Weibo Corporation
Q1 2008 Earnings Call Transcript

Published: 16 Apr 2008

[Operator:]

Good morning. My name is Luanne and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Wachovia First Quarter 2008 Earnings Release Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' prepared remarks, there will be a question and answer period. [Operator Instructions]. As a reminder ladies and gentlemen, this conference is being recorded today, Monday, April 14th, 2008. I'd now like to introduce Ms. Alice Lehman, Director of Wachovia Investor Relations. Ms. Lehman, you may begin your conference.

[Alice Lehman:]

Thank you, operator, and thanks to everyone on the line for joining the call this morning. We hope you’ve received our earnings release by now, as well as the slides we'll be using in today's presentation and supplemental quarterly earnings report. If you haven't, all of those documents are available on our Investor Relations website at wachovia.com/investor. In this call, we'll review the slide presentation package. In addition to this teleconference, this call is available through a listen-only live audio webcast. Replays of the teleconference will be available by about noon today and will continue through 5

[Operator:]

[Operator Instructions]. We'll pause for one moment to compile the Q&A roster. Your first question comes from Jason Goldberg with Lehman Brothers.

[Jason Goldberg:]

Thank you, good morning. G. Kennedy Thompson – Chairman, President and CEO Good morning.

[Jason Goldberg:]

Ken, you've been, I guess, consistent in saying at the least up until your 10-K in late February that you felt comfortable with your capital and dividend position. Obviously, something has changed dramatically, you obviously went into February knowing the housing market was stressed. Can you just kind of update us with your thoughts over the subsequent six weeks at the end of February? G. Kennedy Thompson – Chairman, President and CEO Yes, Jason. We saw in the results of February and March in our mortgage portfolio deterioration and through that period we really dug deeply into the model that Don was talking about where we were trying to not only look at house price depreciation, but also look at behavioral elements. And that led us to the conclusion that credit costs were going to be higher in mortgage than we had anticipated. We also had a desire to really try to take a view of the market going forward that was harsh enough that we could see prepared for whatever came along. And so that led us to the strategy significantly increasing our provision expense, which obviously impacted our income statement, and at that point we looked at our capital ratios and looked at the economy that is predicted by almost everyone going forward. We simply made a decision that the best thing that we could do for shareholders was to adopt that viewpoint and we decided that raising capital was the right thing to do and then we decided if we were going to raise capital, we ought to really raise capital and have a very conservative balance sheet and... and so that led to the decision to the $7 billion capital raise and also to reducing the dividend payout. And we really sized the dividend payout to the 40% to 50% of cash earnings guidance that we had given in the past and we feel comfortable that looking at the way our businesses are performing that is achievable in spite of the... the heightened reserving required on the… on our mortgage book and in fact really across all asset classes.

[Jason Goldberg:]

Okay. And then as a follow up, I guess we are just [inaudible] on in terms of what kind of gives you the confidence that you now have enough capital, given how quickly this environment continued to deteriorate? G. Kennedy Thompson – Chairman, President and CEO Well, I mean we're going to be… by late 2009 we are going to have a Tier 1 ratio that's just under 9% and we think we’ve taken, as I said, a harsh view of... of what could happen going forward. And we’ve raised more capital than would be required to be very well capitalized and to handle losses that would even be higher than what we are forecasting.

[Jason Goldberg:]

Thank you.

[Operator:]

Your next question comes from Kevin Fitzsimmons with Sandler O'Neill. Kevin Fitzsimmons – Sandler O'Neill & Partners L.P. Good morning, everyone. G. Kennedy Thompson – Chairman, President and CEO Good morning. Kevin Fitzsimmons – Sandler O'Neill & Partners L.P. Could you give a little more detail on, you cited a dramatic change in customer behavior or consumer behavior and that led to the decision to cut the dividend and increase capital. And so just wondering if you could be particular by… I am assuming it’s California, but are you talking about people walking away from houses and if you can give us any specific examples. Thanks. G. Kennedy Thompson – Chairman, President and CEO Well, I’ll let Don talk specifically, but I would just say that what we're seeing is that when equity in the home approaches zero, behavior changes. And that's what the model tries to do, as to then take that behavior along with house price depreciation and factor that into future losses. So, Don? Donald Truslow – Senior Executive Vice President and Chief Risk Officer Ken, that's exactly right. And Kevin, it's just this pattern almost that somewhere and I don’t know where the tipping point is, but somewhere when a borrower crosses the 100% loan to value and somewhere north of that and they presumably run into some sort of cash flow bump, whether it's reduced income or kind of normal things in life that has created past dues before their propensity to just default and stop paying their mortgage on rises dramatically and I mean really accelerates up. And it's almost regardless of how they scored, say, in FICO or others kinds of character, credit characteristics. It's difficult on the walk away part of the question, that is going on clearly and there is lots of evidence of that in the market. And we see it's hard to quantify though from the standpoint of how many of our defaults are just walk away. And the reason is people, they don't tell you. And so we do our best to try to gauge, but that portion of the default is just kind of hard to quantify. But that behavior is going on, we are seeing in our portfolio the most significant declines and default activity in California and, of course, it's the largest concentration for us in the Pick-A-Payment portfolio by far. What I don't know and I guess we're just learning over time is whether the same sort of behavioral trends and patterns will spread to other markets or be observed in other markets at the same pace that they have been in California. But in essence, it built our correlations and the model to assume that they do. Kevin Fitzsimmons – Sandler O'Neill & Partners L.P. Okay. Great. G. Kennedy Thompson – Chairman, President and CEO I might just add that you also see evidence of what Don is talking about. If you look across our industry and look at credit statistics on equity loans and equity loans, because they are… at many banks you're seeing those loans going obviously above 100% loan to value and you’re seeing dramatically increasing default rates and losses. Kevin Fitzsimmons – Sandler O'Neill & Partners L.P. Okay, great. Just one quick follow-up. Can you... can you say… whether characterize, Ken, what you're... what the discussions like these days with the regulators and I don’t know if you can comment on that when your last regulatory exam was, but just generally did that factor in at all to the decision to raise capital now… G. Kennedy Thompson – Chairman, President and CEO No. Kevin Fitzsimmons – Sandler O'Neill & Partners L.P. Given what we are hearing about the environment? G. Kennedy Thompson – Chairman, President and CEO Yes. Let me... I'm going to ask Don and Tom to speak up on that as well. But I can tell you this, we had no regulator at any time approach us and ask us to raise capital to cut our dividend zero, not one conversation. That was a decision that we made based on our belief that the right thing to do at this point was to take on a lot of capital and get prepared. Kevin Fitzsimmons – Sandler O'Neill & Partners L.P. Okay. Great, thanks.

[Operator:]

Your next question comes from Jonathan Adams with Oppenheimer Capital.

[Jonathan Adams:]

I guess I had a similar question to the past individual. And if I look on Page 19 of your presentation, it strikes me that there is nothing in the 90-day past due trends that would justify the kind of change that you have made in your outlook. You can pick a different... a number of different metrics, whether it’s the dividend in suggesting that over a broad range of scenarios, it wouldn't need to be cut and then five or six weeks later coming to a different conclusion or some other metrics as well. But it just strikes me, it's difficult to understand how management’s view of the environment has changed so dramatically? Donald Truslow – Senior Executive Vice President and Chief Risk Officer I guess... this is Don. One thing that doesn't show on the chart is the level of cures between 90 days and further severities in default have been dropping. The severities in the marketplace when we take a house back, it takes a lower price to get homes sold. And our outlook is, I think, everybody has been reading, there is an expectation that there is a broad accumulation of foreclosed properties that haven't hit the market yet, and perhaps even some shadow foreclosure sitting out there that haven’t emerged as yet. So, our concern looking forward is that and again what we are beginning to see more evidence of and sense more of in the first quarter is that conditions are going to continue to get tougher and there is an overhang of inventory out there that is going to be costly for the industry to work through. So, on the default rates at 90 days, not a dramatic change in pace, but it's more the roll rates, the propensity to go all the way to foreclosure, the higher severities taken on dispersing of properties, and then the just further understanding and recognition that there is an inventory of foreclosed property is building out there that eventually [inaudible] that way.

[Operator:]

Your next question comes from Keith Horowitz with Citi.

[Keith Horowitz:]

Hi, it's a question for Don. Are your allowances so now very dependent on changes in home prices? I'm sure you thought about the pros and cons of using the different housing price in this season. I was wondering why you decided to use OFHEO rather than Case Schiller. From what I understand Case Schiller will be a more conservative estimate and I was wondering what your allowance would look like if you use Case Schiller? Thanks. Donald Truslow – Senior Executive Vice President and Chief Risk Officer Yes, good question, Keith. We did look at several different indices. Case Schiller is confined, I think primarily to the 20 largest or larger metropolitan areas around the country. It includes loans or houses with loans of all sizes, so jumbo products included. And as we stood back and looked at our geographies, our MSAs, and our loan type, OFHEO is a broader measure, it attracts the sale of particular houses over time. It does focus on conforming products, so the size of the loans tend to line up pretty closely with the size of the loans in our portfolio and that we don't have a jumbo product in our portfolio. Additionally, the loans that we have in the Pick-A-Pay portfolio began with loan to values and levels of equity on the front end that are very similar to what you would find in a conforming product. And so as we back-tested and you can see a little bit of that on Page 20, if you look at the base for the relative change from the original loan to value, again these are averages, but loan to values shown here to the estimated current loan to value, they track reasonably close with the MSA weighted OFHEO peak to first quarter changes. And that's particularly true when you think about, in fact, that there is some deferred interest in these balances. So, there's been 2% or 3% average degradation in the loan to value since origination from the deferred interest. So, kind of rolling all that together, we decided to basically use the OFHEO index for calibrating these correlations in the model. And we fully anticipate and have experienced that in certain markets, we have seen and will see housing price declines larger than these percentages indicate. So, we think that that's been captured and again the calibration.

[Keith Horowitz:]

And just a follow-up. Have you given any thought in terms of sensitivity? So, what will your answer look like if you did use the Case Schiller, say, just in California? Donald Truslow – Senior Executive Vice President and Chief Risk Officer We didn't... Keith, we didn't run the model on Case Schiller, again because they didn't... we didn't think that it really captured the dynamics of our portfolio.

[Keith Horowitz:]

Okay, thank you.

[Operator:]

Your next question comes from Betsy Graseck with Morgan Stanley.

[Betsy Graseck:]

Thanks. Don, just a follow-up on that one. Does the OFHEO include the foreclosures that are going on? Donald Truslow – Senior Executive Vice President and Chief Risk Officer I am not sure.

[Betsy Graseck:]

I'm just wondering if the housing values that are being impacted by foreclosures is being represented in the OFHEO index in your opinion? Donald Truslow – Senior Executive Vice President and Chief Risk Officer I think they would be in that they’ve... I mean I have to go back and ask specifically to be really sure. But they would track the change in housing prices, because they do tad [ph] a home sales. So, much like what's happening to our portfolio to the extent that there are a rash of foreclosures taking place in an MSA and thriving driving the value of homes. And I presume that would be reflected in the home sale data that OFHEO is collecting.

[Betsy Graseck:]

Okay. Radar Logic, which explicitly includes the foreclosures, which has been helpful to us at least. But on Page 21, you've got the percentage of the Pick-A-Pay portfolio that's got an LTV above 100%? Donald Truslow – Senior Executive Vice President and Chief Risk Officer Yes.

[Betsy Graseck:]

14%. Can… is this the first time you're giving that data? Donald Truslow – Senior Executive Vice President and Chief Risk Officer It is. And we wanted to provide that strat just to... number one, that's the most stressed stratification in the portfolio, and also just exhibit that we recognize there has been severe deterioration in several of our markets that where we have the Pick-A-Pay loans.

[Betsy Graseck:]

Is it possible for you to give us some sense as to how rapidly that has been growing, say, year-on-year and what your expectations are for that portfolio in over the next year-and-a-half given your assumptions for the 20% default rates that you've indicated? Donald Truslow – Senior Executive Vice President and Chief Risk Officer Yes, that is built in our assumption, it's built into the model, but Betsy we haven't provided them here.

[Betsy Graseck:]

I guess I'm just wondering that this 14% you're not expecting the entire group to going into default, is that right? Donald Truslow – Senior Executive Vice President and Chief Risk Officer That would be correct.

[Betsy Graseck:]

And then what's your recourse to the borrowers who are defaulting? Donald Truslow – Senior Executive Vice President and Chief Risk Officer It depends on the state, so California is what the... what people refer to is a single action state. And if you go through a judicial foreclosure process, my understanding is you can sue the borrower for deficiency once the property has been sold. That's a cumbersome way though to go through foreclosure and you're subject to the courts and it takes a long time. A non-judicial foreclosure process is typically a speedier way to get to your property, but you lock yourself out of pursuing the borrower for deficiency if you pursue a non-judicial foreclosure. So, most of the foreclosures in California are non-judicial, and therefore you really got a limited ability to go after the borrower.

[Betsy Graseck:]

Okay. And as we get through this, do you anticipate changing any of your other loan asset classes and the reserving policies against them. I'm just wondering given that you're changing the Pick-A-Pay today, should we... as having those continue to decline, are you expecting some other asset classes that are a function of housing values to change as well, like the resi construction or the non-Pick-A-Pay mortgage? Donald Truslow – Senior Executive Vice President and Chief Risk Officer Yes, we have… included in the $2 billion reserve build for the quarter only $1.1 billion is related to Pick-A-Pay. And so the portions that are related to the other consumer portfolios do anticipate particularly and Florida would probably be the... kind of the hot spot, but… in Florida and the more traditional mortgage product, the decline in housing prices and higher defaults and higher losses. So…

[Betsy Graseck:]

Okay. Donald Truslow – Senior Executive Vice President and Chief Risk Officer So, we're expecting an increase in those credit costs and are providing for those. And we'll provide across the year if things unfold differently than we’re expecting now.

[Betsy Graseck:]

Okay. And then just lastly, there was obviously in the journal last night a price range that was estimated for the capital infusion that you are anticipating getting pre-market open. Can you speak to... to those price points, the $23 or $24 that was mentioned in the paper? Donald Truslow – Senior Executive Vice President and Chief Risk Officer No. We can't do that now, actually it's not a closed transaction.

[Betsy Graseck:]

Okay. But, you’ll give us the... Donald Truslow – Senior Executive Vice President and Chief Risk Officer You will learn it soon enough.

[Betsy Graseck:]

Right. So, you'll give to us today. Donald Truslow – Senior Executive Vice President and Chief Risk Officer I'm sure it will be available today.

[Betsy Graseck:]

All right. Okay, thanks.

[Operator:]

Ladies and gentlemen, we have reached our allotted time for Q&A. I’d now like to turn the call back to management for any closing remarks. G. Kennedy Thompson – Chairman, President and CEO Okay. Again I just want to thank you all for rallying on very short notice to allow us to lay out our earnings and the plan that we got in place now to move forward aggressively at Wachovia. We think it's the right course of action, we think it's the conservative course of action, and we feel very confident about the underlying businesses at this company that they will supply the ability to generate earnings regardless of the credit cycle or anything that's going on in the mark-to-market world for us. So, as usual we are available the rest of the day in our IR area to take your questions. And we hope you will call with us. Thank you.

[Operator:]

Thank you for participating in today's conference call. You may now disconnect.