When Warren Buffett was just beginning to build Berkshire Hathaway's (BRK.A 2.10%)(BRK.B 2.12%) stake in Wells Fargo (WFC 0.64%)back in the early 90's, he gushed over the bank's top managers, Carl Reichardt and Paul Hazen. In a short "how do I love thee, let me count the ways" tribute in Berkshire's 1990 shareholder letter, Buffett highlighted three things he particularly liked about the leadership of Reichardt and Hazen:
- The two partners trust and admire each other.
- They pay people at the company well, but "abhor" having a bigger headcount than necessary.
- They "attack costs as vigorously when profits are at record levels as when they are under pressure."
Reichardt and Hazen no longer run Wells Fargo. Nor does Dick Kovacevich, who followed Hazen. But it appears that current CEO John Stumpf may be carrying on in the same tradition -- and is likely making Mr. Buffett very happy in the process.
There were plenty of reasons for investors to be upset with the bank's first-quarter results. Low interest rates continued to squeeze Wells' net interest margin as it fell to 3.48% from 3.56% in December, and 3.91% in the first quarter of last year. Mortgage banking revenue -- a significant contributor to the bank's non-interest income -- started to drop as well.
Despite the soft spots, the bank still managed to top analysts' estimates, posting $0.92 in earnings per share versus the expected $0.88.
How did it manage that? By continuing to cut costs and right-size the bank (see: Nos. 2 and 3 above). Non-interest expenses at Wells Fargo were down 8% from the December quarter and nearly 6% from the year-ago March quarter. Lower expenses took the (post-provision) efficiency ratio for Wells from 67.8% in the first quarter of 2012 to 63.4% in this most recent quarter.
Wells Fargo's stock was down more than 1% in Friday's afternoon trading. Some might describe that outcome thusly: "Investors were disappointed with Wells Fargo's earnings." The conclusion would probably be backed up with detail about the drop in mortgage-banking income or tight margins.
I'll save you that short-sighted interpretation of the results and instead hold this up as a good illustration of why Buffett has made Wells Fargo Berkshire's top equity holding, and why you'll only end up confused and poor if you try to take your cues from what Mr. Market is doing.