Wells Fargo Reports Record Profit as Credit Improves

Wells Fargo Reports Profit, Beats Estimates
Wells Fargo is the last of the four biggest U.S. banks to report results. Photographer: Kimberly White/Bloomberg

Wells Fargo & Co., the largest U.S. home lender, reported record third-quarter profit that beat most analysts’ estimates as credit conditions improved, and said it’s not planning to halt foreclosures.

Net income rose 3.1 percent to $3.34 billion, or 60 cents a diluted share, from $3.24 billion, or 56 cents, in the same period a year earlier, the San Francisco-based bank said today in a statement. Analysts surveyed by Bloomberg estimated profit of 56 cents. Revenue dropped 7.1 percent to $20.9 billion.

“It’s remarkable that here we are in one of the worst environments the banking industry has ever experienced and this company is producing record earnings,” said Nancy Bush, an independent analyst based in New Jersey who specializes in financial firms. “And there is lots of upside in terms of loan growth.”

Chief Executive Officer John Stumpf, 57, is more than halfway through the integration of Wachovia Corp., the lender bought at the depths of the credit crisis, and is using the economic recovery to streamline businesses. In July, the lender said it slashed 3,800 jobs and closed its consumer-finance branch network.

Net charge-offs fell to $4.1 billion from $4.5 billion in the previous quarter. The lender set aside $3.4 billion to cover those losses, releasing $650 million of reserves, according to the statement.

Stock Price

Wells Fargo rose $1.20, or 4.9 percent, to $25.75 in New York Stock Exchange composite trading at 12:52 p.m. The stock declined 9 percent this year through yesterday, making it one of the worst performers in the 24-company KBW Bank Index.

The bank ranks among the biggest mortgage servicers, which perform billing and collections, and is seeking to reassure investors it’s not among companies that seized homes based on faulty documents. Attorneys general in all 50 states started a probe into foreclosure practices after court documents surfaced showing employees signed papers without ensuring their accuracy. That prompted Bank of America Corp., JPMorgan Chase & Co. and Ally Financial Inc. to suspend some seizures and evictions.

In Wells Fargo’s process, “the affidavit signer and reviewer are the same team member,” Stumpf said on the conference call. “They’re properly notarized and if we find error, we’ll fix it.”

Court Documents

In a May 20 deposition, a Wells Fargo employee said he signed 50 to 150 documents a day without personally confirming the information was correct. A judge dismissed that case in June. The bank said it’s reviewing pending foreclosures in 23 states to provide “further assurance” that information is correct, according to an Oct. 12 statement from Vickee Adams, a company spokeswoman.

Earlier this month, the company agreed to pay $24 million to eight states and make more than $772 million in loan modifications to resolve allegations that Wachovia deceptively marketed adjustable-rate mortgages.

Wells Fargo is the last of the four biggest U.S. banks to report results. JPMorgan Chase & Co., ranked second, reported a $4.42 billion profit Oct. 13, while Citigroup Inc., ranked third, announced quarterly net income of $2.17 billion Oct. 18. Bank of America Corp., the largest U.S. bank by assets, posted a $7.3 billion loss tied to new federal rules on credit cards.

Non-performing assets climbed to $34.6 billion from $32.9 billion in the previous quarter, with souring business loans and commercial real estate transactions up almost $400 million, the bank said.

“You can’t track nonaccruals to charge-offs and the main reason is that most of our loan portfolio, both consumer and commercial, is in secured loans,” Chief Financial Officer Howard Atkins said in a phone interview. “The actual loss content in the nonaccrual portfolio is not that high.”

Net interest margin, the difference between what the bank pays for funds and what it charges for loans, narrowed to 4.25 percent from 4.38 percent in the second quarter.

Sliding Shares

Shares of banks have fallen over the past week amid speculation faulty mortgage documents may mean lenders will have to buy back billions of dollars in loans from mortgage-bond investors who will challenge the paperwork. Forced repurchases for the industry may total $55 billion to $120 billion over five years, JPMorgan analysts led by John Sim and Ed Reardon wrote in an Oct. 15 report.

Wells Fargo reduced its reserve for repurchases and reported $414 million in losses in the quarter. The company said at the end of September that 16,527 loans totaling about $3.8 billion were being challenged, down from 18,675 and $4.3 billion in the second quarter.

“Wells is adequately protected” from large-scale repurchases, said David A. George, a Robert W. Baird & Co. analyst, in a Bloomberg Television interview. He estimates the bank will suffer $5 billion to $6 billion in losses. “It’s a pretty manageable issue for Wells overall. We’re estimating that this is going to last over the next 8 to 12 quarters.”

The lender originated $101 billion of home loans in the quarter, and had another $101 billion in the pipeline, both up over the second quarter, according to the bank.

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