Wells Fargo posts second quarter profit, surpasses Street
CHARLOTTE (AP) ó Wells Fargo & Co. joined other big banks in announcing a big second-quarter profit and tempering the news by reporting it is still contending with losses from failed loans.
The bank also followed its rivals Wednesday in forecasting loan losses would continue in the coming quarters as more consumers are unemployed and can’t make their payments. The company said some of its second-quarter loan losses came from the continuing cleanup of the loan portfolio acquired along with struggling Wachovia Corp. in December.
Wells Fargo said its earnings after payment of preferred dividends came to $2.58 billion, or 57 cents per share, up from $1.75 billion, or 53 cents per share, a year earlier.
The earnings surpassed the 34 cents per share forecast of analysts surveyed by Thomson Reuters. Wells Fargo’s revenue of $22.5 billion also beat their forecast.
Wells Fargo’s shares fell 68 cents, or 2.7 percent, to $24.67 in afternoon trading. On Wednesday, increasing worries about the health of banks sent the stocks of many financial companies sliding.
“I think Wells Fargo remains fairly strong, but are still struggling some from their mortgage loans, and that’s something we all need to expect,” said Nancy Atkinson, senior analyst at Boston-based research firm Aite Group. “As consumers continue to lose jobs and be concerned about their ability to make their mortgage payments, there are going to be problems for a while.”
Wells Fargo said its results also reflected a $700 million credit-reserve build, a $565 million charge to bolster a federal deposit insurance fund, and merger-related and restructuring expenses of $244 million.
Like Bank of America Corp., JPMorgan Chase & Co. and Citigroup Inc., Wells Fargo added more money to its reserves to cover failed loans. Wells Fargo said it recorded a $5.1 billion provision for loan losses during the second quarter.
All four banks reported billion-dollar profits that masked the fact that the banking industry is still deeply troubled because of loan losses that are expected to continue.
The amount of loans that Wells Fargo wrote off as unpaid during the second quarter totaled $4.39 billion, or 2.11 percent of average loans, up from $3.26 billion, or 1.54 percent, in the first quarter. Nonperforming assets, or loans past due, totaled $18.34 billion up from $12.61 billion in the previous quarter.
“Credit losses rose in the second quarter, as expected, due to the weak economy and higher unemployment in the quarter,” said Chief Credit Officer Mike Loughlin in a statement. He added that the San Francisco-based bank expects credit losses and nonperforming assets to increase.
Even so, “we are beginning to see some stabilization in early stage delinquency in the unsecured consumer loan portfolios,” Loughlin said, mirroring signs at other banks that have seen similar trends from customers who are between one and three months behind on payments.
Credit card charge-offs, or balances determined to be uncollectible, rose $82 million to $664 million in the quarter, as customers who are already at last three months past due continue to miss payments because of rising unemployment and bankruptcies, Loughlin added.
Loughlin reported that Wells Fargo took significant writedowns in the Wachovia portfolio, and was exiting riskier mortgage businesses including Wachovia’s Pick-A-Pay loans. Those loans, in which borrowers got low introductory rates and were allowed to defer some interest payments until later years, were a big contributing factor to Wachovia’s near-collapse.
The Wachovia deal was one of a series of bank takeovers announced last fall during the height of the credit crisis.
Wells Fargo said it had strong profit from its mortgage-banking business. During the most recent quarter, Wells Fargo originated $129 billion of mortgages ó the second highest level since 2003.
Analysts have warned that the increase in mortgage-banking activity is likely not sustainable over a long period of time. They also have raised concerns that Wells Fargo will need to raise more capital to cover potential losses from its real-estate loans, including the loans it inherited from Wachovia.
“We continue to recommend that investors remain cautious on Wells Fargo as credit costs continue to increase at an alarming rate and this quarter’s strong mortgage-banking revenues should slow down in the second half of the year,” wrote FBR Capital Markets analyst Paul Miller in a research note Wednesday.
Most financial firms’ prospects are closely linked to the job market “and we don’t expect any stabilization in credit costs for any financial company until the unemployment rate peaks sometime in 2010,” he said.
Chief Financial Officer Howard Atkins told The Associated Press that the bank had $90 billion of unclosed mortgage applications in the pipeline at the end of the second quarter ó signaling that the momentum will continue at least into the third quarter.
Regarding the need to raise more capital to cover future loan losses he said: “Those analysts would be wrong.”
In May, the government told Wells Fargo it needed to raise $13.7 billion in additional capital after the Treasury released results of “stress tests” of the nation’s largest banks. The tests were designed to determine how banks would fare if economic conditions worsened, and whether they might need additional capital.
By early May, Wells Fargo had raised $8.6 billion in a common stock offering. While the company has until the end of the third quarter to raise the funds, Atkins said Wells Fargo has already generated $14.2 billion from market and internal sources toward the $13.7 billion.
The bank has also received $25 billion in bailout funds. It’s not known when it will repay the government.
“We’d like to repay TARP as quickly as we can, but we will do so in a way that is friendly to our shareholders,” Atkins said.
Chief Executive John Stumpf said in a statement Wednesday the company’s top priority is to integrate Wachovia as smoothly as possible, adding that the integration is on track.
Earlier this month, Wells Fargo renamed its investment banking and capital-markets businesses as Wells Fargo Securities. Before acquiring Wachovia and its investment banking, Wells Fargo had only a small presence in the investment-banking business.
Stumpf added that in November, banks in Colorado will convert Wachovia branches to Wells Fargo ones.