atkins

Yes.

John McDonald - Sanford Bernstein C. Bernstein & Co.

Some others that have done that have made some comment about the earnings that they’re going to report in the next week or two. Do you have any comments about that?

Howard I. Atkins

No. We’ll be reporting earnings in the next week or two.

John McDonald - Sanford Bernstein C. Bernstein & Co.

On the expense saves, it looks like it’s about 25% of Wachovia’s base. Any thoughts on branch overlap or any other factors to give us some sense of the reasonableness or confidence in those cost saves?

John G. Stumpf

It’s very early but we are very confident on those and those are important. But the real important thing here is growing revenue and, I’m not going to minimize the expense saves, but the magic here is in working together and serving these wonderful markets.

Operator

Your next question comes from [Mike Holson - The Boston Company].

[Mike Holson - The Boston Company]

On what John was talking about, should investors assume that you will tell us how the $74 billion breaks down between the fair value adjustment at time of closing and the credit reserve build over time before you do the equity raise?

Howard I. Atkins

We’ll certainly provide updates in the equity raise that will try to refine those calculations for you and obviously when the deal closes we’ll have all the detail that you need on that.

[Mike Holson - The Boston Company]

A follow up on due diligence, were you able to do due diligence over the course of this week with Wachovia’s help or was your follow up work just based on maybe information amongst all Wells Fargo members?

Howard I. Atkins

We had extensive help from Wachovia. They allowed us to look at the information but again we believe we have given our understanding of these businesses and markets and so on, we have put in numbers based on our understanding of that.

[Mike Holson - The Boston Company]

So rather than relying on Wachovia, which has been wrong about most everything, you are using your own assumptions?

Howard I. Atkins

What I’m saying is that Wachovia provided us with data that was important for our ability to therefore evaluate what we believe were the credit qualities.

[Bruce Selso]

If I could add some clarity on that, there was a data room that was shared among I assume a group of potential bidders. But once the deal with Citi was announced, we stopped to have any conversations with Wachovia or look at any of the data in the data room. We had already amassed a lot of the data from that data room and information, and we spent the rest of the time analyzing that data and figuring it out.

Richard M. Kovacevich

And again they are our decisions. We were analyzing the data. It was not additional conversations or anything with Wachovia.

Operator

Your next question comes from [Corey Gilcrest - Marsh Company].

[Corey Gilcrest - Marsh Company]

Number one, on the net interest margin benefit to Wachovia, what does the AAA bring and what does your ability to lower high-cost deposits given what’s been going on with Wachovia in confidence, what does that bring for net interest margin benefit in the Wachovia assets? Number two. The $74 billion in charges, to what extent can you shelter income going forward with that?

John G. Stumpf

Let me take a crack at the first one. Clearly today there is from a depositive perspective, a flight to quality. We are the beneficiary of that because of our reputation, our strength, our soundness and so forth and I believe that the combined company will also enjoy that benefit. How that all works out into a net interest margin, who knows it depends on what short rates are going to do and what long rates do and the make of the balance sheet and so forth. But clearly that will be a benefit. And the second question?

Howard I. Atkins

We’ll be refining that $74 billion but we do expect that the bulk of that will be tax sheltered, tax deductible.

Operator

Your next question comes from Nancy Bush - NAB Research.

Nancy Bush - NAB Research

This 3.7% pro forma TCE ratio Howard, do you want to get that back to the 5%+ pre-deal or given the stronger base of deposits, etc. can you run that at something a bit lower?

Howard I. Atkins

Again, on our current models that will naturally grow post the initial combination of the companies. We’ll be looking at the combined balance sheets and once we figure out what the asset mix of the company will be over the next couple of years in terms of which businesses, which assets we want to keep and which ones we don’t, we’ll come back and answer that question.

On our balance sheet we felt that 5% or 5.5% was an appropriate number. As you know, the Wachovia organization has lower risk assets, securities businesses that drive down that TCE to total asset ratio. And again we’re just going to have to see which businesses we’re going to wind up with here in the end to answer that question.

Nancy Bush - NAB Research

When are you going to run this by the rating agencies and do you expect to keep your rating intact?

Howard I. Atkins

We’ve had preliminary conversations with both Moody’s and S&P. I would assume that they will be doing formal reviews. And we would certainly make the case that despite the obvious size and complexity of this transaction, net-net we think that the combined organization will be a better franchise with greater prospects for internal capital generation than we have even now on a higher capital base over time.

Richard M. Kovacevich

And more diversified in every sense of the word.

Howard I. Atkins

Economically and risk wise we see this as being something that leads to an even better organization but the rating agencies will do what they need to do and what they think is appropriate.

Operator

Our final question comes from David Hilder - Putnam Investments.

David Hilder - Putnam Investments

Any thoughts on the management structure beyond Dick staying on?

John G. Stumpf

It’s too early. We’ve got the first one in place and then we’ll worry about the rest.

David Hilder - Putnam Investments

The name?

John G. Stumpf

I think that’s pretty obvious. It’s going to be Wells Fargo and we’ll take our time as we work through that, but Wells Fargo and Company will be the surviving name.

David Hilder - Putnam Investments

To Bob Steel, could you address the question of whether Wachovia had a binding agreement with Citigroup and whether Wachovia might owe anything to Citigroup in compensation?

Robert K. Steel

This call’s been focused on a forward-looking basis but it seems from some of the questions there’s controversy on this issue and that’ll be addressed in the appropriate way.

David Hilder - Putnam Investments

You can’t speak to the question of whether Wachovia had a binding agreement with Citigroup?

Robert K. Steel

No.

John G. Stumpf

I’d like to first of all thank all of you on the phone from the analyst community who have an interest in this. I hope that you see it as compelling as we see it. And to all of those new team members, Wachovia associates across the country, Dick and I and our team welcome you. We are so proud of being able to call you part of our family coming up in the future. These are of course challenging times in the industry. You’ve shown leadership in so many areas and we can’t wait to get to know you. I think you’ll enjoy the stagecoach. Let’s ride together.

Operator

Ladies and Gentlemen, this does conclude today’s teleconference.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Wells Fargo Acquisition of Wachovia Conference Call Transcript

Check out Seeking Alpha’s new Earnings Center »

This Transcript
All Transcripts