When Warren Buffett was just beginning to build Berkshire Hathaway Inc. (NYSE:BRK.B)‘s stake in Wells Fargo & Co (NYSE:WFC) 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:
1. The two partners trust and admire each other.
2. They pay people at the company well, but “abhor” having a bigger headcount than necessary.
3. 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 & Co (NYSE:WFC). 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 & Co (NYSE:WFC) 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.